How to Educate Your VCs on Cash Management Best Practices
A disagreement with an investor is high on the “let’s not do that” list for every founder / CEO. You have priorities and an investor spat is a distraction. Especially in the early days. Because of this, many founders / CEOs shelve things they want to do to not rock the boat.
We speak with prospects weekly, and surprising to us, there is a common concern around how managing their company cash could possibly make a rift with an investor. It usually sounds like:
“I know I can do better than leaving my cash in the bank. BUT I don’t want to make my investors mad. Or worse, have them sue me.”
First off, if you ever think your investors could sue you. You might have allowed the wrong people to invest.
Second, if you educate your investors on why, what, and how you plan to use your pile of cash. Their support might surprise you.
In our post, “What is the real cost of sitting in cash?”. We explained how leaving your money in the bank can earn you a negative real return. i. e. The equivalent of lighting your money on fire and watching it turn to smoke.
When you think about the potential negative real returns on keeping your cash in the bank. It should be a no brainer to everyone that there has to be another way.
Do you think established companies leave their cash pile idle in the bank? Hint:They don’t.
We do the research on what large companies do and you can see what’s going on by checking out these posts (How Apple manages their corporate cash, Analyzing the cash portfolios of Airbnb, Zoom & DoorDash , What Snowflake does with their money). If Apple, Airbnb, and others are putting their cash to work. Why shouldn't you?
In the rest of this post we will explain:
- What your fiduciary role is when managing a company's cash.
- Why some investors may have concerns around doing something outside of leaving the money in the bank.
- A playbook you can use to build the support you need.
Founder / CEO as Explorer & Captain
As the Founder / CEO of a company you have a fiduciary responsibility. That means you should always act with the best intentions for the company and mission.
Think of this role as the explorer looking to find new lands and trade routes. You have an idea of where / how the riches can be had (your company mission). You sold that mission to the kings and queens to fund it (investors). Just because you got their money, doesn’t mean you can run off with it. There are expectations that you use the funding to do the exploration with best efforts.
Once those wires hit your bank account your level of responsibility increases. You need to build your team with the best talent possible. Confirm the plan of attack ( business plan ). And then push through tough situations to hit milestones ( growth / KPIs ).
You are the captain of the exploration ship going out to conquer the world and bring home the expected returns. A la’ Columbus, Magellan, or Cabot.
Investor Concerns and Their Cash
Most investors are not born rich. They may have been a founder and reached the promised land of an exit. Or early employees who went on a mission and found riches. They can even be professionals tasked to provide returns to LPs. The point is, they worked hard and struggled to now have the ability to fund future explorations.
This hard earned money is now their tool and resource to generate more cash. That makes every exploration they fund very personal. And when things are personal, things get serious.
You earned their trust for your mission based on specific factors. How you were going to tackle an enormous TAM. How you were going to revolutionize a stagnant industry. Or you are building in a space they love.
They gave you the money to focus 110% on the mission. So any effort you take that puts the mission at risk can make their hair stand up. Spidey senses are tingling! Because of this, they compensate by taking a stand to keep all money in the bank. This reduces and / or eliminates their fears of money being lost and not going to the mission.
We know that larger and more mature companies are doing more than just keeping their cash in the bank to keep it safe & earnings market rates. So the idea that you can’t be 110% on mission while mimicking what they do is misplaced.
How to Get It Done
As the captain of your ship, you have the right to consider how best to divide your cash. In the following sections we are going to outline some best practices to get your investors on board.
Educate Your Investors
One of the best ways to reduce or remove ignorance and prejudice is through education. It is also the cornerstone of getting your investors on board with how you want to manage your company cash.
It is important to show them that you are not proposing some hair-brained scheme. And the quickest and easiest way to do so is through examples.
While we have already presented real life examples in previous sections. Consider tapping us to help arm you with examples that might hit closer to home for your investors. i.e . Your company compared to Apple might not be a true apples to apples comparison. Pun intended. Instead, research companies more specific to your industry, next growth stage, etc.
The key is to show investors what you plan to do is normal and a best practice.
Transparency is Golden
Like you laid out the plan of why you and your team were the best for the mission. You need to do the same with your cash management plan. A good dose of fear and greed helps you here.
For fear - talk about the risk associated with leaving money in the bank. Like how FDIC protection runs out on bank account balances above $250k. Or how negative real returns on bank balances are in fact possible thanks to inflation.
For greed - talk about the benefits your company will receive. Like how you will have your cash in the safest asset in the world: US Treasury Bills. Or how by putting your idle cash to work you can access more resources!
Using fear and greed are essential to help move mental frameworks. As Napoleon Bonaparte said, “Men are moved by two levers only: fear and self interest.”
Bring on Specialized Players
Next step is to make sure investors know you have the skills needed to manage your cash. Unfortunately, they may see this as not the best use of your time.
Take that wall down by bringing on specialized players who have skills in cash management. This does not mean you need to look for a full time finance employee. There are other avenues available to bring on specialized players.
Fractional CFOs are worth exploring. Or partnering with an outsourced firm dedicated to this task is another. If you need introductions, contact us because we have a deep bench that we can direct you towards.
Build / Show the Playbook
The final step is building your cash management plan and playbook. This shows:
- How much cash you plan to keep in your operating account.
- What assets you can and can not invest in.
- What your target returns are and what that equals in real dollars.
- Who and how reviews will happen to make sure it is working.
An investment policy outlines all of this. You can either create this investment policy yourself. Or you can use a tool like the SIPS(Standard Investment Policy for Startups) to get things moving quickly.
The main thing is to have a plan and make it available to your investors. This shows them you have a well thought out direction and serves as your defense if someone questions what you are doing.
You are in control of your ship. No matter where or from whom the money came from you have a fiduciary responsibility to it. Educating your investors through real world examples, transparency, and adding specialized talent will help them get on board with a corporate cash management plan.
Having a solid cash management plan will help you make sure that your company’s money is safe, liquid & earning the market rate of return (rather than languishing in your checking account). The SIPS is a great place to get started on this journey, and we are here to help you, so please do reach out!
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