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

Episode Date: November 8, 2023

Todays show: Kruze's Scott Orn joins Jason on the latest edition of Startup Finance Basics! In this episode, they discuss the current state of the market (0:40), diversifying bank relationships (6:09), managing risk (16:25), and much more! * Time stamps: (0:00) Kruze's Scott Orn joins Jason (0:40) The current state of the market (6:09) The SVB lesson: Diversify your bank relationships (16:25) Capital preservation, liquidity, and risk management * Check out Kruze: https://kruzeconsulting.com * Follow Scott: https://twitter.com/scottorn https://www.linkedin.com/in/scottorn * Read LAUNCH Fund 4 Deal Memo: https://www.launch.co/four Apply for Funding: https://www.launch.co/apply Buy ANGEL: https://www.angelthebook.com Great 2023 interviews: Steve Huffman, Brian Chesky, Aaron Levie, Sophia Amoruso, Reid Hoffman, Frank Slootman, Billy McFarland Check out Jason’s suite of newsletters: https://substack.com/@calacanis * Follow Jason: Twitter: https://twitter.com/jason Instagram: https://www.instagram.com/jason LinkedIn: https://www.linkedin.com/in/jasoncalacanis * Follow TWiST: Substack: https://twistartups.substack.com Twitter: https://twitter.com/TWiStartups YouTube: https://www.youtube.com/thisweekin * Subscribe to the Founder University Podcast: https://www.founder.university/podcast

All right, everybody, it's time to get back to basics. That's what we do here at this week in startup 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 Cruz, K-R-U-Z-E, many, many of our startups use Cruz as their accounting and finance partner.

and Scott's a CFA, obviously, and he is passionate about startups just like me. And welcome back to the program, Scott. Thanks, Jason. Appreciate it. Thanks. Great to be here. Yeah.

So 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. So is that in line with what you're seeing here in the fourth quarter of 2023? That's exactly it, actually.

So we have, we're still seeing a lot of companies go out of business. But interestingly, Cruz is pretty interesting because we can see all of our company's 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. But 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 cold a little bit. Sure. So now the good companies are getting funded and raising more money. And that meeting is ticking up. So I think it's an awesome sign. And we kind of hear that anecdotally from the founders. You probably hear it at launch, you know, we're like, hey, it's getting a little easier.

Or I have less me-to 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. In other words, they fail to reach escape velocity, become sustainable companies and have an exit. Okay, that's fine. We're all grownups. 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, 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. And 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 and 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 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. So that's really an opportunity and a defense of, 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 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 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. So this is, we're talking in generalities. This is for educational purposes only. Please consult your register. investment advisor, disclaimer, disclaimer, disclaimer. Exactly. So the most important thing is safety. And we've talked about this before, I think.

No venture capitalists 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 brain, and rate, you know you're going to spend $100,000, $200,000, whatever it is every month.

Plan 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, you know, 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. And, hey, that could be meaningful. You get $2 million in your account. It's $100 grand a year. That $100,000 a year can 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, 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 Cruz,

our clients right now have something like $4 billion. Two billion of that is in operating accounts, which pretty much pay no interest whatsoever. Huh. Two 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 you 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 learn 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 dollars in the bank account. They're making $2 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 earlier this year.

Silicon Valley Bank and first Republic. Yeah. And so you guys, again, it's amazing that Cruz has all this data. And this is all anonymized data. This is like one individual company. This is aggregate data. So let's talk about the aggregate data. How many bank accounts should, in your mind, if you had, like, say, a treasury of $3 million,

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 a couple of answers to that. So what's answered the banks and then there's specific products inside of a bank that can help you spread that money. So first banks, I'm, I.

recommend having at least two banks. I think two is probably fine for someone with three million dollars. And what we, what we've seen now is a bifurcation after SBB and first buck. And by way, we had 550 clients with SB. We had another 120 clients with first book. So like, my world was not great for those two weeks. It was a tough time for everybody. Crazy chaos. Yeah. 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 whizbang, login, portals and can do all this stuff. They're not modern software. Yeah, exactly. That's better one saying. Legacy software in most cases. But they, 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, as The new version of SBB, Steeful, 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. They're great.

They're great. And Brex and Mercury, we can mention them. So you got your, you had your, 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 Neo Banks, that's Brex, Mercury, and some others. And then you have the classics, the old school, the Wells, the Bank of America, Morgan Stanley, etc.

It's exactly right. And from a stat perspective, we've seen before the crisis, half of all startups that Cruz banked or Cruz works with had their money in SBB. Now 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 that the launch portfolio too, but like, they're doing the right thing. So, but yeah, that Mercury. That's certainly a goodwill gesture too. 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 have the number of accounts cut in half. But they can rebuild from here. And it looks like J.P. Morgan was a big beneficiary, huh? Oh, huge. Huge beneficiary. And Mercury and Brex did really, 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 an escape hatch bank. And 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 virtualized 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. So pretty much every bank is offering that now, except for J.P Morgan. And I think J.P Morgan's stance is like, we don't really need to do that. And God bless them, they're right. They don't have to do that. But that product. These are called sweep. Are they call them sweep accounts sometimes? Insured cash sweeps. Icestes. You'll hear like that a lot. But it will just say sweep accounts. Yeah. Yeah.

The critical part of that is the insured part because they're, they're only spreading the money out in $250,000 bytes 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 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. Yeah, it's fantastic.

And the, 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.

Now almost everyone's got two. Yeah. And they should. And some people, like you said, you talk to those founders to have three or four because they're going crazy. I don't like to have too many because then you're not paying attention. I like having three. 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 you're 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. It's true. 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 paid? I don't know. 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. Yes. When $5 million turns to $5,000, $5,000. And move $4,995.

$5,000 to the other bank. I did it. It was crazy. If I can build on that too, people think that 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. They will quietly continue to manage your money for 3% or 3.5% instead of paying you five or five and a half. 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 they should be paying you. So I think that's a great tactic. Obviously, you hope they'll be more responsive and not make you do that. But you have to reach out of them. You know,

two or three emails without a call back or something. Yeah, yeah, yeah. 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, you can only give you $5,000.

Bank of America. Yeah. And I said, I said, I said, listen, I'm going to World Series, and I have like X millions of dollars here. And he's like, sorry, that's the thing. And I said, okay, I said, this is your card here? I said, okay, here's my assistant.

We're moving every dollar out of here tomorrow. I said, it's great to meet you. 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've 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.

It's because they would come to your office. They would talk to you. They'd take it a lunch or have a coffee. And then they just would be thoughtful about the banking relationship. I really hope that, you know, and I think what is 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. Is SBB like at first citizens or something? I don't know. But the cool thing, if there's a kind of a positive in this whole thing, is a lot of great people stayed at SB.

And we talk to them all the time. And they're very proactive. And then some really good people left SB. So there's more to be, it used to be, you basically had two bank choices, First Republic or SBB. Now there's a lot of different banks that you can work with with that same culture. Because these other banks hired the SBB 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. But you're right. Those banks were wonderful to work with and they got startups. And I just think it's going to, they're going to all rebound. It's going to 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 Thiel or whoever's money, you know, some rich venture capitalist. It turned out, like, they were the local town bank. they did my kids' school. And so, like, one of my kids' school was like, we don't know if we can pay our teachers next week. God. Is there any rich person who goes to our school who can pay our teachers? Oh, my gosh.

That's when I sent that all caps tweet. And I was like, well, 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 cash. 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. Mark, sum those three out for us as we wrap here.

Yeah. I mean, the capital preservation is not taking, not putting things in exotic securities, right? Short-term government bond funds, things like that. The U.S. government treasuries are paying something like five and a half percent right now for three or six months. Like the U.S. government's the best creditor in the world. So these are the kind of things you want to think about. And then 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. You just never know what's going to happen. But most of the service providers out there understand that and are hitting that window. And then the third thing is risk management. This is again, 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. These 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 NFPs. Yeah, no, that doesn't work. You can't bring it to Vegas and play in the World Series of Post. 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.

And we'll see everybody next time. You're on this week in Startups, Startup Basics.