Investing Startup Cash: A Brief Primer
Investing startup corporate cash should not be overly complicated and should not distract from the real work of building the company. Use this approach for cash beyond the FDIC limit and when you have a high confidence analysis of the timing of your cash needs. Even with this, I recommend erring on the side of caution and favoring liquidity where possible, because startups are notoriously bad at accurately forecasting cash needs.
***Best practice is to have your Board approve an Investment Policy Statement that at the very least lays out the allowable instruments, credit quality, maturity, and diversification requirements. Put this in place BEFORE you begin any investment activities, lest you find your VP Finance now thinks they are a day trader.***
Classic treasury management involves investing excess cash (cash beyond near-term operational needs) in highly liquid, high quality, short-term securities. The risks: 1) The custodian – make sure they are top notch. 2) Credit quality and duration risk – I don’t recommend taking much of either since cash is the precious lifeblood of your business. 3) Thinking you are now a hedge fund and can extend runway with investments – we’re here for RISK management, nothing more.
Classic TM Option 1: Work with an investment manager to invest your excess cash in a portfolio they design for you. You could work with an outside group (I’ve worked with and recommend CapTrust) or your bank may have a cash/asset management group that can provide this service for you. Your default option should be a high-quality money market fund with daily liquidity. If you have particularly good insight into the timing of your future cash needs, you can work with your manager to create a laddered approach that may generate some additional yield.
Classic TM Option 2: Manage it yourself. Open a business brokerage (think Fidelity, Vanguard, etc.) to invest directly in MMF, treasuries, or CP. Unless you have experienced staff dedicated to treasury management, I recommend against doing this unless it’s putting it all into a super safe, daily liquidity, MMF.
A new-ish approach: Skip the brokerages and manage your treasury with The Treasury. This wasn’t very attractive the last few years when T-bills yielded 0, but with 6-month bonds yielding 4.7% going straight to the source of the risk-free asset at treasurydirect.gov is the latest fad. Unless you’re a gold bug (which is not an acceptable position for a corporate treasury), there is no safer place to park cash than with the lender of last resort. You MUST understand your burn needs to manage a direct investment approach like this, laddering maturities to coincide with cash outflows. Back-of-the-enveloping average burn will NOT work here because the timing of expenses matters (think taxes), so you need to have a solid financial projection model that shows cash flows, and even with that budget for lots of unexpected surprises the earlier / less established your business is.
An even newer option: there are some new kids on the block that have designed programs to automate the above for you. Save yourself the hassle of the treasurydirect website (likely built around the same time as the second constitutional convention) and try a service like Meow.co. Meow provides a high interest checking account that invests directly in T-Bills. Accounts are custodied in SMA’s in your name with BNY Mellon Pershing. I just learned about meow so can’t endorse it, but I like the concept.
