Hello WU Learner!
There is a wealth of advice out there for startups trying to raise money, and for good reason. Without that first round or seed funding, many great ideas would never become anything more than an idea. 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.
1. Capital preservation is critical
Angels and VCs invest in entrepreneurs to take risks in operating their businesses, not to take risks in making financial investments. 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.
Uncertainty abounds in startup land. You may need to liquidate an investment to free up cash, so make sure that doing so doesn’t lead to an uneconomical investment. 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. 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.
3. Cost Management
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.
4. Counterparty risk
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.
Doing some very basic but important cash management will allow you to focus on running your business. And pushing the business forward should, and will, generate infinitely more value than any cash management strategy could ever deliver.