This Week in Startups - Managing your cash reserves | Startup Finance Basics w/ Kruze's Scott Orn | E1644

Episode Date: December 21, 2022

Kruze COO Scott Orn is back with Jason to educate founders on how to get the most out of their cash reserves. (0:00) (0:00) Your fiduciary duty to protect and invest your cash responsibly + developing an investment policy  (8:00) Evaluating your chart of accounts + Jason's credit card hack  (12:30) Final thoughts for founders going into 2023  Check out Kruze: https://www.kruzeconsulting.com FOLLOW Scott: https://twitter.com/scottorn FOLLOW Jason: https://linktr.ee/calacanis FOLLOW Molly: https://twitter.com/mollywood Subscribe to our YouTube to watch all full episodes: https://www.youtube.com/channel/UCkkhmBWfS7pILYIk0izkc3A?sub_confirmation=1

All right, everybody, the time has come. The final episode of Startups Finance Basics with my pal Scott from Cruz. It's the final episode of 2022. A heck of a year. This one was one for the books, was it not? It was. It was a heck of a year. And we're going right into January, which is crazy busy for us.

And a great time to get all your financials all settled. And I'm excited to talk about what we're going to talk about right now because it's a positive thing to talk about. like it's great. Yeah, I mean, people do have, in some cases, a lot of cash on the books. If you were smart enough to raise in the up market, you got cash. If you close around, you might have a lot of cash. And now you used to have zero percent interest that you put money into a bank account. You got nothing.

Now we seem to have options for people to make one, two, three, four percent on their money. This doesn't seem like a lot. But if you raise $10 million, getting $400,000 pays for two, three staffers. It could be four salespeople. It's amazing. It's amazing. And there's just so many people out there that don't know this and are just sitting with their money in their bank account earning no yield.

We've actually been doing like tons of sweeps around Cruz, around the Cruz client base, just being like, hey, you've got your money in a zero interest bearing account. Please let us help you at least just email your banker and get into like a very simple money market account where you can get 3%. It's like, oh my gosh. So you're right. And you could hire two more engineers at least for $400,000. Like that, you can make real progress on your startup. Absolutely. And you know, this is the, you've raised this money. It is your fiduciary responsibility to store it safely and wisely. I don't want people buying Bitcoin. I don't want people putting it in equities. That's not your job as a founder, but putting it into a safe

interest bearing account. That's expected, right? So you're not expected to buy bonds. You're not expected, although I did do that one time. I think bonds was okay when I talked to my account. So let's start there. What type of accounts are okay, which ones aren't? If I bought a bunch of muni bonds with, let's say I had $10 million and I put $3 million into munis, $3 million into treasuries, $4 million into a interest-bearing account, they all did four, five or six percent. Would I be okay? You're okay. I would just make sure you use an advisor to do this. Make sure you use like a service because I really want to hammer that fiduciary point you made because you cannot as a founder lose this money.

This is the venture capitalist money. This is their limited partners money. It's not even their money. And so they have a fiduciary duty to make sure you are doing things correctly and being safe. So one very simple step is just to develop a very simple investment policy. It's like a two or three page document that you ratify at the board level and just say, we are going to invest in very safe, very liquid with a little bit of yield. investments. This is what it is. And then you spell out exactly what you spell out money market

funds, certificate of deposits. You can do bond ladders, but you want to keep those very, very short term. Ideally, like within, you basically want to time it so that money is coming out of those bonds every month to fund your operating expenses a couple months ahead of time. And you see, you want to kind of stay at like a 12 month maturity. So maybe 18 months have you got, if you're sitting on like four. That's staggering. That's what the bond ladder is supposed to contact. But you, You maybe get out 18 months, but really I would stick to kind of three to 12 months. But the bond gets you, what, 25% more? So you go from three to four or four to five.

Yep, that's exactly it. So you get a little bit extra, but remember, it's a little bit harder to access that capital versus like a money market or savings. But you can sell those bonds if you're using a service. So I wouldn't just go out and like. What is this service? It's a money manager or somebody at Morgan Stanley Goldman Sachs, someone like that? All those banks have them. They all have money management or they call them Treasury Program.

And also like, Treasury program. I didn't know the word. All the, all the banks have it. Got it. And then there's also some. First Republic. Exactly. Treasury services.

And then there's also like some kind of specialized tech companies that do this and try to do it in a very efficient way. You know, you really just want safety at the end of day. And I am, I'm a fan of like this very simple savings account or money market account because then it's still sitting there in your bank login where you can actually see it every day or some of these specialized services. You have your login. and you can do a one-day transfer and get the money very quickly.

I do think there's room for bond ladders, but those are more for companies that have raised maybe $20,000, $40 million, which even today, there's still a lot of Series A, Series B companies that have raised, like, huge chunks of capital. I have companies in my portfolio sitting on $50 to $100 million right now, and we're having these discussions, high-level board discussions, because, hey, we might be doing a riff, we might be laying people off, and we need to think that through.

Hey, if we're going to be cutting people, and we can get an extra 25% on this interest, maybe we cut one less person, we put more money to work. What are the horror stories here? Because there have been people who have done stupid things with their treasury. What are dumb things? My old horror story used to be auctioned race securities in 2008 through 2010. There was a Silicon Valley Bank, not the Silicon Valley Bank, a Silicon Valley Bank.

Okay. Lowercase. Yes, lowercase. Thank you for clarifying that. No problem. I don't want to get trouble with my friends at SBB. No, we love SB. We're going to lose tickets to the Warriors games.

We have, they have the most clients with crews by any, any bank. So, but so this other bank was selling auction rate securities and it's ill liquid, but the auction had never failed. And you could get, you know, 300 more basis points. It's never failed. Lehman goes down. All of a sudden, these auction rate securities freeze. No one can get their money out.

I remember why I was working in Venture Capital time, we had a client, a company that had $35 million on their balance sheet and 30 of it was an auction rate securities. What do you think happened? Of course, the CEO got fired. Of course the CFO got fired. got fired. The company ended up getting sold because they had a liquidity problem. The VCs didn't want to put more money in because they had to go back to their partnership and say like, look at this boneheaded thing, this company did. And that was happening a lot. Who's the board member?

Who's the partner on that one? I'm not going to say. But so that. No, no, I don't want you. Don't please don't. I have to beep it out. That was my old example. And now we have a brand new example with all this FTX meltdown and hedge funds having to close and God knows how many startups have money at some of these places. I mean, I remember personally, and this sound, I hope I don't come across the wrong way here, but like I remember personally talking to like 10 or 15 companies

nine months ago who had been kind of hold that if they put their money of block five, they could get, you know, 6% or 8% when interest rates were like zero. We've talked about this over and over. Yeah, it's crazy, right? So I just would just and I, and you know, I mean,

you're sure you've been looked at like this meat, at the same way I was, Jason, like I was looked at like the person who didn't understand things. Yeah, you were the dumb one. You don't get it. Okay, boomer, have fun being poor.

You know what? Have fun staying in business. Yes. Have fun being a good fiduciary. Have fun being professional. You don't need to make the extra two points on something that could explode in your lap. And the fallout from this has been nothing short of tragic.

There's a lot of companies that are going to go out of business that didn't need to because they got greedy. And they started playing in instruments that you and I, people have been in the industry for decades. We have together a lot of experience. If we don't understand it, what business does some first-time founder have playing these silly shell games? And it's so sad because you lose money like that and you go to,

you're done, like you're unfundable the next time. That's it. If you build a startup and you don't make it, but you tried everything, your investors are going to respect you. They'll be there probably to finance you another time on your next startup. If you just blow five or ten million dollars because of a lack of fiduciary responsibility, like, no one can fund you again. You're done.

I mean, the other thing I'm doing and I'm seeing some of my founders do right now, it's a very simple thing to do. You just get your chart of accounts out, and I'll have you explain what a chart of accounts is in a minute. And you as the CEO or founders, you sit around and you talk about your chart of accounts and you say what bills are reoccurring every month. And then I have a little trick I do. I will take all of our credit cards with all these SaaS subscriptions on it.

And I have ones where you can set, there are these dynamic ones. You can say, hey, this has a $10,000 limit or it's a $10 limit. And I will set it down to $10. And I say, I want every single SaaS software, every single periodical, anything you have a subscription to, it's going to bounce. So keep an eye on your emails. And then we'll move it to a new card. And so that was the 2022 card. we're now moving everybody to the 2023 card,

and then you can not get these surprises. There is a lot of subscriptions, there are a lot of subscriptions in these companies, and they build up, and it could be one, it could be 4%, it could be 3%, you don't know. And maybe there's SaaS software that one person's using, but they bought six seats.

I had this happen. Two people were using it. We're paying for eight. I told the person, hey, we're going down to two. I had another provider. They were charging us to store some data, data, and it turned out 10 years after being on the service, there was a company that was doing it for free.

We went from paying $24,000 a year, Scott, to paying zero. Oh, my God. That's a lot of money. Now, you have to look at the SaaS software, you have to look at storage providers, whatever. It may turn out there's somebody out there who has looked at the market and said, you know what? People used to pay to host their videos. I'll do it for free.

Well, what about the one, I mean, I love what you're doing because, What about the ones that just charge you every year? And the person who signed up for it left six years ago. And no one even knows what's happening. You know, like that happens a lot. You can look at your chart accounts. Also, your account should send you what's called a general ledger, which sounds a little scary. But all you do is skim down that.

It's not that hard. And just look at the vendor's names every time. And you can also get your account to give you spend by vendor. That's actually what I like to look at. Oh, spend by vendor. Yeah, it's awesome. It's a very easy report. And then you just go, boom, boom, boom.

Oh, don't need that. Because the other question is, do we need this, though? If we're in a recessionary environment, do we still need this? Can we consolidate? Yes, it's crazy, right? It's time to have the discussion. And you know what? It's a hard discussion.

But every startup right now is saying, who's essential? What's essential? And if this person is not doing essential work, you know, hey, listen, there's the easy thing, the lazy thing, we have to fire them, we'll let them go, we do a riff. But you could also say, as management, is there something essential they could be doing? So it could be just the same way you're looking at that list of vendors, chart of accounts, whatever it is,

looking at where your money is stored, making sure you got those yielding accounts, not just a checking account. And then just think to yourself. Can I make a point of that real fast, Jason? Yeah, yeah, please. The interest that you are paid on your cash is an expense for the banks in anyone else. They are not motivated.

They're not going to call you. Yes. In fact, you probably have to call them. two or three times with multiple emails. I get that call. I've gotten that call once because the money manager really wanted my business. So, because they were like,

hey, J-Cal, we want to manage your money for you. And I said, oh, here's a copy of my book in 11 languages with 2,000 five-star reviews.

Please let me know after you read the book if you think you can beat my returns. Oh, this was someone who want to invest your money like in the stock market and stuff like that. that interesting. Exactly.

And I touched them. I said, hey, please read the book. And then come back and tell me what you can do that's better than what I do in my day job as an investor. And they came back. You know what they said? We actually, we talked about it in our meeting and we're wondering, would we be able to get some of our customers into your funds, your venture fund? And I was like, okay, well, now we're talking in the right direction.

Because you can't beat a venture capitalist returns. Why would I give you my money to invest when I have the, the best most precious asset class in the world, startups, which you and I are passionate about. That's why you and I, Scott, do this every year to make sure startups get it right. The best place in the world to work

is in the startup ecosystem. You love it, I love it. Anything in terms of wrapping up here that we need to let people know as we close 2022 and go into 2023. Just be a squeaky wheel with your cash, make sure you're getting a yield that can pay for a couple extra people.

do what you said, which is go through your expenses and make sure you're not wasting money. I love the credit card limits. It's also a great way to prevent employee fraud, having low limits. You'd be shocked at how often we see employees spending a bunch of money on their credit card. No one knows until it's too late. They quit. They're out of there. It's hard to get the money back.

And then just be really smart about your financial plan. Make sure you have a financial model. Make sure you have budget to actual. So you compare what you projected to what you're actually doing. and then be in constant communication of the VCs. There's a lot of companies right now that are going back to their inside VCs, the people have already funded them once and having to ask for more capital. And like you said, you know, it was a market where you could just walk down the street and get a term sheet.

That's not how it is anymore. You need those people to understand your business. You need those people to believe in you. You need them to be willing to write another check, even if it's just a test from an outside VC who's looking at the company. they want to know the insiders are supportive and that they're not coming into something that's actually failing.

So those are my four tips. I love it. If you're not credible with your existing investors, you're not fundable. You know what the first thing that happens when somebody is looking at investing in one of our startups to do the Series A after we seed funded?

You know what they're doing? They're picking up the phone. They're calling me. They text me, hey, J-Cow. Want to go to a Warriors game? I got a couple of companies I want to talk to you in your portfolio. Hey, J-Cow.

Want to get some ramen? okay, let's do it. I get these phone calls on the regular. And then founders don't even know these phone calls are happening. No, no. These phone calls are happening and your credibility, the discipline that you have on a lot of these blocking and tackling issues, when we're in a market like this where a founder, where a founder doesn't have three or four term sheets and they're running an auction, when it's the opposite. The VCs are considering three or four companies and there's no competition

for the deal. When there's no competition for the deal, it's going to go to the person. who's the most credible, the easiest to work with, the most discipline, the best communicator, all things being equal. Let's say that all three businesses are equal. The founder who has it together, I always say this, tight is right. And I know accountants, the accounting firms love to hear tight is right. We do. That's what we live by. I mean, listen, this is like if you're a pilot of a plane, you go through a checklist, you make sure you have the right amount of fuel. You want to make sure, hey, your account is your co-pilot. Your attorney is your co-pilot. You got the cockpit? Hey, how much fuel do I have? You got 4,000 gallons of fuel. Now I repeat it back. I got 4,000 gallons

of fuel. Confirmed 4,000. Okay, what's our burn? I got burned 250K a month. Yes, burn is 250K a month. Okay, confirming 250K a month. We're going back and forth. Just making sure we know what this plane is capable of doing. If we got to land this plane and we got to refuel, Let's make sure we know all these numbers. Don't be afraid to just spend an hour with your accountant. They are waiting for the phone call. And listen, best in the business, Cruz, Cruz. Go to Cruise Consulting.com.

I got the domain, right? Right, right? Cruise Consulting.com, yeah. That's it. Very simple, people. And that's Scott. He's the C-O-P-Ectus. This week in Startups.com slash basics.

We're going all the way back to 2014 there. We'll see you next year. Scott, thank you for doing this. You're a true, Mench. Thanks. On behalf of my founders, who I hear from, you keep the bills reasonable and you keep the service level high. That's what I like in my partners.

Reasonable bills, I don't want you to discount. I want you to a fair price. I don't want to get overcharged. I don't want to be undercharged. I want the right price for the right level of service, which you do. And you're responsive and you take your time teaching people. That's important to me. That's why we have a good partnership.

Appreciate Jason. Thanks to everyone at launch too. You guys are amazing. We try to work hard. We try to match your level of service. Okay, we're all in the service business, whether we're writing the checks or you're making sure the accounting is tight. We're all on this together.

Or Wilson's doing the legal work. We're all in it together. All right, everybody, have a great break. And then January comes and we get back to work. Let's go.