Most startups don’t care much about “treasury management”. Many don’t even know what it means, and most founders we work with as fractional CFOs are rightfully concentrating on product development or go-to-market strategy to think much about it. But that’s a mistake, especially now that interest rates have risen.
It’s an understandable unforced error, though. Many of today’s founders are too young to remember the era when one could earn an appreciable amount of yield on idle cash. During and after the 2009 financial crisis, global interest rates plummeted to nearly zero and stayed there for roughly a decade, meaning a whole generation of entrepreneurs have no experience making money simply with the cash they have in the bank.
Those days are over. With innovative new fintech platforms like Burkland client Meow, venture-backed startups can deploy capital they won’t need for a while into interest-bearing instruments and, depending on factors like amounts and maturity dates, earn enough to pay for things like new headcount or engineering resources. For startups coming off Seed or A rounds and whose burn rates suggest runways of 18 months or more, deploying excess cash to work is not only a financial no-brainer, but something VCs will be expecting startup founders to be thinking about as good fiduciary stewards of their capital.
We sat down with the folks at Meow to illustrate a real-world example of this concept in action. Assume Startup Adventures Inc., a hypothetical early-stage company with a growing roster of employees and a revenue-producing product, has raised a $30M Series A round. According to the company’s financial model, burn is expected to be ~$400K per month for the next 12-18 months, so the founding team has ringfenced $8M for operating capital and can deploy $22M from the round into a treasury management strategy. There are several options in terms of yield-bearing instruments, but for the purposes of this example, let’s assume Startup Adventures utilizes U.S. Treasury Bills.
U.S. T-Bills are beautifully boring, backed by the full faith and credit of the United States Government (which means default risk is exceedingly low), and liquid in case circumstances change. Creating a laddered portfolio, this hypothetical company places $2 million in 1-month T-Bills yielding an annualized 4.32% and splits $20 million equally between 6-month and 12-month maturities with 4.79% and 4.71% annualized yields, respectively, when this post was written 1.
Building this kind of laddered portfolio of 1-month, 6-month, and 12-month maturities could generate income to Startup Adventures of more than $1M before fees – cash it can use for salaries, AWS instances, marketing etc. Note that this calculation assumes we roll the 1-month and 6-month positions forward when they mature at interest rates at or close to current ones. Given the rise in inflation in 2022, most experts believe the Federal Reserve will keep interest rates at or near current levels for at least the first half of 2023 and – assuming favorable inflation data – might begin to ease again in the fall.
Important to any treasury management strategy is where the instruments are custodied. While direct ownership is possible through TreasuryDirect.gov, the interface is cludgy and requires time and attention to manage properly. In contrast, platforms like Meow provide a simple and intuitive interface and ease of use for a minimal cost. Moreover, many such platforms utilize custody solutions from strong banking partners (in Meow’s case, BNY Mellon) with liquidity usually available within one business day.
For most of the past decade, the annual yield on a 12-month Treasury bond was around 0.1%. There was no income to earn, so startups got out of the habit of looking to these instruments for returns on their idle cash. Now, with interest rates significantly higher, such returns can allow venture-backed startups to meaningfully extend their runways, grow faster or hire more developers. Meanwhile, innovations in the space (like Meow’s treasury management platform) make the process simple, fast and inexpensive. If you have excess cash on your balance sheet, look for ways to generate yield on it. You – and your investors – will be glad you did.
Disclaimer: The information provided is illustrative and/or for educational purposes only, and does not constitute investment, legal or tax advice, or an offer to buy, sell or hold any security. The information herein is estimated as of the date indicated and may change at any time without notice.
- Yields as of Jan 6, 2023. Current treasury yield curve here.