SPEAKER_01: Alright, everybody, it's time to get back to basics. That's what we do here at this weekend startups. 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.
SPEAKER_00: Great to be here. Yeah, so we we last talked in 2022. I think it
SPEAKER_01: was complete utter chaos. We had Silicon Valley bank and a bunch of startups closing. We saw startup 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
SPEAKER_00: 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 were like a really good index of startup ecosystem. And just in the last like three months, the the median cash at a startup has been ticking up for the first time in about nine months. So that Oh, that's significant. Very, like it's the bottom, right? Potentially the bottom. But what we 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 didn't quite make it didn't deserve to be funded, whatever it is, the weaker companies have been called a little bit. Sure. So now the good companies are getting funded and raising more money. And that meeting is meeting is ticking up. So I think it's like it's an awesome sign. And we're we kind of hear that anecdotally from the founders, you probably hear at launch, you know, we're like, hey, it's getting a little easier, or I have less me to competitors, things like that. I mean, let's let's be candid. You know, startups are an
SPEAKER_01: experiment, you know, 80 90% return nothing to investors. In other words, they fail to reach escape velocity becomes sustainable companies and have an exit. Okay, that's fine. We were all grown ups, 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 called. 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, you know, 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 defensive strategy. Let's go through those two things.
SPEAKER_00: 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 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 of breaking the law. So this is we're talking in generalities. And this is for educational purposes only,
SPEAKER_01: please consult your registered investment advisor, disclaimer, disclaimer, disclaimer. Exactly. So the most important thing is
SPEAKER_00: safety. And we've talked about this before, I think no venture capitalist gave you money startup founder to speculate on commodities, or speculate 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 burn 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 you 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
SPEAKER_01: you're gonna get that 5% or 6%, whatever it is, and hey, that could be meaningful, you get $2 million in your accounts 100 grand a year, that hundred grand a year can pay for another headcount.
SPEAKER_00: 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, that's why the employees Yeah, yes, exactly. So one thing we see and kind of this is why I'm so far enough about this is at cruise, our clients right now have something like $4 billion. 2 billion of that is an operating accounts, which pretty much paid no interest whatsoever. Huh? 2 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 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.
SPEAKER_01: Yeah. And then what we learned from Silicon Valley bank is don't have a single point of failure. Yes. So let's talk about that. Because this is another that you know, the opportunity is, as we just pointed out, hey, somebody's got $40 million 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, first Republic. Yeah. And so you guys again, it's amazing that Cruz has all this data. And this is all anonymized data. It's like one individual copy. 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 was 250 that they were gonna put this across eight banks. Oh, God. There's what there's a
SPEAKER_00: couple answers to that. So let's answer 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 $3 million. And what we what we've seen now is a bifurcation after SPB in first book. And by the way, we had 550 clients with SCB, we had another 120 clients with first book. So like, my world was not great for those two weeks. It was a tough time. Yeah, so. 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 whiz bang, login portals, and all this stuff, modern software. Yeah, exactly. That's better legacy software in most cases, but they but they will not go
SPEAKER_00: 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 neo banks or the S&P, the new version of SBB, it's default, some of those folks, because they those are a little bit easier to work with, right? Yeah, you're talking about Brex and mercury. Yes, yeah, not to
SPEAKER_01: give them a free ad or anything, but these are great services, right, Brex and mercury, we can mention them. So you got your you had your you had your Silicon Valley bank, First Republic, those are 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. They 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 family, etc. It's exactly right. In from a staff perspective,
SPEAKER_00: 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%. Actually, what I hear from the founders post SBB crisis is like a lot of them are sticking with SBB. So SBB is done a pretty good job. I gotta 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 debts, which they didn't have to do. And you probably see it in the launch portfolio, too. But like, it's they're doing the right thing. So but yeah, that mercury was certainly that's certainly a
SPEAKER_01: goodwill gesture to like, you say 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 they have the number of accounts cut in half. But they can rebuild from here. And it looks like JP Morgan was a big beneficiary, huh? Oh, huge, huge beneficiary. And mercury and Brex did really,
SPEAKER_00: 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 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 virtualize software and virtualized servers over the years, they load balancing your money, yes, they've load balanced and virtualize 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 JP Morgan. And I think JP Morgan stance is like, we're JP Morgan, we don't really need to do that. And God bless them. They're right. They don't have to do that. But that's called sweep. Are they called sweep accounts
SPEAKER_01: sometimes insured cash sweeps, ICS is you'll hear it like that a
SPEAKER_00: lot. But it will just say sweep accounts. Yeah, yeah, yeah. The
SPEAKER_00: 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 FBI insurance, that kind of stuff. But that has made people as a lot of people to 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.
SPEAKER_01: 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, 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 start up, and
SPEAKER_00: 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 to Yeah, and they should. And in some people, like you said, you talk to those founders have three or four because they're going crazy. I don't like to have too many. Because then you're not like, yeah, yeah, you don't want to like, lose track of stuff or forget that you have $500,000 somewhere, things like that.
SPEAKER_01: 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 your right, you don't have to go start another account, you've already got it set up. And so if 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. Like, hey, no, I literally did this. They were being responsive. 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 fees out of me was 5000. 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 $5,001 and move $4,995,000 to the other bank. I did it was crazy. If I can build on that,
SPEAKER_00: too. People think that like their bank is going to like contact them and be like, Hey, Jason, great news. We're gonna pay you more interest, we're gonna pay you a higher interest rate this month, they will not contact you. No, you have there will quietly continue to manage your money for 3% or three and a half percent instead of paying you five or five and a half where 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 this is like, you know, two or three emails without a call. Yeah,
SPEAKER_01: 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, I can only give you 5000 Bank of America. Yeah. And
SPEAKER_01: I said to the guy 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, um, 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 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 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. Is because they would come to your office, they would talk to you, they take it to lunch, have a coffee. And 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
SPEAKER_00: Citizens in Philadelphia. It's a major bank. I think it's first citizens maybe. But they still go by SBB first citizens. Yeah, SBB like at first citizens or something. I don't know. But the
SPEAKER_00: cool thing if there's a if there's a kind of a positive in this whole thing is a lot of great people stayed at SBB. And we talked to them all the time, and they're very proactive. And then some really good people left SBB. So there's more it 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 yeah, that you're right, they those banks were wonderful to work with. And they got startups, I just think it's gonna they're gonna all rebound, it's gonna be I think that white
SPEAKER_01: 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, as I'm rich venture capitalist, that 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. And is there any rich person who's our school compare teachers? Oh, my gosh, when I sent that all cap street, I was like, Well, I'm really concerned here, like the schools are going to not be able to get their money. Alright, so just high level. It's really three core concepts we talked about here. You got 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 some those three up for us as we wrap here. Yeah, I mean, the capital preservation is not
SPEAKER_00: taking not putting things in exotic securities, right? short term government bond funds, things like that. The US government treasuries are paying something like five and a half percent right now for three or six months, like the US government's the best creditor in the world. So these are the kind of things you want to think about. And then that's so 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 know access to your capital, right? You just never know what's going to happen. So but most of the service providers out there understand that and hitting that window. And then the third thing is risk management. This is again, like 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, like the simple, keep it simple. And your job is
SPEAKER_01: 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 Poker. That's not what this is for. No, you know, 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. Here on this week in startups startup basics.
