Good luck!
Fintechs targeting SMBs is a go-to-market strategy template that makes sense until you go to market and realize that if you have a better product, there's a better, bigger market and that market is the mid-market...
The thing with startups, like with SMBs is that most times are fragile, not-financially sound institutions. At least for startups, those that don't die, usually grow and need the larger scale features anyways.
Thanks! In general we optimize for simple UX and would rather connect to your banking app than replace it. That does help keep feature demand down. But our goal is to grow along with our customers, communicate closely with them, and add the features they need as they scale.
I like that your app is simple (a number that goes up). It would be cool for you to put this directly on your home page for potential customers to plug their number in and see the rate in which it goes up. I had Claude mock it up here [1]
This is really only an issue for startups with effectively zero revenue.
Your company gets classified as a PHC (and is subject to additional tax) if investment income, including interest, is more than 60% of its revenue. This isn't something most startups need to worry about if you have any revenue.
QSBS is based on intent, if the IRS thinks more than 80% of your assets are used for investment purposes and not for actively running your business. Basically it's so people don't use a small business tax exemption as a loophole for their investments. But the IRS absolutely considers idle cash in your company treasury as part of running your business, or else any startup that's raised money and didn't immediately spend it all would be considered an "investment vehicle," which they obviously don't.
Moreover, any of these potential issues would apply equally to a startup doing anything with their treasury, including putting it in a money market fund as most startups do. So we're not introducing any new tax risk. But of course, if any startup thinks these might be an issue for their business, they should talk to their tax advisor.
Agree on getting tax advice. But because QSBS is such a gift to VCs I really don’t want to jeopardize it particularly when a bunch of startups are raising $20m on $0 revenue, so the balance sheet is basically just cash. At ~5% that’s $1M/yr of interest, which can easily be the only income the company has. If that cash is sitting in an investment portfolio instead of boring cash equivalents, it feels like you could start getting into weird territory with the 80% active business asset test. The probability is Low but the impact for us is massive.
You’re still exposing yourself to duration risk, right? What’s the average duration of your short-term MBS portfolio?
MBS bonds pay a risk premium for a reason, you’re virtually free of credit risk, but you’re assuming interest rate/duration risk (not particularly relevant if duration is low, I’m not familiar with the duration of short term floating rate MBSes)
Also, what happens in a Silicon Valley bank type scenario, let’s say you have lots of withdrawals and you have to liquidate at under face value. Who eats the loss?
They said “short duration” not “short term”. The real risk is from spread duration rather than simple interest rate duration, and assuming they don’t lever up, that should be minimal.
The beauty of MBS floaters is that you’re relatively insensitive to prepayments because to a first approximation they’re always priced at par.
From an investor standpoint, as they say, you’re making maybe SOFR + 1.5%. That’s not a very sext return. But let’s say your banks repo desk is willing to finance the purchase at 5% down. Then you can lever up your investment 20x and now you’re a big shot making SOFR+30%, which is very sexy. But what’s that, when your lever like that, a tiny decline in price wipes out your entire stake (Welcome to 2008).
Very well put. And yes, to your point, we don't lever up.
And yes, SOFR + 1.5% isn't very sexy, but we're competing against existing treasury product that use money market funds and pay SOFR (or less, after fees). So that 1.5% is meaningful.
We kept all our post-seed cash in a basic MMF for like a year before realizing how much yield we were leaving on the table. Honestly the hardest part wasn't finding better options, it was convincing our board that slightly less liquid != risky. Curious how you handle the liquidity communication with founders who might need to pull funds on short notice.
We're up-front with founders that Palus is meant for longer-term cash, not money you'll need on short notice. Even then, our liquidity timeframe is typically 1-2 days.
I'm curious about your experience dealing with your board. We haven't heard that issue from our customers yet, but thus far we mostly just target up to Series B (mainly since, once companies are taking venture debt, they're typically required to hold their money at specific banks).
What were you trying to invest in, and what did they push back on?
Super fair question haha. I'm gonna flip this question first because I think it perfectly frames the current landscape of startup/SMB treasury products
Say you (like many startups) use Mercury Treasury, Rho Treasury, Brex Treasury, etc. Most of these list somewhere exactly what funds they buy into. Why not just open a fidelity account and by them yourself?
The answer is pretty clearly ease of use. Easy to move money from your bank account (likely also with them) to their treasury, easy to set up rules like ("if my bank balance falls below $X then transfer $Y from treasury"), stuff like that
We provide all of these features too! We are not at all asking people to bank with us or spend the time/friction of actively managing their deposits
So if the ease-of-use is the same and the yields are roughly 40% more than the generic money market wrappers out there, we think it's a no-brainer
If this point is not getting across, my apologies for not being clearer: this product is for startups and SMBs that don't have the time or resources to host a fractional CFO or a full-time finance team. If you have the time to manage your own treasury as a founder, that's amazing and we really want to know your secret sauce!
But for the majority of founders who want to spend their time building, the fee isn't for ease of use just as this "nice to have", it's for the outcome that ease of use delivers: no need to hire for treasury operations, no manual reconciliation between accounts, no time spent on stuff that isn't your product.
We really think that in most cases, the tradeoff is worth it. But if it's not for you, we totally respect that too.
Also want to note that most treasury products start their fees at 0.6%, which we agree is quite ridiculous hence why ours is less than half that.
They're more of a traditional banking product. They seem to have a great high-yield checking account (3%), which is a great place to keep short-term cash. But for long-term holdings that you won't touch for months, a higher-yield product like Palus makes more sense, earning closer to 5%.
For what it's worth, we don't try to replace products like Crescent (or Mercury, Brex, etc.) at all. They're great for day-to-day banking. Instead we connect to your account there and optimize for really simple UX. We're working on setting up automatic sweep to/from Palus to make it even simpler.
I spent time looking into this a couple years ago as a startup founder with this problem. We are in the finance space so I saw how bad the treasury options were with our bank, given their fee cut versus plain T-bonds at the time. I looked into which brokerages allowed us to setup self-directed accounts (many banks don't offer that for businesses at all). I found the "correct" approach. But then there would be more paperwork and back and forth to set up that new account, then manage transferring money around when we needed it, logging into a different system. On a ski trip a friend in finance told me "you're being dumb, if your bank offers you a treasury plan with a one click button, even if it's not perfect, click that button now!" So I did.
Then, the benefit of saving 1-2% extra versus spending my time trying to actually running the business and doing things with our money in the real world, has meant I have never looked back. 1-2% on millions of dollars is significant but it's not nearly as impactful as finding Product-Market-Fit in your actual business.
All this to say: I'd be in your target market but I'm simply not interested in a "marginally better" treasury system versus just going with my bank's options that make it easy for me.
That's fair. But to your point, the problem we see is that banks' treasury products take advantage of founders who (rightfully) don't want to think about their treasury yields.
That's why we designed Palus to be as simple as possible to use. If you check out our demo video, you'll see it's super straightforward. Setup takes <5 min and then you don't have to think about it anymore. We're also building out automatic sweep functionality, so then you REALLY won't have to think about it.
Given the significant increase in returns on a large treasury, we think it's worth the small amount of effort.
> Given the significant increase in returns on a large treasury, we think it's worth the small amount of effort.
Isn't that the point he was making though? It's a large treasury in aggregate, which is why it makes sense for a new entrant to come in, but it's only a 1-2% problem for founders, which is why they don't bother with it much (why fix what's not broken, etc.).
By the time founders raise significant sums of money (which is usually Series B onwards), they might be better suited to deal with a fractional CFO service which provides the full spectrum of services instead.
Startup founder: at this point you need to overcome the stigma of fly by night fintech wrappers sitting on top of banking and the exceptional, outsized risk that creates for consumers a la synchrony and things like yotta essentially losing millions of customer money with no recourse because a discrepancy between those two layers. 1% higher yield is nowhere near juicy enough for me to literally bet the company on and that's close to what would happen if you lost my entire last round (or locked it up 6 months beyond when I need it). Starting with yc companies as a trust indicator is helpful although yc switching to a shotgun "fund hundreds of companies per batch" approach means the yc label carries a LOT less weight than it used to (since they are no longer paying much attention to any one investment).
I like smart finance plays and I hope you can do that and stand out from the glut of finance bros who have (and continue to) muddied the water (poisoned the well?) with this approach of "tech on top if actual finance companies".
Fair! Growing user trust is definitely one of the biggest challenges building in this space.
For what it's worth, we don't hold users' funds ourselves; we use an SEC-regulated custodian (Alpaca) with the assets legally held in your name. And we're working on building transparency measures, like detailed views into your account's specific holdings of underlying assets with verifiable attestations, third-party auditing, and frankly any other measures that our customers would want us to.
I know putting company money into a new product requires a lot of trust. Like any product you're still exploring, I'd encourage you to start small, try us out, and grow your position over time as we earn your trust. And if it helps you trust us, I'd be happy to get on a Zoom call or meet IRL.
Good find- 2.85% is great for a business savings account.
All that is to say: businesses shouldn't treat all their cash the same way, especially when they have significant runway. The exact breakdown depends on the business, but typically you can think of it as three different buckets:
1) You have short-term cash, which you need immediately. This is where you'd use a checking account. This pays very close to 0% but you have immediate access. Most businesses might keep a few weeks' cash here.
2) You have short-term reserves, which is what you'd use in the next couple of months. This is where most companies might use a savings account (or even put it in a money market fund), where you know you can get the cash into your checking account in ~1 day. This pays between 2.5% and up to maybe 3.75%. Each business will structure their cash differently, and some might not even bother having this bucket.
3) Long term reserves, which you won't touch for months. This is where companies try to optimize yield, and where Palus is valuable. Even here, your money is safe, and in Palus's case can usually be in your checking account within a couple of days, but getting extra yield on long-term reserves can be super valuable.
Do you work with non-US companies? I have a company in Estonia, and hold some reserve cash (mix of dollars and euro) on a Wise account. It pays 2.20% variable APR, but I’m starting to explore other options :-)
> Agency MBS holders suffered no credit losses during the crisis, and post-2008 underwriting standards became even stricter.
I suppose the Agency MBS holders still had losses during the GFC. Would your clients wear any losses in MBS price of there's another housing downtuurn or recession? Why not diversify into other bonds as well?
Agency MBS holders who weren't levered or forced to sell never realized losses during the GFC. There were short term paper losses on some MBS, but it was overwhelmingly on long-duration fixed-rate MBS and incurred by people who held 5+ year duration bonds and had to sell early.
Short-duration floating-rate MBS, like the ones we use, were fine. And since regulations have gotten much stricter as a result of 2008, that was very much a worst-case scenario.
We specifically chose agency MBS because their yield and risk profile fits startup long-term cash needs very well (no credit risk by definition, stable NAV preventing principal risk, consistent premium over money market, and easy but non-instant liquidity). Essentially their safety reduces the need to diversify across bond types. It's also worth pointing out that MBS already are quite diversified, since each one is a pool of thousands of mortgages spread across different locations, borrowers, and property types.
We might offer non-MBS options in the future, if customers ask for it, but we're not there yet.
Good luck! Not being startupy or American I don't understand. But sounds like a schlep problem (see pg essays).
If you ever want to pivot an idea I am suprised no one does is why don't long term bets e.g. 2028 president pay interest. When you bet on something almost certain in 5 years you always lose due to lost interest. Maybe bets can include interest or even be chucked in SP500 for duration.
Far from me the idea of criticizing a founder starting something to help other startups. That's amazing. However, the post is not really accurate! Are you sure that all these MBS pools have the same government backing as Treasuries? Ginnie Mae, Fannie Mae, and Freddie Mac are not equal.
Are the additional risks (spread risk, liquidity mismatch, and risks related to the mortgage structure that even Regan discloses!) worth the tiny extra yield above money market funds? Startups have to deal with uncertainty all the time, that's the nature of business. Principal loss, and liquidity issues are not things you should have to deal with as a startup. However, providing options to startups is always great, and I think this is a great direction!
Again, I hope this doesn't come as negative, but I'm not sure this is making the risk clear.
I am not sure I would suggest my portfolio companies to risk their treasuries unless I am sure they're fully understanding the risks associated. Do you intend to provide anything else?
On the government backing: it's a fair nuance to point out. In a technical sense, Ginnie Mae has the explicit full faith and credit guarantee while Fannie/Freddie are GSEs with an implicit one (and are under government conservatorship). But in practice, the distinction isn't really meaningful. In practice, the federal government has always guaranteed these loans (even in 2008, when they were under the most stress they've ever been, and there have been significant reforms as a result). There's no reason to think they'll ever stop. The scenario where the GSE guarantee fails is essentially the collapse of the US economy well beyond anything we saw in 2008 (in which case frankly we all have much bigger problems).
On the risks you mentioned:
1) Principal loss: given the guarantees re credit risk, and the fact that we use short-duration floating rate instruments to protect against price risk, this shouldn't really be a concern.
2) On spread risk: there can be slight variation in spread, mostly affecting yields; this is why we say "4.5-5%" yields given there's some variability in that range (but all far above money market).
3) On liquidity: agency MBS is the second most liquid fixed-income market in the world after Treasuries. In nearly all circumstances, liquidity is 1-2 business days. This product is really meant for long-term cash reserves; our idea is that companies should stop treating 6+ month cash the same as next month's payroll.
Ultimately we encourage founders to do their own research and understand what they're doing with their money. We wouldn't ask anyone to put short-term cash in a MBS portfolio (in the future we'll probably offer some other options too). But for long-term cash they're sitting on, the extra yield can be meaningful to the business: on $5M, it's an extra $50k-75k per year, or half a junior engineer's salary. Given the minimal risk, I think it's worthwhile for a lot of companies.
You should write more pieces like this and display them more prominently than an HN thread.
Your market is founders who have put money in an MMF and stopped thinking about it, not the people evaluating different optimization strategies day-to-day. So acknowledging the risks and saying "here's exactly when you should consider us" is exactly the kind of thing that helps overcome that uncertainty hurdle that results in choosing the simplest, safest option.
Founders should obviously do their own research, but that's asking the customer to proactively expend effort digging through future marketing copy to evaluate your product. They're not realistically going to do that as well as they should and the people who don't need to probably aren't your target market.
At .49% expense ratio, plus whatever your cut is, it won't be a very cheap product. Even SPAXX, the default holding of cash at Fidelity is cheaper at .42% ER.
There is no free lunch in investing, so that extra yield comes with extra risk. Be that duration, credit, etc. That's not to say MBS's don't have their place, but I would never claim people's mortgages as equivalent to cash in any shape or form. Your website claims MBSF is safe for 3+ month durations, but that is not the avg duration of MBSF held securities, so you are encouraging duration risk.
I haven't read the full prospectus on MBSF, so I'm not an expert on that product, but it seems expensive and complicated, which is not what you want for cash and cash-like things. This should be a hard pass for literally everyone.
Meanwhile you can hold something like ICSH[0] or SGOV[1] with expense in the .09% or lower range(i.e. for every $10k we are talking $9/yr or less in fees). SGOV is 0-3 month max duration, so it's perfect for holdings in the 3 month time-frame. If you need longer time frames you can buy govt bond ladders in whatever time frame you want.
What your product should have been: You specify duration for each of your buckets, and then you pick appropriate, cheap index-based investments that are cheap and easy to reason about for each of the buckets.
The 4.5-5% yields we quote are net of expense ratio. Then our cut is 0.25%, comparable to the 0.15% to 0.6% charged by Mercury, Rho, etc. And we're working on bringing that expense ratio down as we scale.
Functionally speaking, short-duration floating-rate agency MBS trade at such a stable NAV that they're perfectly sufficient for long-term cash, and many large companies trade these.
MBSF is complex in the way that basically any fund is complex, but the strategy it employs is actually quite simple since it only trades a single asset class. Yes the expense ratio is higher than some other funds but the additional yields more than make up for it.
ICSH and SGOV are great funds too, and make sense for shorter-term cash, but they pay significantly less than we do.
Broadly speaking, our product is meant for exactly the kind of cash strategy you're thinking about: multiple buckets with duration spread accordingly. At the moment, our platform is just for the long-term bucket. But in the future, we might add additional shorter-term buckets too (maybe even with ICSH or SGOV).
This would be a really nice product to start ups outside the US tech belt. Hubris of treading water in longterm a-series SUs elsewhere, this could be a viable solution if accessible.
To add more context: yes, US Treasuries are exempt from state tax, and municipal bonds are tax exempt too. It's pretty rare for startups to hold them directly; they usually hold money market funds. It varies between different MMFs, but they can be partially state tax-exempt depending on what percentage of the underlying assets are federal bonds.[1] For instance, Vanguard shows you how much of each of their funds is tax-exempt here: https://investor.vanguard.com/content/dam/retail/publicsite/...
However, this tax exemption is usually priced in: muni bond funds, and MMFs that hold lots of tax-exempt assets, tend to return less than funds which are not tax exempt. For the majority of startups that operate at a net loss, tax-exempt funds are probably a bad choice, since you're earning less yield and the tax exemption likely doesn't affect you.
[1] The rules around this also varies from state to state; for instance, in CA, CT, and NY, you can only get any tax exemption if a fund is at least 50% tax-exempt in each quarter of a given year.
STRC has only been around for less than a year. I don't know too much about what assets it holds (and maybe it's worth me looking into it), but those kinds of returns are generally a sign that you're taking on a lot more risk than you think (even if it hasn't had a major price decrease yet).
We're competing against long-term cash held in a money-market fund (an instrument optimized for short-term use with same-day liquidity) earning 3.5%. In that context our yields definitely are competitive.
We use Mercury’s treasury account to get yields on cash, and what appeals to me is it is easy to manage. I don’t have to worry about setting up processes to move money around and it’s integrated with my bank account, and we wouldn’t want to switch even for a higher yield… the operational burden is more important to us than yield.
I think the yield is about 3.2% based on how we set it up to be as liquid as possible. We could have accepted less liquidity for more like 3.8%
We know that the main barrier to switching is just time and ease of use, so we deliberately built this to have the same operational burden as using your current treasury product
Palus links straight to your bank account just like Mercury, and we'll also allow you to set up rules for moving money around!
That said, if there's any other features that really keep people tied to their current products we want to know about it. Our goal here is to build something that actually cares about the fact that you're a startup with limited time to care about yields, and not just throw your money in a generic fund and forget you exist
Any higher yield comes from higher risk. If any startup feels the startup is not risky enough and really wants to have higher yield for higher risk just put the money in a Bond ETF that suits your risk appetite. Crazy that YC funds things that make a simple thing more complex and more costly for zero upside.
The bond funds offered in existing startup treasury products aren't suited for startups' long-term cash reserves. They either offer low-yield money market funds, or bond funds that aren't well suited for capital preservation on the order of months the way startups operate (see here for an example of VFSTX, the fund offered by one of the leading startup treasury products today: https://totalrealreturns.com/n/USDOLLAR,VFSTX?start=2021-01-...)
Our goal is to make sophisticated treasury management easy for startups. With Palus, they don't need to manage a brokerage account, or handle treasury ladders, or anything like that.
If the value proposition is better interest rates, it sounds like Palus would get that by giving up their cut, what would be your monetization strategy then?
Lucky for both of us, the value prop isn't just "we are offering better interest rates on the same instruments because we gave up our cut"
It's actually "we found a way better set of instruments for long-term cash that allow us to offer better interest rates without giving up the cut altogether"
That being said, we do think the current treasury products can be a little predatory with their rates. For example, Rho charges a variable rate that peaks at 0.6% for any deposit of $2M or less. We think that's crazy so our margin is a flat 0.25%, no asterisks or fine print.
As other users mentioned, that would probably raise concerns about risk. In terms of yields for startups I'm assuming we would be talking about zero risk assets, that is US treasury. But I'd be interested in learning about these alternative assets.
That's totally fair. Risk is 100% the right concern to have when you hear about higher yields
We have a pretty comprehensive blog post about these assets (floating-rate agency MBS) and why we think they are a much better fit for startup treasuries. I encourage you (and anyone else reading this) to give it a read so that you understand exactly how they work and what the tradeoffs are: https://www.palus.finance/info/safety
That said, we understand not everyone wants to spend their day reading our blog posts. So the best tl;dr we can give is that the higher yields do not come with a credit risk, but instead with 1-2 days of liquidity cost versus same-day for MMFs. Which is much more ideal for a startup's idle cash
Interesting, I think maybe an approach that would sell me more is actually leaning into the risk aspect a little bit. If you tell me that there is no beta increase, just pure alpha, alarms ring off, but if there is a slight beta with outsized alpha, then I think of it as a tradeoff that I am making, I am willing to take a little bit more risk for a higher return, which might in turn reduce longer term startup risks and allow me to increase my chances of winning by having an extra month or two of runway, now I'm comparing risks instead of thinking about just the risk you introduce.
It helps that even if from Palus' perspective there is no increased beta risk compared to the market standard of treasury instruments, even if your thesis that the alpha comes from an inefficiency due to bad 2008 reputation, as a buyer there is still a non-systemic risk associated with going for a niche provider and trusting you.
So when you consider that in the eyes of a buyer there's already a non-systemic risk inefficiencies based on lack of distributor trust, then it doesn't really make sense to keep systemic risk low, I think the play here would be to increase the systemic risk of the play to something manageable, since the customer is already paying a last-mile risk of trusting you as a distributor of the federal products.
All of this might make it more tempting for clients to switch and choose you, otherwise if the choice is between 3.5% and 5%, it's not really a significant difference, however if the difference is 9% vs 3.5% and the risk is minimal, then maybe startups will bite, founders are already making wild bets, it isn't crazy to bet that there will not be a housing market crisis and that a provider won't scam you. If that happens tough luck, I guess.
I would go even further and say that this bet could be tied into the vision or industry of the founder, for example if the founder thinks that things are basically the same as they always were and that AI won't change the market dynamics much, then that's not a strong sale because lightning may strike twice on the same spot.
Or to put a simpler example, the industry itself might make it a good fit, if the industry is Real Estate that's the most obvious example, they are going bust anyways if there's a housing crisis. But if it's entertainment, or any other industry that depends on consumers having large discretionary income, they are probably going to fail anyways if there's a large consumer crisis.
So yeah, tl;dr I think that the better play is to lean into the risk rather than trying to communicate that there is no risk.
I definitely see your point. Our thesis with the MBS product, in finance terms, is that most startups can afford to take on a bit more liquidity risk on their long-term cash (on the order of a couple of days) to get significantly better yields without taking on credit or price risk on their principal.
We've had discussions about offering products in the future with higher yields that carry more risk. Most founders we've talked to are very risk-averse on their company treasury, but if our users tell us they want access to different instruments with different risk profiles, we're happy to meet them where they are.
The reason for the current framing is that pretty much every founder we have spoken to hears "high yield" and then instantly asks about safety. But like you said, at this spread it isn't risky
But yeah, any time you put those two words together it inspires skepticism, which is totally understandable. I think this comes down to a lack of education, most people think the only two dimensions in this space are yield vs risk when in reality there is a third one (liquidity) that is balancing out the spread
Super open to suggestions for alternate framing. Maybe something like "optimizing" yields?
Good luck! Fintechs targeting SMBs is a go-to-market strategy template that makes sense until you go to market and realize that if you have a better product, there's a better, bigger market and that market is the mid-market...
The thing with startups, like with SMBs is that most times are fragile, not-financially sound institutions. At least for startups, those that don't die, usually grow and need the larger scale features anyways.
Thanks! In general we optimize for simple UX and would rather connect to your banking app than replace it. That does help keep feature demand down. But our goal is to grow along with our customers, communicate closely with them, and add the features they need as they scale.
You can probably go the other way and target consumers no? Or are they not equidistant?
I like that your app is simple (a number that goes up). It would be cool for you to put this directly on your home page for potential customers to plug their number in and see the rate in which it goes up. I had Claude mock it up here [1]
[1] https://claude.ai/artifacts/32bf6312-22b2-4d34-9840-bf33718f...
Not publicly accessible, could you fix permissions?
Isn't the issue of products like this that they present PHC risk, jeopardize QSBS - particularly at the earliest stages where revenue is de minimis?
This is really only an issue for startups with effectively zero revenue.
Your company gets classified as a PHC (and is subject to additional tax) if investment income, including interest, is more than 60% of its revenue. This isn't something most startups need to worry about if you have any revenue.
QSBS is based on intent, if the IRS thinks more than 80% of your assets are used for investment purposes and not for actively running your business. Basically it's so people don't use a small business tax exemption as a loophole for their investments. But the IRS absolutely considers idle cash in your company treasury as part of running your business, or else any startup that's raised money and didn't immediately spend it all would be considered an "investment vehicle," which they obviously don't.
Moreover, any of these potential issues would apply equally to a startup doing anything with their treasury, including putting it in a money market fund as most startups do. So we're not introducing any new tax risk. But of course, if any startup thinks these might be an issue for their business, they should talk to their tax advisor.
Agree on getting tax advice. But because QSBS is such a gift to VCs I really don’t want to jeopardize it particularly when a bunch of startups are raising $20m on $0 revenue, so the balance sheet is basically just cash. At ~5% that’s $1M/yr of interest, which can easily be the only income the company has. If that cash is sitting in an investment portfolio instead of boring cash equivalents, it feels like you could start getting into weird territory with the 80% active business asset test. The probability is Low but the impact for us is massive.
You’re still exposing yourself to duration risk, right? What’s the average duration of your short-term MBS portfolio?
MBS bonds pay a risk premium for a reason, you’re virtually free of credit risk, but you’re assuming interest rate/duration risk (not particularly relevant if duration is low, I’m not familiar with the duration of short term floating rate MBSes)
Also, what happens in a Silicon Valley bank type scenario, let’s say you have lots of withdrawals and you have to liquidate at under face value. Who eats the loss?
They said “short duration” not “short term”. The real risk is from spread duration rather than simple interest rate duration, and assuming they don’t lever up, that should be minimal.
The beauty of MBS floaters is that you’re relatively insensitive to prepayments because to a first approximation they’re always priced at par.
From an investor standpoint, as they say, you’re making maybe SOFR + 1.5%. That’s not a very sext return. But let’s say your banks repo desk is willing to finance the purchase at 5% down. Then you can lever up your investment 20x and now you’re a big shot making SOFR+30%, which is very sexy. But what’s that, when your lever like that, a tiny decline in price wipes out your entire stake (Welcome to 2008).
Very well put. And yes, to your point, we don't lever up.
And yes, SOFR + 1.5% isn't very sexy, but we're competing against existing treasury product that use money market funds and pay SOFR (or less, after fees). So that 1.5% is meaningful.
Thanks for the informative reply, that makes sense.
We kept all our post-seed cash in a basic MMF for like a year before realizing how much yield we were leaving on the table. Honestly the hardest part wasn't finding better options, it was convincing our board that slightly less liquid != risky. Curious how you handle the liquidity communication with founders who might need to pull funds on short notice.
We're up-front with founders that Palus is meant for longer-term cash, not money you'll need on short notice. Even then, our liquidity timeframe is typically 1-2 days.
I'm curious about your experience dealing with your board. We haven't heard that issue from our customers yet, but thus far we mostly just target up to Series B (mainly since, once companies are taking venture debt, they're typically required to hold their money at specific banks).
What were you trying to invest in, and what did they push back on?
I’ve wanted this produce for years. Signed up. Thank you.
What's the advantage of this versus opening a Fidelity account and buying the same product?
Super fair question haha. I'm gonna flip this question first because I think it perfectly frames the current landscape of startup/SMB treasury products
Say you (like many startups) use Mercury Treasury, Rho Treasury, Brex Treasury, etc. Most of these list somewhere exactly what funds they buy into. Why not just open a fidelity account and by them yourself?
The answer is pretty clearly ease of use. Easy to move money from your bank account (likely also with them) to their treasury, easy to set up rules like ("if my bank balance falls below $X then transfer $Y from treasury"), stuff like that
We provide all of these features too! We are not at all asking people to bank with us or spend the time/friction of actively managing their deposits
So if the ease-of-use is the same and the yields are roughly 40% more than the generic money market wrappers out there, we think it's a no-brainer
(EDIT: adding mention that I am OP's co-founder)
My read of this answer is "There really is no difference except you pay us 0.25% for 'ease of use'".
If this point is not getting across, my apologies for not being clearer: this product is for startups and SMBs that don't have the time or resources to host a fractional CFO or a full-time finance team. If you have the time to manage your own treasury as a founder, that's amazing and we really want to know your secret sauce!
But for the majority of founders who want to spend their time building, the fee isn't for ease of use just as this "nice to have", it's for the outcome that ease of use delivers: no need to hire for treasury operations, no manual reconciliation between accounts, no time spent on stuff that isn't your product.
We really think that in most cases, the tradeoff is worth it. But if it's not for you, we totally respect that too.
Also want to note that most treasury products start their fees at 0.6%, which we agree is quite ridiculous hence why ours is less than half that.
How do you compare to a group like https://crescent.finance? Disclosure: I am an investor in Crescent, but primarily I’m just curious!
Do you mean this Crescent? https://www.getcrescent.com/
They're more of a traditional banking product. They seem to have a great high-yield checking account (3%), which is a great place to keep short-term cash. But for long-term holdings that you won't touch for months, a higher-yield product like Palus makes more sense, earning closer to 5%.
For what it's worth, we don't try to replace products like Crescent (or Mercury, Brex, etc.) at all. They're great for day-to-day banking. Instead we connect to your account there and optimize for really simple UX. We're working on setting up automatic sweep to/from Palus to make it even simpler.
I spent time looking into this a couple years ago as a startup founder with this problem. We are in the finance space so I saw how bad the treasury options were with our bank, given their fee cut versus plain T-bonds at the time. I looked into which brokerages allowed us to setup self-directed accounts (many banks don't offer that for businesses at all). I found the "correct" approach. But then there would be more paperwork and back and forth to set up that new account, then manage transferring money around when we needed it, logging into a different system. On a ski trip a friend in finance told me "you're being dumb, if your bank offers you a treasury plan with a one click button, even if it's not perfect, click that button now!" So I did.
Then, the benefit of saving 1-2% extra versus spending my time trying to actually running the business and doing things with our money in the real world, has meant I have never looked back. 1-2% on millions of dollars is significant but it's not nearly as impactful as finding Product-Market-Fit in your actual business.
All this to say: I'd be in your target market but I'm simply not interested in a "marginally better" treasury system versus just going with my bank's options that make it easy for me.
That's fair. But to your point, the problem we see is that banks' treasury products take advantage of founders who (rightfully) don't want to think about their treasury yields.
That's why we designed Palus to be as simple as possible to use. If you check out our demo video, you'll see it's super straightforward. Setup takes <5 min and then you don't have to think about it anymore. We're also building out automatic sweep functionality, so then you REALLY won't have to think about it.
Given the significant increase in returns on a large treasury, we think it's worth the small amount of effort.
> Given the significant increase in returns on a large treasury, we think it's worth the small amount of effort.
Isn't that the point he was making though? It's a large treasury in aggregate, which is why it makes sense for a new entrant to come in, but it's only a 1-2% problem for founders, which is why they don't bother with it much (why fix what's not broken, etc.).
By the time founders raise significant sums of money (which is usually Series B onwards), they might be better suited to deal with a fractional CFO service which provides the full spectrum of services instead.
Similar to something like Jiko?
Startup founder: at this point you need to overcome the stigma of fly by night fintech wrappers sitting on top of banking and the exceptional, outsized risk that creates for consumers a la synchrony and things like yotta essentially losing millions of customer money with no recourse because a discrepancy between those two layers. 1% higher yield is nowhere near juicy enough for me to literally bet the company on and that's close to what would happen if you lost my entire last round (or locked it up 6 months beyond when I need it). Starting with yc companies as a trust indicator is helpful although yc switching to a shotgun "fund hundreds of companies per batch" approach means the yc label carries a LOT less weight than it used to (since they are no longer paying much attention to any one investment).
I like smart finance plays and I hope you can do that and stand out from the glut of finance bros who have (and continue to) muddied the water (poisoned the well?) with this approach of "tech on top if actual finance companies".
Good luck out there!
Fair! Growing user trust is definitely one of the biggest challenges building in this space.
For what it's worth, we don't hold users' funds ourselves; we use an SEC-regulated custodian (Alpaca) with the assets legally held in your name. And we're working on building transparency measures, like detailed views into your account's specific holdings of underlying assets with verifiable attestations, third-party auditing, and frankly any other measures that our customers would want us to.
I know putting company money into a new product requires a lot of trust. Like any product you're still exploring, I'd encourage you to start small, try us out, and grow your position over time as we earn your trust. And if it helps you trust us, I'd be happy to get on a Zoom call or meet IRL.
Nice to have some higher yield options.
There are banks out there that will do business savings accounts not much below this (2.85%) while keeping things safe (FDIC insured) and liquid.
https://www.liveoak.bank/business-savings/
Good find- 2.85% is great for a business savings account.
All that is to say: businesses shouldn't treat all their cash the same way, especially when they have significant runway. The exact breakdown depends on the business, but typically you can think of it as three different buckets:
1) You have short-term cash, which you need immediately. This is where you'd use a checking account. This pays very close to 0% but you have immediate access. Most businesses might keep a few weeks' cash here.
2) You have short-term reserves, which is what you'd use in the next couple of months. This is where most companies might use a savings account (or even put it in a money market fund), where you know you can get the cash into your checking account in ~1 day. This pays between 2.5% and up to maybe 3.75%. Each business will structure their cash differently, and some might not even bother having this bucket.
3) Long term reserves, which you won't touch for months. This is where companies try to optimize yield, and where Palus is valuable. Even here, your money is safe, and in Palus's case can usually be in your checking account within a couple of days, but getting extra yield on long-term reserves can be super valuable.
Congrats on the launch!
Do you work with non-US companies? I have a company in Estonia, and hold some reserve cash (mix of dollars and euro) on a Wise account. It pays 2.20% variable APR, but I’m starting to explore other options :-)
Thanks! Yes we do. Sign up or book a call on our site and let's discuss.
> Agency MBS holders suffered no credit losses during the crisis, and post-2008 underwriting standards became even stricter.
I suppose the Agency MBS holders still had losses during the GFC. Would your clients wear any losses in MBS price of there's another housing downtuurn or recession? Why not diversify into other bonds as well?
Agency MBS holders who weren't levered or forced to sell never realized losses during the GFC. There were short term paper losses on some MBS, but it was overwhelmingly on long-duration fixed-rate MBS and incurred by people who held 5+ year duration bonds and had to sell early.
Short-duration floating-rate MBS, like the ones we use, were fine. And since regulations have gotten much stricter as a result of 2008, that was very much a worst-case scenario.
We specifically chose agency MBS because their yield and risk profile fits startup long-term cash needs very well (no credit risk by definition, stable NAV preventing principal risk, consistent premium over money market, and easy but non-instant liquidity). Essentially their safety reduces the need to diversify across bond types. It's also worth pointing out that MBS already are quite diversified, since each one is a pool of thousands of mortgages spread across different locations, borrowers, and property types.
We might offer non-MBS options in the future, if customers ask for it, but we're not there yet.
Good luck! Not being startupy or American I don't understand. But sounds like a schlep problem (see pg essays).
If you ever want to pivot an idea I am suprised no one does is why don't long term bets e.g. 2028 president pay interest. When you bet on something almost certain in 5 years you always lose due to lost interest. Maybe bets can include interest or even be chucked in SP500 for duration.
Tons of schlep blindness here for sure. That's the only plausible explanation for why existing treasury products have made it this far
I'd say your long-term bets are earning interest... it's just going to the house and not to you
Far from me the idea of criticizing a founder starting something to help other startups. That's amazing. However, the post is not really accurate! Are you sure that all these MBS pools have the same government backing as Treasuries? Ginnie Mae, Fannie Mae, and Freddie Mac are not equal. Are the additional risks (spread risk, liquidity mismatch, and risks related to the mortgage structure that even Regan discloses!) worth the tiny extra yield above money market funds? Startups have to deal with uncertainty all the time, that's the nature of business. Principal loss, and liquidity issues are not things you should have to deal with as a startup. However, providing options to startups is always great, and I think this is a great direction!
Again, I hope this doesn't come as negative, but I'm not sure this is making the risk clear. I am not sure I would suggest my portfolio companies to risk their treasuries unless I am sure they're fully understanding the risks associated. Do you intend to provide anything else?
These are good points.
On the government backing: it's a fair nuance to point out. In a technical sense, Ginnie Mae has the explicit full faith and credit guarantee while Fannie/Freddie are GSEs with an implicit one (and are under government conservatorship). But in practice, the distinction isn't really meaningful. In practice, the federal government has always guaranteed these loans (even in 2008, when they were under the most stress they've ever been, and there have been significant reforms as a result). There's no reason to think they'll ever stop. The scenario where the GSE guarantee fails is essentially the collapse of the US economy well beyond anything we saw in 2008 (in which case frankly we all have much bigger problems).
On the risks you mentioned: 1) Principal loss: given the guarantees re credit risk, and the fact that we use short-duration floating rate instruments to protect against price risk, this shouldn't really be a concern. 2) On spread risk: there can be slight variation in spread, mostly affecting yields; this is why we say "4.5-5%" yields given there's some variability in that range (but all far above money market). 3) On liquidity: agency MBS is the second most liquid fixed-income market in the world after Treasuries. In nearly all circumstances, liquidity is 1-2 business days. This product is really meant for long-term cash reserves; our idea is that companies should stop treating 6+ month cash the same as next month's payroll.
Ultimately we encourage founders to do their own research and understand what they're doing with their money. We wouldn't ask anyone to put short-term cash in a MBS portfolio (in the future we'll probably offer some other options too). But for long-term cash they're sitting on, the extra yield can be meaningful to the business: on $5M, it's an extra $50k-75k per year, or half a junior engineer's salary. Given the minimal risk, I think it's worthwhile for a lot of companies.
You should write more pieces like this and display them more prominently than an HN thread.
Your market is founders who have put money in an MMF and stopped thinking about it, not the people evaluating different optimization strategies day-to-day. So acknowledging the risks and saying "here's exactly when you should consider us" is exactly the kind of thing that helps overcome that uncertainty hurdle that results in choosing the simplest, safest option.
Founders should obviously do their own research, but that's asking the customer to proactively expend effort digging through future marketing copy to evaluate your product. They're not realistically going to do that as well as they should and the people who don't need to probably aren't your target market.
Yeah that's a great point. We do have some pieces up already (https://www.palus.finance/info/safety) but plan on adding way more.
Honestly this HN post has been really insightful in knowing what questions founders will want us to answer.
At .49% expense ratio, plus whatever your cut is, it won't be a very cheap product. Even SPAXX, the default holding of cash at Fidelity is cheaper at .42% ER.
There is no free lunch in investing, so that extra yield comes with extra risk. Be that duration, credit, etc. That's not to say MBS's don't have their place, but I would never claim people's mortgages as equivalent to cash in any shape or form. Your website claims MBSF is safe for 3+ month durations, but that is not the avg duration of MBSF held securities, so you are encouraging duration risk.
I haven't read the full prospectus on MBSF, so I'm not an expert on that product, but it seems expensive and complicated, which is not what you want for cash and cash-like things. This should be a hard pass for literally everyone.
Meanwhile you can hold something like ICSH[0] or SGOV[1] with expense in the .09% or lower range(i.e. for every $10k we are talking $9/yr or less in fees). SGOV is 0-3 month max duration, so it's perfect for holdings in the 3 month time-frame. If you need longer time frames you can buy govt bond ladders in whatever time frame you want.
What your product should have been: You specify duration for each of your buckets, and then you pick appropriate, cheap index-based investments that are cheap and easy to reason about for each of the buckets.
0: https://www.ishares.com/us/products/258806/ishares-liquidity... 1: https://www.ishares.com/us/products/314116/ishares-0-3-month...
The 4.5-5% yields we quote are net of expense ratio. Then our cut is 0.25%, comparable to the 0.15% to 0.6% charged by Mercury, Rho, etc. And we're working on bringing that expense ratio down as we scale.
Functionally speaking, short-duration floating-rate agency MBS trade at such a stable NAV that they're perfectly sufficient for long-term cash, and many large companies trade these.
MBSF is complex in the way that basically any fund is complex, but the strategy it employs is actually quite simple since it only trades a single asset class. Yes the expense ratio is higher than some other funds but the additional yields more than make up for it.
ICSH and SGOV are great funds too, and make sense for shorter-term cash, but they pay significantly less than we do.
Broadly speaking, our product is meant for exactly the kind of cash strategy you're thinking about: multiple buckets with duration spread accordingly. At the moment, our platform is just for the long-term bucket. But in the future, we might add additional shorter-term buckets too (maybe even with ICSH or SGOV).
This would be a really nice product to start ups outside the US tech belt. Hubris of treading water in longterm a-series SUs elsewhere, this could be a viable solution if accessible.
Not the OP but curious why you think so?
If this gives an extra 1% per se, I imagine that is more worth it to a company fresh off a large fundraise with a ton of cash in the bank.
Startups otherwise are lean and won't hold enough cash to get a meaningful return from the 1%.
Is the income generated exempt from state taxes?
No haha they are not exempt. But neither are money market funds, which are currently the most popular choice for startups and SMBs
US treasuries are exempt from state tax but you didn't mention them. And Municipal bonds have no taxes but a lower rate.
To add more context: yes, US Treasuries are exempt from state tax, and municipal bonds are tax exempt too. It's pretty rare for startups to hold them directly; they usually hold money market funds. It varies between different MMFs, but they can be partially state tax-exempt depending on what percentage of the underlying assets are federal bonds.[1] For instance, Vanguard shows you how much of each of their funds is tax-exempt here: https://investor.vanguard.com/content/dam/retail/publicsite/...
However, this tax exemption is usually priced in: muni bond funds, and MMFs that hold lots of tax-exempt assets, tend to return less than funds which are not tax exempt. For the majority of startups that operate at a net loss, tax-exempt funds are probably a bad choice, since you're earning less yield and the tax exemption likely doesn't affect you.
[1] The rules around this also varies from state to state; for instance, in CA, CT, and NY, you can only get any tax exemption if a fund is at least 50% tax-exempt in each quarter of a given year.
Is this available for Non Profits?
I've had an easy time setting up treasury accounts with Rho & Mercury for 2 co's, but the latter gave me a no-go on an account for a non profit.
Yep! Fill out the signup on our website and we'll be in touch
Anyone can buy STRC with 10-11% yield, paid monthly. Full liquidity (i.e. can sell anytime).
5% return is not competitive.
STRC is much riskier (I'm having trouble imagining any scenario where it does NOT default.)
STRC has only been around for less than a year. I don't know too much about what assets it holds (and maybe it's worth me looking into it), but those kinds of returns are generally a sign that you're taking on a lot more risk than you think (even if it hasn't had a major price decrease yet).
We're competing against long-term cash held in a money-market fund (an instrument optimized for short-term use with same-day liquidity) earning 3.5%. In that context our yields definitely are competitive.
I googled it. That is Strategy? Ponzi Saylor's company. Ooook.
Why not buy Celsius (1) instead, even better yields ;)
(1) https://en.wikipedia.org/wiki/Celsius_Network
We use Mercury’s treasury account to get yields on cash, and what appeals to me is it is easy to manage. I don’t have to worry about setting up processes to move money around and it’s integrated with my bank account, and we wouldn’t want to switch even for a higher yield… the operational burden is more important to us than yield.
I think the yield is about 3.2% based on how we set it up to be as liquid as possible. We could have accepted less liquidity for more like 3.8%
Hey Andrew thanks for the feedback
We know that the main barrier to switching is just time and ease of use, so we deliberately built this to have the same operational burden as using your current treasury product
Palus links straight to your bank account just like Mercury, and we'll also allow you to set up rules for moving money around!
That said, if there's any other features that really keep people tied to their current products we want to know about it. Our goal here is to build something that actually cares about the fact that you're a startup with limited time to care about yields, and not just throw your money in a generic fund and forget you exist
Any higher yield comes from higher risk. If any startup feels the startup is not risky enough and really wants to have higher yield for higher risk just put the money in a Bond ETF that suits your risk appetite. Crazy that YC funds things that make a simple thing more complex and more costly for zero upside.
The bond funds offered in existing startup treasury products aren't suited for startups' long-term cash reserves. They either offer low-yield money market funds, or bond funds that aren't well suited for capital preservation on the order of months the way startups operate (see here for an example of VFSTX, the fund offered by one of the leading startup treasury products today: https://totalrealreturns.com/n/USDOLLAR,VFSTX?start=2021-01-...)
Our goal is to make sophisticated treasury management easy for startups. With Palus, they don't need to manage a brokerage account, or handle treasury ladders, or anything like that.
If the value proposition is better interest rates, it sounds like Palus would get that by giving up their cut, what would be your monetization strategy then?
Lucky for both of us, the value prop isn't just "we are offering better interest rates on the same instruments because we gave up our cut"
It's actually "we found a way better set of instruments for long-term cash that allow us to offer better interest rates without giving up the cut altogether"
That being said, we do think the current treasury products can be a little predatory with their rates. For example, Rho charges a variable rate that peaks at 0.6% for any deposit of $2M or less. We think that's crazy so our margin is a flat 0.25%, no asterisks or fine print.
As other users mentioned, that would probably raise concerns about risk. In terms of yields for startups I'm assuming we would be talking about zero risk assets, that is US treasury. But I'd be interested in learning about these alternative assets.
That's totally fair. Risk is 100% the right concern to have when you hear about higher yields
We have a pretty comprehensive blog post about these assets (floating-rate agency MBS) and why we think they are a much better fit for startup treasuries. I encourage you (and anyone else reading this) to give it a read so that you understand exactly how they work and what the tradeoffs are: https://www.palus.finance/info/safety
That said, we understand not everyone wants to spend their day reading our blog posts. So the best tl;dr we can give is that the higher yields do not come with a credit risk, but instead with 1-2 days of liquidity cost versus same-day for MMFs. Which is much more ideal for a startup's idle cash
Interesting, I think maybe an approach that would sell me more is actually leaning into the risk aspect a little bit. If you tell me that there is no beta increase, just pure alpha, alarms ring off, but if there is a slight beta with outsized alpha, then I think of it as a tradeoff that I am making, I am willing to take a little bit more risk for a higher return, which might in turn reduce longer term startup risks and allow me to increase my chances of winning by having an extra month or two of runway, now I'm comparing risks instead of thinking about just the risk you introduce.
It helps that even if from Palus' perspective there is no increased beta risk compared to the market standard of treasury instruments, even if your thesis that the alpha comes from an inefficiency due to bad 2008 reputation, as a buyer there is still a non-systemic risk associated with going for a niche provider and trusting you.
So when you consider that in the eyes of a buyer there's already a non-systemic risk inefficiencies based on lack of distributor trust, then it doesn't really make sense to keep systemic risk low, I think the play here would be to increase the systemic risk of the play to something manageable, since the customer is already paying a last-mile risk of trusting you as a distributor of the federal products.
All of this might make it more tempting for clients to switch and choose you, otherwise if the choice is between 3.5% and 5%, it's not really a significant difference, however if the difference is 9% vs 3.5% and the risk is minimal, then maybe startups will bite, founders are already making wild bets, it isn't crazy to bet that there will not be a housing market crisis and that a provider won't scam you. If that happens tough luck, I guess.
I would go even further and say that this bet could be tied into the vision or industry of the founder, for example if the founder thinks that things are basically the same as they always were and that AI won't change the market dynamics much, then that's not a strong sale because lightning may strike twice on the same spot.
Or to put a simpler example, the industry itself might make it a good fit, if the industry is Real Estate that's the most obvious example, they are going bust anyways if there's a housing crisis. But if it's entertainment, or any other industry that depends on consumers having large discretionary income, they are probably going to fail anyways if there's a large consumer crisis.
So yeah, tl;dr I think that the better play is to lean into the risk rather than trying to communicate that there is no risk.
I definitely see your point. Our thesis with the MBS product, in finance terms, is that most startups can afford to take on a bit more liquidity risk on their long-term cash (on the order of a couple of days) to get significantly better yields without taking on credit or price risk on their principal.
We've had discussions about offering products in the future with higher yields that carry more risk. Most founders we've talked to are very risk-averse on their company treasury, but if our users tell us they want access to different instruments with different risk profiles, we're happy to meet them where they are.
Dude, don't put safe and high-yielding next to each other. It makes your post look like a scam.
1% spread is in fact, pretty small, so yeah, it probably isn't very risky.
The reason for the current framing is that pretty much every founder we have spoken to hears "high yield" and then instantly asks about safety. But like you said, at this spread it isn't risky
But yeah, any time you put those two words together it inspires skepticism, which is totally understandable. I think this comes down to a lack of education, most people think the only two dimensions in this space are yield vs risk when in reality there is a third one (liquidity) that is balancing out the spread
Super open to suggestions for alternate framing. Maybe something like "optimizing" yields?
Did YC finally stop investing in AI companies only?
Haha just wait until we add a chatbot in the corner of your window that's constantly pinging you to deposit more money
Name suggestions are appreciated