And pushing the business forward should, and will, generate infinitely more value than any cash management strategy could ever deliver.Įditor’s note: The original version of this post first appeared on the Wharton Entrepreneurship Blog on March 18, 2014. The brokerage account invests in short-dated T-Bills and/or in a bank deposit sweep account, and the checking account is funded to ensure the company has sufficient cash for one to two months of operations-an amount that will likely not exceed the FDIC insurance threshold for the typical early stage startup.ĭoing some very basic but important cash management will allow you to focus on running your business. In the case of CommonBond, we decided on a combined approach: we set up a checking account and a brokerage account, both at the same bank so that wire fees or transfer time were never part of the calculus. If you invest in a money market account, make sure you’re comfortable with the counterparty risk-the likelihood that your financial institution of choice will run into bad times that results in either a lock-up or loss of your assets with the institution. Watch out for banks with minimum balance fees or those that charge a relatively high commission for a simple T-bill trade-a cost which can also lead to a negative yield on the transaction. The penalty for exiting a CD early (and the negative yield it can create) may be reason enough for a startup to stay clear of CDs as instruments for short-term cash management. Bank CDs, for example, typically provide a higher yield than T-Bills or money market funds, but only if you lock up the cash for a period of time.
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You may need to liquidate an investment to free up cash, so make sure that doing so doesn’t lead to an uneconomical investment. Given the relatively small capital base of a startup, there is simply too small an incentive and too great an investor confidence risk to take much investment risk with your cash management. Your investment does not work out, and you lose principal-a cardinal sin that can quickly lose both your investor and your credibility with respect to subsequent fundraising rounds. If the investment works out, yes, you’ll have more cash, but probably not a meaningful amount or, If you instead decide to expose your cash to more risk in the hopes of a higher return, one of two outcomes are likely: If we further assumed a yield of 0.10 percent (which would actually be quite high for a low-risk money market fund at today’s yields), we’re talking $500 for the year. Compounding the issue (no pun intended), any upside in today’s yield environment is so meager that it simply doesn’t compensate for any risk-taking, given the amount of cash early-stage companies have to manage.įor example, let’s assume your $1mm account has an average balance throughout the year of $500,000. Here’s how we approached the considerations:Īngels and VCs invest in entrepreneurs to take risks in operating their businesses, not to take risks in making financial investments.
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When CommonBond raised its first round of funding in November 2012, we confronted the same question on how to best manage our cash, and it was incumbent upon us to find the optimal answer. Given the diversity of products and the multitude of providers, this could quickly become a time-consuming, complex process. The question then becomes: “What is the best strategy for managing this newfound cash?” So, let’s assume for a moment that you’ve successfully raised capital for your business (congratulations, by the way). As a founder, it’s incredibly exciting to be starting a business at a time when doing so-while I wouldn’t say is “easy”-has never been more possible for so many people. We also live in a highly innovative fundraising environment today, and the attention paid to helping entrepreneurs navigate their options and access capital is critical.
Without that first round or seed funding, many great ideas would never become anything more than an idea. There is a wealth of advice out there for startups trying to raise money-and for good reason.
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