As inflation cools and interest rates fall, venture-funded startups face a new set of cash management challenges. After years of record-high rates, the era of easy 5%+ returns on startup reserves is fading. If your company is sitting on a sizable war chest, it’s time to rethink your approach to safety, liquidity, and yield.
Why Rate Declines Matter for Startups
When rates are high, startups can park cash in money market funds or short-term treasuries and earn a tidy return. For companies with $10 million or more in the bank, that’s hundreds of thousands of dollars a year – enough to extend runway or hire aggressively. As rates drop, these yields start shrinking, which makes effective cash management more essential than ever.
The Number One Rule: Safety and Liquidity Come First
No matter how tempting it may be to chase higher yields, don’t tie up startup runway in long-dated securities or illiquid investments. Prioritize:
- Safety. Stick to government-backed securities or insured money market accounts to keep funds protected.
- Liquidity. Make sure your cash is accessible within a few days in case of payroll, emergencies, or new opportunities. Avoid maturities longer than 9-12 months – even if yields on longer bonds look appealing. Remember, most startups plan for 18-24 months of burn, and you don’t want to be caught unable to access funds when needed.
Yield Strategies in a Falling-Rate Environment
- Don’t Reach for Yield. Resist locking funds in longer-dated (2-4 year) treasuries to eke out a fractionally higher return. The risk to liquidity outweighs the reward.
- Look for Thoughtful Money Market Funds. Some funds maintain slightly longer average maturities in their underlying securities for strategic yield boost – without sacrificing next-day access for redemptions. Carefully review the fund’s structure and speak with a bank or advisor if you need help evaluating the risk/return.
Partner with a Cash Management Professional
The best way to optimize yield without sacrificing core priorities is to work closely with a financial institution or cash management advisor who understands the VC-backed startup landscape. They can help you choose the best options to keep your cash protected and accessible, while maximizing returns where possible.
As rates drop, smart cash management is about discipline, not desperation. Keep your VC funds safe, liquid, and strategically deployed – and reach out to Kruze Consulting for expert guidance on every aspect of venture-funded startup finance.
