Managing Cash After Raising A Round
Your investors just deposited millions of dollars in your checking account. Should you really just leave it there?
Congratulations! You’re the Founder and CEO of UnicornCo, and you’ve just raised a Series A round of $3M.
After several grueling weeks of investor pitches and negotiations, you’re ready to take a moment to relax and celebrate. (But only a moment — then it’s right back to the real work of growing and improving your business.)
When the investors’ wires hit your business checking account, though, you realize that you have a new problem, and it’s not one that you’ve considered before this moment…
What should you do with all this cash?
You have a business plan and financial projections, of course — your burn rate is $75K per month, and given how fast you’re planning to scale, the $3M should give you roughly 18 months of runway. That means you won’t touch most of this cash for a while. You shouldn’t just leave it all in your regular business checking account… Or should you?
In this article, I’ll describe three cash management strategies that are commonly used by startups at the Seed and Series A stages. I’ll also share tips from founders who have tackled this question in the past, and I’ll offer a few suggestions for CEOs who suddenly find themselves with a large sum of idle capital.
Define your objectives
Almost every startup should design its cash management strategy to satisfy the following four objectives:
- Limit risk — The point of raising capital is to build a successful business, not to make money as a day trader. Your first priority should be to safeguard the funds that you’ve raised.
- Stay liquid — Flexibility is extremely valuable to any early-stage company, so be careful that you can always access more cash than you think you’ll need in the near-term.
- Simplify the financial management — Founders’ time is valuable, and you need to stay focused on growing and improving your business. Unless you already have a strong CFO on your team, don’t over-engineer your strategy. When in doubt, remember the famous Navy saying — “Keep It Simple, Stupid.”
- Earn a return on your cash — The interest that your cash will earn can have a meaningful impact on your business. For every $1M of cash on hand that your business holds for a full year, each additional 1% of interest is worth $10K. For a startup that has just raised several million dollars, adopting a smart cash management strategy might even pay for an additional employee.
Although almost all startups should share these objectives, the relative importance of each differs by company. Because of this diversity, there is no single “correct” approach that every startup should adopt.
A hardware startup with an unpredictable cost schedule and $750K in cash on hand, for example, will likely need to prioritize liquidity over earning a return on its idle cash. A SaaS company with highly predictable expenses and $5M in cash on hand, though, can probably afford to sacrifice some liquidity in order to generate higher returns.
Example One: keep all money in a checking account
The scenario:
UnicornCo keeps 100% of its money in a simple business checking account.
Key takeaways:
Except if they have very little cash on hand, most startups should not rely solely on a business checking account. Checking accounts provide an easy and straightforward way to store cash. Unfortunately, though, they usually offer very low interest rates.
The details:
Checking accounts have two main advantages.
First, they are designed to make deposits and withdrawals easy. It’s difficult to imagine a more liquid way to store your company’s cash (except perhaps to stash it under your mattress — and we don’t recommend that approach!)
Second, storing all of your cash in a checking account will make it very easy to understand, manage, and report your company’s finances. As Modumate CEO Richman Neumann wrote, “One nice perk [of using a checking account] is that each month, I show the whole team our bank account, and the checking account’s balance is a complete picture of all the money Modumate has left, so it hits the point home well.”
The main disadvantage of checking accounts is that they usually offer far lower interest rates than those available through savings accounts or Treasurys.
The difference between 1% and 2% may sound insignificant to a time-pressed founder — in reality, though, it represents $10K per year for every $1M of idle capital.
For startups with large sums of cash on hand, checking accounts and savings accounts also carry a hidden risk — bank failure.
Although very rare, bank failures still occasionally happen. The Federal Deposit Insurance Corporation only insures business checking and savings accounts up to $250K, so any startup that keeps millions of dollars in a single account is accepting at least a small risk of disaster.
Example Two: keep most money in a high-yield savings account
The scenario:
- UnicornCo keeps enough cash for two months of runway in a simple business checking account.
- UnicornCo keeps the remainder of its cash in a high-yield business savings account.
Key takeaways:
For many startups, relying primarily on a savings account is an excellent choice. This approach is almost as convenient and simple as relying on a checking account, and it usually offers returns that are only slightly lower than those available from more complicated (and potentially constraining) strategies.
The details:
Savings accounts sacrifice some of the liquidity and convenience of checking accounts in exchange for higher interest rates.
This week, I’ve spoken with a handful of founders who have opened high-yield savings accounts during the past several months. Judging by this highly anecdotal evidence, a founder who opens one of these accounts can currently expect to receive an interest rate of roughly two percent.
Commercial banks compete on convenience, fees, and amenities. As a result, the interest rates offered by various banks can be surprisingly inconsistent. In addition, banks are often willing to negotiate rates and waive fees — especially for customers who plan to open accounts containing millions of dollars.
For these reasons, it’s almost always worthwhile to shop around at a few banks and attempt to negotiate your rate before opening an account.
Unfortunately, there are a few significant drawbacks to relying on a savings account.
Many high-yield savings accounts will require you to commit to keeping most of your balance in place for a year or more. Early or frequent withdrawals might incur steep penalties.
Also, savings accounts and checking accounts are equally susceptible to the risk of bank failures.
Most importantly, the interest rates available through simple business savings accounts are typically lower than the (virtually risk-free) interest rates offered by Treasurys.
For a startup with only a few hundred thousand dollars of cash on hand, this difference is unlikely to make a significant impact. For a startup that holds millions of dollars of cash, though, a few dozen basis points can quickly translate into tens of thousands of dollars.
Example Three: keep most money in short-term Treasury bills
The scenario:
- UnicornCo keeps enough cash for two months of runway in a simple business checking account.
- UnicornCo invests the remainder of its money in 4-week U.S. Treasury bills.
Key takeaways:
For most startups with many months of runway and at least several hundred thousands of dollars of cash on hand, this is an excellent approach. By purchasing short-term Treasurys, many startups will be able to earn interest rates that are a few dozen basis points or more higher than those available through most business savings accounts.
The details:
Purchasing U.S. government debt is a safe and relatively easy way to generate a decent interest rate on your company’s cash.
Some founders do this via TreasuryDirect.gov, which allows investors to buy U.S. debt directly from the source by participating in U.S. Treasury Department auctions.
As of February 27, the interest rate for one-month Treasurys was 2.43%. (You can find the most recent data on this page of the Treasury Department’s website.)
For the past decade, the spread between the rates for one-month bills and one-year bills has remained very small. As of February 27, for example, it was only 12 basis points (2.43% for one-month bills and 2.55% for one-year bills.)
As long as the difference continues to be so small, most founders who buy directly from the Treasury Department should opt for the one-month bills. For most startups, it isn’t worth locking up capital for several months or more in order to eke out such a small advantage.
Although TreasuryDirect provides an easy and low-cost approach for many startups, it’s worth checking whether your bank offers any simpler alternatives.
My favorite cash management solution, for example, was explained to me by Own Up Co-Founder and COO Mike Tassone. At the end of each day, Own Up’s checking account automatically rebalances to a preset target. Any cash above the target amount is automatically deposited in a separate money market account that is fully — and automatically — allocated to Treasurys.
So, what should your startup do?
There is no one-size-fits-all solution. Your company’s answer will depend on the amount of cash it has on hand, its burn rate, and your own comfort level with the various options.
I suggest that you set aside a couple of hours to game out a few options. Then commit to a simple plan, and stick with it.
Regardless of what strategy you choose, it’s a good idea keep your investors informed. They may have handled this question in the past, and so they may be able to help. Also, this is an easy opportunity to update them about a small win while reassuring them that you’re responsibly safeguarding the company’s funds.
Please let us know what you think
Have you managed cash for a startup? Is there another strategy that this article doesn’t explain? Do you agree with these recommendations?
We’d really like to hear from you, so please let us know your thoughts!
You can reply in the comments or email me directly at patrick@launchcapital.com.
Thank you to the many people who shared their advice, feedback, and personal stories to help create and improve this article. I’d like to extend a special note of thanks to Kevin Rocco of Biorez, Tommy Nicholas of Alloy, Richman Neumann of Modumate, Ben Reich of Datasembly, Krystle Mobayeni of BentoBox, Ryan McDevitt of Benchmark Space Systems, and Mike Tassone of Own Up. This article would not have been possible without your support!
