Managing your treasury in 2023 | Startup Finance Basics w/ Kruze's Scott Orn | E1843

Episode Summary

Executive Summary: In this podcast, Jason and Scott Orn discuss startup treasury management, emphasizing capital preservation, liquidity, and risk management. They note the startup market is stabilizing, with median cash balances ticking up for the first time in nine months. Key advice includes diversifying bank accounts (at least two), using insured cash sweeps, and having a board-approved investment plan. They highlight that many startups still leave cash idle in non-interest-bearing accounts, missing out on 5-6% yields. The SVB crisis underscored the need for multiple banking relationships and proactive treasury oversight.

Main Topics: Startup Market Recovery (Priority: 4/5): Discussion of the startup ecosystem reaching a floor in Q4 2023, with median cash balances increasing for the first time in nine months, indicating weaker companies have been culled and stronger ones are raising capital. Treasury Management Principles (Priority: 5/5): Core concepts: capital preservation (safe, short-term government securities), liquidity (access within 1-3 days), and risk management (board-approved plan, no speculation). Bank Diversification (Priority: 5/5): Recommendation to have at least two bank accounts (operating + escape hatch) and use insured cash sweeps to spread deposits across FDIC-insured institutions. Post-SVB, startups now average two bank accounts. Interest Rate Opportunities (Priority: 4/5): Startups with significant cash can earn 5-6% on treasuries or money market funds. Example: $40M in bank yields $2M/year in interest, which can fund employees or growth. Lessons from SVB Crisis (Priority: 5/5): The Silicon Valley Bank failure highlighted the danger of single-point-of-failure banking. Many startups now use a mix of traditional banks (JPMorgan, Wells Fargo) and neobanks (Mercury, Brex). Proactive Banking Relationships (Priority: 3/5): Founders must be proactive in negotiating interest rates and service levels. Moving money to another bank often gets immediate attention from the original bank.

Key Arguments: Startups should keep 3-6 months of operating cash in their checking account and invest the rest in safe, liquid instruments like short-term Treasuries or money market funds. Having a board-approved investment plan protects founders from making risky bets and aligns stakeholders. Diversifying across at least two banks reduces risk of a single bank failure disrupting operations. Insured cash sweeps (ICS) allow startups to keep all deposits FDIC-insured by spreading across multiple banks overnight. Many startups are leaving millions in non-interest-bearing accounts; they should move excess cash to interest-bearing accounts to earn 5-6% annually. Post-SVB, the median startup now has two bank accounts, up from one before the crisis.

Data Points: Cruz client count: 800+ - Cruz has over 800 startup clients, providing a broad view of the ecosystem. Median cash trend: Ticking up for first time in 9 months - Indicates market bottoming and stronger companies raising capital. Total cash under Cruz management: $4 billion - $2 billion in operating accounts (mostly non-interest-bearing), $2 billion in interest-bearing instruments. Interest rate on Treasuries: 5-6% - Short-term government bonds paying 5-6% as of late 2023. Example interest income: $2 million/year on $40 million - A startup with $40M in bank can earn $2M annually in interest. SVB client concentration pre-crisis: 50% - Half of Cruz clients had money in SVB before the crisis. SVB client concentration post-crisis: 25% - Down to a quarter, showing diversification. Average bank accounts per startup: 2 - Median startup now has two bank accounts, up from one before SVB.

Pivotal Quotes: "The median cash at a startup has been ticking up for the first time in about nine months. So that's significant. Very like it's the bottom, right? Potentially the bottom." — Scott Orn: Discussing the startup market recovery in Q4 2023. "I still talk to tons of founders who are a little bit asleep at the wheel and still have way too much cash sitting in their operating account, not earning interest." — Scott Orn: Highlighting the missed opportunity of idle cash. "The day you move that money out is the day you get their attention. You're going to get the market rate, what they should be paying you." — Scott Orn: Advice on negotiating better interest rates with banks.

Implications: Startup founders must proactively manage treasury to earn interest and mitigate bank failure risk. Diversifying banks and using insured cash sweeps are now standard practices. The SVB crisis permanently changed banking relationships, making multiple accounts and board-approved plans essential for financial health.