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

0:00All right, everybody, it's time to get back to basics. That's what we do here at This Week in Startups. Sometimes we just say, hey, let's pause for a second and let's talk about the basic things you need to know about in order to run your startup. And one of the most important things for you to get right is your finances, right? You got to have tight accounting. You got to have tight finances. And so my friend Scott Orne is from Cruise, K-R-U-Z-E. Many, many of our startups use Cruise as their accounting and finance partner. and scott's a cfa obviously and he is passionate about startups just like me and um welcome back to the program scott thanks jason appreciate it thanks great to be here yeah so we you know we last talk in 2022 i think it was complete utter chaos we had silicon valley bank and a bunch of startups closing we still have startups shutting down but the market seems to have reached some sort of, I would say, floor or some sort of sanity.

0:58So is that in line with what you're seeing here in the fourth quarter of 2023? That's exactly it, actually. So we're still seeing a lot of companies go out of business. But interestingly, Cruise is pretty interesting because we can see all of our companies' cash balances and we can see their burn rates. So we have over 800 clients. So we're like a really good index of the startup ecosystem. And just in the last like three months, the median cash at a startup has been ticking up for the first time in about nine months. So that's significant. It's the bottom, right? Potentially the bottom. But what we think happened was, I hate to say this because the people who work at startups that go under, they've worked their butts off.

1:40But some of those companies were funded, maybe didn't quite make it, didn't deserve to be funded, whatever it is. The weaker companies have been culled a little bit. Sure. So now the good companies are getting funded and raising more money and that median is ticking up. So I think it's an awesome sign. And we kind of hear that anecdotally from the founders. You probably hear at launch, you know, we're like, hey, it's getting a little easier or I have less me too competitors, things like that. Yeah, I mean, let's be candid. You know, startups are an experiment. You know, 80, 90 % return nothing to investors.

2:14In other words, they fail to reach escape velocity become sustainable companies and have an exit okay that's fine we're all grown-ups we go into this knowing that we're swinging for the fences that's totally okay for the companies to shut down but we had something very artificial for the last three or four years of the peak market which was the companies that would have normally shut down after 18 to 36 months of operation they didn't reach product market fit great you tried you know uh That's okay. They were able to get bridge rounds, they were able to get extensions. And so they stayed alive a little longer than they probably should have.

2:47And then now that the markets are shut down, and people are being more diligent in how they deploy venture funds, and then LPs are being more diligent in how much money they give to GPs to put into startups. Hey, you know, things are going to get a little tighter. Like you said, the herd will get culled. And, you know, there's a lot of lessons for the companies that survive. And one of the most important lessons is how do you manage your treasury? If you are, in fact, having your, you know, money in your bank account and your treasury increase, well, you want to put that money to work for you and you also want to protect yourself.

3:22So that's really an opportunity and a defensive strategy. Let's go through those two things. So you, the, the most important, by the way, I should say we're, this is not an investment advice. There's registered investment advisor stuff. The great thing is if you're a startup and you're listening to this, we're going to talk high concept here. Any bank, fund, anyone you talk to is going to be a registered investment advisor. So they're bound by all these compliance laws by the SEC. So they're going to take care of you. Otherwise, they're breaking the law. We're talking in generalities. And this is for educational purposes only.

3:53Please consult your registered investment advisor. Disclaimer, disclaimer, disclaimer. Exactly. So the most important thing is safety. And we've talked about this before, I think. Like no venture capitalist gave you money, startup founder, to speculate on commodities or speculate in the junk bond market or whatever it is, right? Like they want you to have that money locked up, safe and accessible, which is liquidity. So safety and liquidity are two of the most important things because, you know, you're a startup, you're going to burn your cash. And so over time, if you look at your burn rate, you know, you're going to spend$100 ,000, $200 ,000, whatever it is every month.

4:29plan ahead, keep three to six months of cash in your operating account, put the rest in money market, treasury, a safe place so that, but also two or three days away from liquidity, being able to pull back into your bank account. And also I'm a huge fan of having an investment plan that the board actually ratifies. You want to be able to say to your board, like Jason, if you're on the board and you get like that five page plan, it says like, hey, we're only putting money in short term, you know, treasuries and government bonds. You feel pretty good about things, right? Sure. And you're going to get that 5 % or 6%, whatever it is.

5:08And hey, that could be meaningful. You get$2 million in your account. It's a hundred grand a year. That hundred grand a year could pay for another headcount. I was out to dinner last night with my buddy who runs a startup has$40 million in the bank. He's making$2 million a year in interest. Like that's a sizable amount of money for his company. I mean, that's a lot. 20 employees. Yeah. Yes, exactly. So one thing we see, and kind of, this is why I'm so fired up about this is at Cruise, our clients right now have something like$4 billion. $2 billion of that is in operating accounts, which pretty much pay no interest whatsoever.

5:42$2 billion is in those money market treasuries, whatever, whatever they chose. I think there's, 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. So if that's you, talk to your financial advisor, talk to your bank, whoever is advising on this stuff and get that money, a safe amount of that money to work and make sure it's liquid, make sure it's safe. Yeah. And then what we learned from Silicon Valley Bank is don't have a single point of failure. Yes. So let's talk about that because this is another, you know, the opportunity is, as we just pointed out, hey, somebody's got$40 million in the bank account they're making two million great and it's all done safe and it's all done with your board and it's all done with experts helping you set it up these are all important facts but then there's downside protection and some people only had their money in one bank account and we saw two bank accounts have runs on the bank uh earlier this year silicon valley bank and um uh first uh first republic yeah and so you guys again it's amazing uh that cruise has all this data and this is all anonymized data it's in like one individual copy this is aggregate data so let's talk about the aggregate data uh how many bank accounts should uh in your mind if you had like say a treasury of three million dollars should i have three banks four banks i had somebody telling me they were whatever the fdic limit was or the protection was maybe it was 250 that they were going to put this across eight banks oh god there's what should people do there's a couple answers to that so let's answer the banks and then there's specific products inside of a bank that can help you spread that money.

7:17So first banks, I recommend having at least two banks. I think two is probably fine for someone with$3 million. And what we've seen now is a bifurcation after SVB and first buck. And by the way, we had 550 clients with SVB. We had another 120 clients with first buck. So my world was not great for those two weeks. It was a tough time for everybody. Crazy chaos. Yeah. So, so what we see now is companies, let's be totally honest, the big giant money center banks don't always have the best kind of operating experience for a startup founder, right? They're not whiz bang, log in portals and do all this stuff.

7:56They're not modern software. Yeah, exactly. That's better. Legacy software in most cases. But they will not go bankrupt. And so that's very important. So what we see, we call it the escape hatch bank, where we're seeing a lot of companies have an account with the JP Morgan, Wells Fargo, Bank of Americas of the world, and keeping some money there. But also keeping money in some of the neobanks or the new version of SVB, Stiefel, some of those folks. Because those are a little bit easier to work with, right? Yes, you're talking about Brex and Mercury. Yes. Yeah, not to give them a free ad or anything, but these are great services.

8:30They're great. And Brax and Mercury, we can mention them. So you had your Silicon Valley Bank, First Republic. Those were like boutique banks focused on Silicon Valley. And I think those are kind of recovering now, and some people are starting to use them again and feeling great about it. Then you have the neobanks, that's Brax, Mercury, and some others. And then you have the classics, the old school, the Wells, the Bank of America, Morgan Stanley, et cetera. It's exactly right. And from a stat perspective, we've seen before the crisis, half of all startups that Cruise banked or Cruise works with had their money in SVB.

9:02Now that's down to 25%. Crazy. Actually, what I hear from the founders post SVB crisis is like a lot of them are sticking with SVB. So SVB has done a pretty good job. I got to hand it to them. Like they've done a good job of hanging on to those relationships, doing the right thing. We've seen them restructure a lot of debt, which they didn't have to do. And you probably see it on the launch portfolio too. but like it's they're doing the right thing so but yeah that mercury was certainly that's certainly a goodwill gesture to like you say it could be hardcore about the venture debt that founders could have so i think that they're doing the right thing there and yeah you know they they they have the number of accounts cut in half but uh they can rebuild from here and uh it looks like jb morgan was a big beneficiary huh oh huge huge beneficiary and mercury and brex did really really well too and again well those are great services now going back to your first question so you're going to have two banks, your operating bank and escape hatch bank.

9:54And then within all these banks, except for JP Morgan, I think they have a product called it goes by different names, but insured cash sweeps. And what that is, there's actually a network out there called Intrify that spreads deposits overnight across many, many FDIC banks. And so it's almost like, you know, how we virtualize software and virtualized servers over the years. It's load balancing your money. Yes. They've load balanced and virtualized the deposit base. And so that money goes out overnight into all these other banks. It's safe. It's insured up to the$250 ,000 limit. And then it comes back kind of virtually.

10:29So pretty much every bank is offering that now, except for JP Morgan. And I think JP Morgan's stance is like, we're JP Morgan. We don't really need to do that. And God bless them. They're right. They don't have to do that. These are called sweep? Are they called sweep accounts sometimes? Insured cash sweeps, ICSs. You'll hear it like that a lot. but it will just say sweep accounts yeah yeah yeah the critical part of that is the insured part because they're they're only spreading the money out in 250 000 bites to all these you know the bank in plano texas that has fdi insured that kind of stuff but that has made people it's a lot of people to sleep a lot easier they know everything's insured there's a little bit of a fee for that but it's in my mind it's totally worth it so that's the other technique that people are using to protect their money.

11:13Yeah, it's fantastic. And now I noticed from your statistics, you're tracking how many of your customers have multiple bank accounts. And it's about two bank accounts for every startup. So here we go. If you look at this chart, if you're watching, you can see the percentage of startups with a funded account by bank, and it's over 200%, which means I think if I'm reading the chart correctly, that they have two or more. That's exactly right. So before the median startup, and this is kind of showing everybody, but the median had one for the most part. And that's, you know, that's across the cruise client base.

11:50Now almost everyone's got two. Yeah. And they should. And some people, like you said, you talk to those founders that have three or four because they're going crazy. I don't like to have too many because then you're not paying attention. Yeah. Yeah. You don't want to like lose track of stuff or forget that you have$500 ,000 somewhere, things like that. Here's the reason I like to have three. if you ever need to get a venture loan down the road or you need some help with something you have the name of somebody and you have a point of contact and you have that relationship already set up so if you're unhappy with your current provider as is your right you don't have to go start another account you've already got it set up and so if you you know bank a is not giving you the service you want you just and you have you know let's say 10 in banks b and c you just take that 80 % in a and you put 70 % of it into bank number B and then they call you the next day and they're like hey no I literally did this they weren't being responsive yeah and I was like you know what I have a choice they work for me and I'm not chasing them anymore so I just said to my person leave$1 ,000 in that account like I was like what's the minimum you can have there without getting fees I don't maybe it was 5 ,000 and I was like great leave that number plus$1 and it will be very clear to them what I'm doing.

13:08Yes. When 5 million turns to$5 ,001 and move$4 ,995 ,000 to the other bank. I did it. It was crazy. If I can build on that too, people think that like their bank is going to like contact them and be like, hey, Jason, great news. We're going to pay you more interest. We're going to pay you a higher interest rate this month. They will not contact you. No. You have, they will quietly continue to manage your money for 3 % or three and a half percent instead of paying you five or five and a half or so you need to be proactive and actually pay attention to that stuff and you're absolutely right the day you move that money out is the day you get their attention you're going to get the market rate what what they should be paying you so i i think that's a great tactic obviously you hope they'll be more responsive and not make you do that but yeah this is for like you know two or three emails without a call yeah exactly yeah yeah um you know i did that once too i went to a bank and i needed to get money out for the world series of poker and they're like sorry i can only give you 5 000 bank of america yeah and i said yeah i said listen i'm going to world series and i have like x millions of dollars here um and he's like sorry that's the thing and i said okay i said this is your card here i said okay um uh uh here's uh my assistant we're moving every dollar out of here tomorrow i said it's great to meet you um and i put the card in my pocket and i turned around i walked out he said hold on a second let me see if i can call my manager that's incredible turned around immediately so you know sometimes you got to remember like the service providers are there to provide a service and you know all these rules that they make those are all flexible if you need help like this is why silicon valley bank and first republic were so successful yes is because they would come to your office they would talk to you they'd take you to lunch or have a coffee and then they just would be thoughtful about the banking relationship i i really hope that you know and i think what is uh silicon valley bank is now called citizens bank it's um there's a citizens in philadelphia that's a major bank i think it's first citizens maybe um but they still go by svb first citizens yeah yeah it's like at first citizens or something i don't know but the cool thing if there's a if there's a kind of a positive in this whole thing is a lot of great people stayed at SVB and we talked to them all the time and they're very proactive.

15:23And then some really good people left SVB. So there's more, it used to be, you basically had two bank choices, First Republic or SVB. Now there's a lot of different banks that you can work with, with that same culture because these other banks hired the SVB personnel to bring that culture, build that business at their banks. So you have a better, you have a lot more diversity of choice nowadays which i which i like um but you know that you're right they those banks were wonderful to work with and they got startups and i just think it's gonna they're gonna all rebound it's gonna be i think they'll all rebound i think that white glove service which they were criticized with i think because silicon valley bank just made it everybody think oh this is rich tech people it's like peter teal or whoever's money you know some rich venture capitalist it turned out like they were the local town bank they did my my kid's school uh and so like one of my kids school was like uh we don't know if we can pay our teachers next week can is there any rich person who goes to our school can pay our teachers oh my gosh that's when i sent that all caps tweet i was like whoa i'm really concerned here like the schools are going to not be able to get their money all right so just high level it's really three core concepts we talked about here you got you got cash uh you got capital preservation that's number one got to make sure that that capital is preserved you got liquidity got to make sure you can get to your money and then you have risk management okay just ballpark sum those three up for us as we wrap here yeah i mean the The capital preservation is not taking, not putting things in exotic securities, right?

16:48Short-term government bond funds, things like that. The US government treasuries are paying something like five and a half percent right now for three or six months. Like the US government's the best creditor in the world. So these are the kinds of things you want to think about. And then that, so that's the capital preservation. On liquidity aspect, you want to be able to get that money in one to three days. You don't want to have to wait 10 days, 30 days to get access to your capital, right? You just never know what's going to happen. So, but most of the service providers out there understand that and are hitting that window.

17:19And then the third thing is risk management. This is again, like you, you just don't want to do anything crazy. You also want to have that investment plan ratified by your board. So they agree with it. They're on the same page that will keep everybody aligned. And if you're a startup founder and you gamble with this money, like you're not going to get to play the game again. You know, if you keep it simple, keep it simple, keep it simple. and your job is to build a great product, build a great team that builds a great product that delights customers. This is, you know, these are your chores. Whether it's HR, it's accounting, it's legal.

17:53These are the chores that are required of you. Have a great partner like Cruz, have a great board, come to your board, show them the plan. Hopefully you got adults on your board who are going to say, no, you can't buy Bitcoin or NFTs. Yeah, no, that doesn't work. You can't bring it to Vegas and play in the World Series of Poker. That's not what this is for. even if you're the best poker player in the world. Keep it simple. Tight is right. Scott, great job. Thank you, Jason. Appreciate it. And we'll see everybody next time here on This Week in Startups Startup Basics.