Mike Dombrowski's Advice on Cash Management for Startups

Mike Dombrowski of InterPrime - Podcast Transcript

Scott:	Hey, it’s Scott Orn, at Kruze Consulting and thanks for joining us on Founders and Friends for another awesome podcast. Let’s give a quick shout out to the Kruze Consulting accounting team. We’re very fortunate, we have a ton of people at Kruze who work on the monthly books for our clients and get them all set up, due diligence ready, rocking every month, answering all the client’s questions, making all those adjustments. And there’s no better moment for a founder and for us really, when a founder says, “Hey, I think I’m going to get a term sheet, are my books ready for diligence?” And we get to say, “Yes, they are fire away. Send them over, give them access.” That’s a great feeling, it’s the feeling that lets us know we’ve done a job very well done, and nothing is better than watching that cash at the bank account. So, if you are a venture-backed startup, you’re going out to fundraise, maybe check us out, check us out @kruzeconsulting.com. We love what we do. At taping here, I think we have 575 clients. Clients raised over a billion dollars this year, so we know what we’re doing and hopefully we can help you be successful in your fundraise. All right, let’s get to the podcast. Thanks.
Singer:	It’s Kruze Consulting Founders and Friends with your host, Scotty Orn.
Scott:	Welcome to Founders of Friends podcast with Scott Orn, at Kruze Consulting. And today my very special guest is Mike Dombrowski of InterPrime. Welcome Mike.
Mike:	Thanks for having me, Scott.
Scott:	It’s great to have you here, you are a trusted friend, partner of Kruze and you specialize in cash management, which is something that every startup needs to think about. So, I want to have you on the podcast. Maybe you can just kind of retrace your career a little bit and us how you found InterPrime and why you thought it was so interesting.
Mike:	Yeah, absolutely. My background, I’ve been on wall street my whole career. Started out as an equity trader, then went into portfolio management, managing bank portfolios, primarily focused on interest rate risk and risk management. Then I started my own company inside of another company where I was basically advising bank portfolios of how to manage their money. So, the big banks like Bank of America, JP Morgan, I think and all of them also hedge fund, et cetera. And I built that company, call it a close to 12, 15 years. I think I was just getting burnt out and I said, okay, I think it’s time for me to maybe transition, let’s get out of Wall Street, right? Because once you get into Wall Street, you never get to leave, right? So, I was like, let’s try to maybe find something in FinTech in the tech world. Right? At the same time, I was starting to do a little bit of fencing myself as like an angel investor through syndicates, et cetera. I went through and I was watching the live presentations of YC and InterPrime came across the stage and during their two-minute pitch, where they were talking about being focused on cash management for startups and using technology to give cash management techniques to companies that generally won’t have the access to them. Because if they don’t have a hundred million, 200 million, the Goldman Sachs of the world, et cetera, won’t help them with cash management. So, I was like, that’s very interesting. This is my background. This is the tech space. It’s kind of blends both of them together. So, I did what every hardworking person does, sent out a cold email to the founders and from that point forward had a engaging conversation and then we stayed in contact for about a year. And then I guess one of my keys of life is being pleasantly persistent. And I imagine over that time I provided them some sort of value and kind of went from there to me joining the company as the head of Capital Markets.
Scott:	I love it. Cold emails work, number one, and you talked about the persistence that really does matter and it works and especially in early stage startups, that’s really, really cool. And so, what’s the InterPrime pitch? How do you guys and ladies portray yourself and how do you help startups?
Mike:	Mainly for us is we’re tech forward first. We’re a technology company first, right? So, we’re leveraging technology to automate a lot of the processes that cash managers or CFOs or treasurers would have to do. Things like hunting first bank CDs, figuring out your burn rate, understanding how much money you should or should not have in your bank account because of risk parameters, things of that nature. So, we take that all off their plate, right? So, if you’re an early stage company, you may not have the budget to hire somebody or even want to do it. You can outsource it to us where we’re basically an extension of your team. If you’re a little bit larger and you have somebody that actually does do that function of finance, we can jump in there and we help them actually take things off of their plate so they can focus on more important tasks instead of dealing with banks and all that other types of stuff. We use technology to offload all that stuff for them.
Scott:	I love it. And so, the startup founder or the accounting firm that’s working with the startup founder, what? They just reach out to you at InterPrime and how does the flow or service process work?
Mike:	Yeah, absolutely. This happens quite frequently because we’re very big on partnerships as you know, right? So just as an example, we just had a company from a focused accounting firm, for tech companies. One of their customers raised a series A, he said, “You don’t need to be keeping all this money simply in your bank account. You need to start doing something else for that. Let me introduce to this team over here at InterPrime.” They introduced them to us and the process is pretty simple, straightforward. We have a conversation, understand risk parameter, what they’re trying to accomplish with their cash, et cetera. And then we walk them through a process. We help them install an investment policy, which is basically their playbook of how they’re going to manage their money. From that point forward, we help them get the accounts in place, fund the accounts, and then we invested the money for them based on their investment policy. And it’s basically set it and forget it for them, from that point forward, they can check in with us as much as they want. They can go directly through our web portal and see all their accounts, what they have, their assets, what they’re earning, et cetera, et cetera. And at that point, it’s automated and just moves forward.
Scott:	I love it. And you talked about the investment policy, which is something that probably every startup should have. I mean, can you talk about that? And then you have a lot of free resources about that, right?
Mike:	Yes, 100%. First and foremost, every company should have an investment policy, especially if you’re taking investor funds and all an investment policy is, it’s not a legally binding document. I’m not a lawyer, I don’t play one on the internet, right? But it does outline all the things that are going to be pertinent to your company. So, things like how much money you’re going to keep in your bank account, how much you’re going to move to your bank account when you need the funds and your operational account, if you will, what you can and cannot invest in, who’s going to be managing this type. How often are you going to look at it? And quite honestly, it is a pain to create one of those. So what we did is we created something called the Standard Investment Policy for Startups, also known as the SIPS. It is a free resource that we created. We’ve had multiple law firms, VC firms, CFO firms, accounting firms, all look at the document and basically become “supporters” by saying, “The language in this document is valid. This is what you should be doing.” And they’ve become supporters of it. And it is a free resource on our site. I’m sure you’ll probably give people the link to it or they can email me directly, however they want to do it. But that is the cornerstone of any good cash management program for our company is the investment policy. And even if you’re in a founder, think of it this way, it’s kind of CYA, if you’re taking investor dollars and buy that whole construct, right? You need to be using their money in a proper fashion. So, having an investment policy, both shows them and your team that you’re going to be using the money correctly in a very prudent fashion.
Scott:	Totally. I actually recommend people bring it up and get it approved at their board meetings.
Mike:	Yes.
Scott:	Especially when you get into that 15 to $50 million capital raise zone, which is happening a lot more often these days. Those are real dollars to put into a cash management program. And you mentioned the CYA cover your tushy part of that, which is I’ve seen… We talked about this a couple weeks ago, but I’ve seen some cash management programs go wrong, really wrong for startups. And it’s really sad because the people who build a startup or start a startup, they’re not doing it to be like financial engineers or…
Mike:	Right.
Scott:	They’re doing to change the world and build a technology or address a need, and yet they can get kind of sidetracked or maybe not, or sold on something that’s not kosher. I always think of things in terms of like safety, liquidity and yield, which we’ll talk about in a little bit.
Mike:	Sure.
Scott:	But I’ve seen founders get fired from their own companies because they had their cash in riskier assets than they really realized. And riskier assets than the board ever authorized. And-
Mike:	Exactly.
Scott:	… You also have to remember you’re a fiduciary. You are not just some Joe Blow that works at the company. You’re fiduciary, you’re liable. You have to do things the right way. And if you do things the wrong way, not only might you get fired from your company that you spend a lot of time building, but you might never get another chance if you’re irresponsible.
Mike:	Exactly.
Scott:	So, it’s just a basic building block, a basic CYA, and really it’ll just help the company run a little bit smoother, having that documented.
Mike:	Absolutely. It checks so many boxes and just makes… It’s so much better for everybody out there, from the founder to the board, to the company itself. And I think largely it’s just education, right? A lot of founders don’t even know A; what it is. B; why they would use it. C; what the benefits are. And that’s kind of one of our main things that we do, we’re very content focused on educating founders and companies of what they should be doing just because they don’t know. And it’s all about education.
Scott:	I totally agree. Now, when you’re onboarding someone to InterPrime, is the investment policy document the first thing you talked about or how do you introduce that to the flow?
Mike:	It’s probably quickly thereafter the initial conversation and trying to figure out… Mainly first things first is what’s their goal, right? What is the goal with this excess capital? Clearly, they’re going to be using it for growth. That’s what it’s supposed to be for. Right? We know that, but beyond that, they’re not… Say you raise $5 million. You’re not just going to blow out $5 million right away. So, there’s going to be a large portion of it sitting around. Right? Yeah. So, we first start with, what’s the goal with your excess cash? And I always say, do you want it to be as safe as possible? But duh! Of course, everybody does, right? Do you want it to be liquid so you can get at it? Yes, of course. Or three, are you very mindful or looking more for yield as the number one goal? What we tend to find is most people, come back two camps. They either are looking for a blend of safety and some yield. And then the second camp is what we call the yield hunters. They know their runway is so long that they’re not going to get that money, so they’re trying to optimize for yield and figure out how to generate as much money as possible off their balance sheet.
Scott:	That’s so sounds like a Netflix special or something like that. Yield hunter.
Mike:	It probably [crosstalk].
Scott:	Let me interject my very strong opinion here, which is, I really believe in safety first above everything.
Mike:	100%.
Scott:	Because again, we talked about the fiduciary and so sometimes I’ll get pitched on super exotic cash management tools or things like that. But I’ve seen things blow up. I was around in 2008 when Lehman went down and auction rate securities were an asset class that a lot of startups had been putting money into.
Mike:	Right.
Scott:	Comerica Bank had sold that a lot to a lot of founders. And it was basically like an enhanced yield and theoretically safe. But when the blow up happened in the financial system, they were frozen, those assets were frozen. And so a lot of startups… We had a biotech company that had 35 million in cash, which was a huge amount back then. And something like 30 or 32 million was stuck in auction rate securities.
Mike:	Oh my God.
Scott:	Of course, the CFO got fired. The company basically collapsed, all because they had just done the wrong cash management tool strategy. So, again, you’re not a financial engineer, you’re building a company, keep that money safe. It’s great to get some extra yield, but just safety should be your first requirement, in my humble opinion.
Mike:	You’re absolutely 100% correct. And that is our opinion as well. We put them in three steps, right? First is safety over everything. Second priority is liquidity. Because you need to be able to get at it and a distant third is returns or yield. And that’s the way people should be thinking about it. Most people flip it the other way and think yield liquidity and safety, but risk is paramount over everything, even, just thinking about it, right? Some people don’t even know if you have over $250,000 in your bank account, you’re technically at risk, right? To your point about Lehman.
Scott:	Maybe explain why the government doesn’t assure that.
Mike:	Just because it’s not good, right? It’s just FDIC protection from the government cops out there. And then beyond that, what you should be thinking about doing is, start thinking about Treasury Bills, very safe assets. Safest asset in the world is Treasury Bills. Why? You own them directly. If your bank goes out of business, you own those assets. The government will eventually give you your money back, right? So, step number one is anything over 250, you’ve got to immediately start thinking more serious about what you’re doing with, even personal money or corporate cash, right? Just because to your point, Lehman, very outside tail risk that a bank will go down. It does happen. Why even be involved with that, right? There’s no sense in even doing that. So yeah.
Scott:	There’s always this outlier black swan event possible. I mean, we’re taping this in October of 2021, and China could fire a rocket at Taiwan.
Mike:	Exactly.
Scott:	Or something could happen in the Middle East or something could happen in Latin America or there could be a terrorist attack in the United States, whatever it is, I don’t mean to fear monger. I’m just bringing up stuff that could happen.
Mike:	Sure.
Scott:	And you have to ask yourself, if I woke up tomorrow, and something like that happened, where would my cash be and would I be able to access it? And the reason why I bring that up is you will for sure get an email from at least one of your VCs that morning asking you that very question. And we saw when COVID hit, when a lot of founders who didn’t have the greatest financial hygiene couldn’t answer like basic cash runway burn rate statistics. It’s one of the reasons why Kruze’s grown a lot is because they didn’t have a policy. They didn’t have a process. So, do that now, heaven forbid that something like that happens, but at least you’ll be prepared and you’ll also build a lot of confidence in your investors…
Mike:	100%.
Scott:	… And your team. People will just know they’re in good shape, they’re fine and they can move on. Right?
Mike:	Exactly. And let’s be honest, it’s not hard to do. It’s very-
Scott:	No.
Mike:	Some people are like, oh, it’s so time consuming. It’s going to take me weeks and weeks and months to implement all these different things. It’s 100% not true. It is possible. And even if you don’t want to do it, that’s why a company like InterPrime around. Right? We could do it for you and leverage it and cut your time and significantly less.
Scott:	Hey, it’s Scott Orn, and we’re going to take a quick break from the podcast to give a shout out to the Kruze tax team. Gosh, it’s so nice to have an in-house tax team. I can’t even tell you. We have some really amazing professionals on team. I think it’s 13 people now and we do everything from your federal state income tax return, state franchise tax filings, R&D tax credits, those are pretty popular these days. And guess what? They’re there for you when you go through diligence. A lot of people don’t know this, but you actually go through tax diligence, not just operational kind of financial diligence, but you do go through tax diligence. So, it’s nice to have Vanessa Kruze on the phone with your VCs and with the accounting firm they hire to diligence all your stuff, and the law firm, they hire to diligence all your stuff. Vanessa knows what she’s doing. She’s done this a million times. And it’s not just Vanessa. We have a really great team of tax professionals that will do those calls too. Sometimes the difference between getting around clothes or having it take another two weeks because thing was disorganized and the tax compliance wasn’t done correctly. We hear those horror stories from clients that come to us. So, hey, if you want Kruze’s tax team on your side, we’re here for you. Check us out @kruzeconsulting.com, thanks. And so, we talked about safety, either bank, but you’re not insured over 250K. So, then you got to start buying treasuries and other super safe assets. Can you talk about the liquidity aspect of this? And maybe this is a good moment to talk about something, the bond laddering and some of the stuff you do to make sure not just the company has access to cash, but has cash rolling off over time to fund the runway basically.
Mike:	Yeah. And I think an easier way to kind of talk about that is I can kind of give you an example of a process that people will go through and which we do with them all the time. Right? So, first things first, you got to know what your burn is if your burn’s going to be increasing, et cetera. Then from there, way to think about it is three to six months’ worth of your burn probably should be either in your operational account or between your operational account and T-Bills. Why? T-Bills, again, safest investment in the world. Thanks to the US government backing, they’ll liquid almost instantaneously, and the money will be in your account the very next day. So, that’s building block number one. Building block number two is when you start going into the other assets, that are out there in the world that can pay you. So, you have bank CDs. Everybody knows about those. They’re not as liquid as a treasury. And then there’s also investment grade corporate bonds. So, you would be buying bonds of companies like Google, Starbucks, et cetera, et cetera. And that’s kind of like your three main players, right? So, your first bucket is operational money for next day liquidity. Then from there, you start implementing the other assets to go for the yield. Right? Because the structure is safety, liquidity, and then yield. Right? So then how do you do that? You start doing a bond ladder, like you mentioned, we just posted a blog post on that, what a bond ladder is. I’ll send you the link to that as well. It’s actually a great way to… I say it’s building your money machine, right? Because what the bond ladder does is it allows you to buy chunks that of bonds that are maturing in different times. So, let’s say, three months in the future, six months in the future, nine months, 12 months, et cetera, right? And as you’re asking, what happens is as those bonds mature, your money comes back to you that you can redeploy either into your business, right? Or you go back to the market and look for new assets to redeploy too. And [crosstalk].
Scott:	And you can roll it over basically, right? If you don’t need the money, you roll it over into another duration or timeframe that fits what your burn rate’s going to be.
Mike:	100%. And you can do fancy things if you want, right? So, you know that you’re going to have a specific bill due in nine months, you can actually create your bond ladder so the money would come due at that time to pay for that expense. Or if it wasn’t a large thing, you could use it to know that the interest payment matches your coupon payments and your interest payments to of sudden expense in the future. So, there’s different ways you can kind of play with it. It’s all about knowing your burn first and foremost, and then figuring out how you want that money to come back to you. Because it’s almost like a washing machine. You deploy it, you get reinvested. It comes back to you, you reinvest it and you just continue on and on and on, like Ron Popeil says, ‘set it and forget it’, right? You remember that old infomercial?
Scott:	I have heard of that. What is the… This is a segue to the third thing, which is just like yield or return. I mean, what’s the advantage of doing the bond laddering and planning out your liquidity like that in terms of is there a quantitative benefit that you can articulate or what should people be expecting?
Mike:	Well, the main thing around the bond laddering to kind of help you there it’s called interest rate risk. Right? So, what that means is basically you’re buying bonds, this as an example, that are paying you 1%, well in six months, when those bonds come back and mature, that money comes back to you. Well, now, if the market’s paying you 2%, you’re now automatically just going to go back to the market and redeploy those dollars at a higher interest rate. Right? So that’s kind of one of the main features of the ladder, right? You can keep going back to the market and hopefully capturing higher interest rates over time. Now, conversely, unfortunately, sometimes it does go the other direction, right? And the yields could go lower, but that’s just all market dependent anyway.
Scott:	You also can buy… There’s something called duration risk, which is basically the longer you have your money locked up, you should theoretically be compensated for that.
Mike:	Yes.
Scott:	So, the ladder is helpful. Say you’ve got, I’m just going to pick a number, 30 months of cash, right? And so, you probably don’t need at least 12 months of that cash for at least a year, maybe two, you can plan it out so you can buy a little bit longer dated treasury, and pick up a little bit of extra interest there. Versus if you bought a super short-term bond with that money, you might get a tiny, tiny bit of interest.
Mike:	Exactly, right. The short of the maturity, the less you’re going to get paid, the longer the maturity, you’re definitely going to get paid a little bit more. Cash management, we tend to preach staying 13 months or less in terms of maturity. If you’re a very mature company, that’s when you could start considering maybe two years, three years, four, [crosstalk] five years, in the future. But generally speaking, call, maybe not even up to like a Series C or D company, you’re probably not going to go too far out beyond 13, 15 months.
Scott:	I like that, I like 13. Yeah, that’s really smart and you mentioned earlier, the difference between US bonds and the Google or Starbucks bonds, can you just explain that a little bit more? Why would someone buy the Google Starbucks stuff instead of the US stuff?
Mike:	Well, US treasuries obviously are backed by the government, right? So, that’s what makes them the safest asset in the world. As long as the US government can pay their bills, you’ll get your money back. If they can’t, let’s be honest, we’re all going to be in a lot worse situation than we’re in about to get your T-Bill money back. Right? So, you have that problem. And then in the corporate bonds, one of the main things just to think about is you want your cash to be as safe as possible, right? So, you need to only buy bonds, in our opinion, of the highest quality companies, meaning massive cash on their balance sheet, large cash flows, et cetera, et cetera. Why? Because you know the money will come back to you. Also, that being said, the bonds and the debt stack, if a company does go bankrupt is higher than everybody else. So, whereas if you’re just owning the stock per se, and you’re getting dividends, they’ll cut their dividend before they stop paying their bond holders. So, again, you do get incremental returns by going to a corporate bond, but long as you’re buying of the soundest companies, you’re very close to almost getting a similar equation to safety of a US government bond.
Scott:	And there’s rating agencies and things like that. You can’t always trust the rating agencies, we learned in the 2008 timeframe. But the rating agencies are going to be very, very accurate for all intent’s purposes on the Google, Starbucks.
Mike:	100%.
Scott:	Those kind of companies.
Mike:	100%. Math is math, right? So, you’ll know with pretty decent clarity and we love to leverage them. Everybody should leverage the rating agencies. Why? The people that are doing the number crunching there are serious about their jobs, right? So just as an example, for us, in our investment policies, we only buy corporate investment, grade corporate bonds that are triple B plus and above on the S&P rating. And there’s actually investment grade levels that are below Triple-B Plus, but we choose to even just not even look at those companies at all and only look for Triple-B Plus and above. Why? Again, reducing risk focus on the strongest, healthiest corporate companies out there of the bond that you’re buying.
Scott:	Makes perfect sense, that’s amazing. This is a really good primer. I really do recommend that everyone checkout. You guys, I think it’s on the… Do you have the URL for the InterPrime investment policy template?
Mike:	Yes, it is interprime.co/sips. S-I-P-S.
Scott:	Yeah. That’s really, really great. And feel free to… You guys, you’ve also written a ton of really good content.
Mike:	Thank you.
Scott:	And also ask your accountant, like this is something we answer for our clients all the time. It becomes important when the companies are raising a lot of money, like they are right now because you can move the needle a little bit and still be safe.
Mike:	100%.
Scott:	Sometimes, I’ll say spending a little bit of time, still maintaining safety, but finding a slightly higher yield can maybe pay for an engineer every year. The extra yield you get in cash, on your cash can help you finance one more hire. And one more hire is meaningful for a startup. But I love the end just by saying please, please be safe with your money [inaudible].
Mike:	Yeah, absolutely. And I think even a point on that is like, as a founder, you are a fiduciary. So, always only work with fiduciaries. Right? And what a lot of people don’t even know is your bank. So, if your bank is providing you cash management services, they are not your fiduciary. They are your bank to provide and sell you things. So, I always keep that in your mind. I always like to say, because InterPrime is a fiduciary. So, one of my things I always like to say is when you’re working with your bank, they’re sitting on the other side of the table with you when you’re working with InterPrime, we’re sitting next to you.
Scott:	That’s really cool. I like that. Can you tell everyone where to find you and how to reach out if they want to work with you?
Mike:	Absolutely. Interprime.co, is obviously the website for InterPrime. You can find me on LinkedIn, Mike Dombrowski. I’m also on Twitter @Mike J Dombrowski, if you want get to me there. And then it’s mike@mnterprime.co, if you want to email me.
Scott:	Love it. Mike, thank you so much. Say hi to the whole InterPrime family for us.
Mike:	Will do, Scott.
Scott:	Really appreciate you coming on and telling the story.
Mike:	Absolutely, it’s great talking to you.
Scott:	Bye buddy. Thank you.
Mike:	See yah.
Singer:	It’s Kruze Consulting Founders and Friends with your host, Scotty Orn.

Information on how startups can manage their cash from Mike Dombrowski, head of Capital Markets at InterPrime

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