HN Explorer

Launch HN: Palus Finance (YC W26): Better yields on idle cash for startups, SMBs

62 points by sam_palus ↗ HN
Hi HN! We’re Sam and Michael from Palus Finance (https://palus.finance). We’re building a treasury management platform for startups and SMBs to earn higher yields with a high-yield bond portfolio.

We were funded by YC for a consumer-focused product for higher-yield savings. But when we joined YC and got our funding, we realized we needed the product for our own startup’s cash reserves, and other startups in the batch started telling us they wanted this too.

We realized that traditional startup treasury products do much the same thing: open a brokerage account, sweep your cash into a money market fund (MMF), and charge a management fee. No strategy involved. (There is actually one widely-advertised treasury product that differentiates on yield, but instead of an MMF it uses a mutual fund where your principal is at considerable risk – it had a 9% loss in 2022 that took years to recover.)

I come from a finance background, so this norm felt weird to me. The typical startup cashflow pattern is a large infusion from a raise covering 18–24 months of burn, drawn down gradually. That's a lot of capital sitting idle for a long time, where even a modest yield improvement compounds into real money.

MMFs are the lowest rung of what's available in fixed income. Yes, they’re very safe and liquid, but when you leave your whole treasury in one, you’re giving up yield to get same-day liquidity on cash you won’t touch for six months or more. Big companies have treasury teams that actively manage their holdings and invest in a range of safe assets to maximize yield. But those sophisticated bond portfolios were just never made accessible to startups. That’s what we’re building.

Our bond portfolio holds short-duration floating-rate agency mortgage-backed securities (MBS), which are an ideal, safe, high-yielding asset for long-term startup cash reserves under most circumstances.[1]

The bond portfolio is managed by Regan Capital, which runs MBSF, the largest floating-rate agency MBS ETF in the country. Right now we're using MBSF to generate yields for customers (you can see its historical returns, including dividends, here: https://totalrealreturns.com/n/USDOLLAR,MBSF). We're working with Regan to set up a dedicated account with the same strategy, which will let us reduce fees and give each startup direct ownership of the underlying securities. All assets are held with an SEC-licensed custodian.

Based on historical returns, we target 4.5–5% returns vs. roughly 3.5% from most money market funds.[2] Liquidity is typically available in 1-2 business days. We will charge a flat 0.25% annual fee on AUM, compared to the 0.15–0.60%, depending on balance, charged by other treasury providers.

We think that startup banking products themselves (Brex, Mercury, etc.) are genuinely good at what they do: payments, payroll, card management. The problem is the treasury product bundled with them, not the bank. So rather than building another neobank, we built Palus to connect to your existing bank account via Plaid. Our goal was to create the simplest possible UX for this product: two buttons and a giant number that goes up.

See here: https://www.youtube.com/watch?v=8Q_gwSqtnxM

We are live with early customers from within YC, and accepting new customers on a rolling basis; you can sign up at https://palus.finance/.

We'd love feedback from founders who've thought about idle cash management or people with a background in fixed-income and structured products. Happy to go deep in the comments.

[1] Agency MBS are pools of residential mortgages guaranteed by federal government agencies (Ginnie Mae, Fannie Mae, and Fred...

41 comments

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_hugerobots_
This would be a really nice product to start ups outside the US tech belt. Hubris of treading water in longterm a-series SUs elsewhere, this could be a viable solution if accessible.
mushufasa
I spent time looking into this a couple years ago as a startup founder with this problem. We are in the finance space so I saw how bad the treasury options were with our bank, given their fee cut versus plain T-bonds at the time. I looked into which brokerages allowed us to setup self-directed accounts (many banks don't offer that for businesses at all). I found the "correct" approach. But then there would be more paperwork and back and forth to set up that new account, then manage transferring money around when we needed it, logging into a different system. On a ski trip a friend in finance told me "you're being dumb, if your bank offers you a treasury plan with a one click button, even if it's not perfect, click that button now!" So I did.

Then, the benefit of saving 1-2% extra versus spending my time trying to actually running the business and doing things with our money in the real world, has meant I have never looked back. 1-2% on millions of dollars is significant but it's not nearly as impactful as finding Product-Market-Fit in your actual business.

All this to say: I'd be in your target market but I'm simply not interested in a "marginally better" treasury system versus just going with my bank's options that make it easy for me.

digitallogic
> 1-2% on millions of dollars is significant but it's not nearly as impactful as finding Product-Market-Fit in your actual business.

You've got really significant, broader lesson here for startups at this stage.

hahahacorn
Is this available for Non Profits?

I've had an easy time setting up treasury accounts with Rho & Mercury for 2 co's, but the latter gave me a no-go on an account for a non profit.

Lionga
Any higher yield comes from higher risk. If any startup feels the startup is not risky enough and really wants to have higher yield for higher risk just put the money in a Bond ETF that suits your risk appetite. Crazy that YC funds things that make a simple thing more complex and more costly for zero upside.
sam_palus
The bond funds offered in existing startup treasury products aren't suited for startups' long-term cash reserves. They either offer low-yield money market funds, or bond funds that aren't well suited for capital preservation on the order of months the way startups operate (see here for an example of VFSTX, the fund offered by one of the leading startup treasury products today: https://totalrealreturns.com/n/USDOLLAR,VFSTX?start=2021-01-...)

Our goal is to make sophisticated treasury management easy for startups. With Palus, they don't need to manage a brokerage account, or handle treasury ladders, or anything like that.

TZubiri
If the value proposition is better interest rates, it sounds like Palus would get that by giving up their cut, what would be your monetization strategy then?
[deleted]
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SigmundA
Nice to have some higher yield options.

There are banks out there that will do business savings accounts not much below this (2.85%) while keeping things safe (FDIC insured) and liquid.

https://www.liveoak.bank/business-savings/

sam_palus
Good find- 2.85% is great for a business savings account.

All that is to say: businesses shouldn't treat all their cash the same way, especially when they have significant runway. The exact breakdown depends on the business, but typically you can think of it as three different buckets:

1) You have short-term cash, which you need immediately. This is where you'd use a checking account. This pays very close to 0% but you have immediate access. Most businesses might keep a few weeks' cash here.

2) You have short-term reserves, which is what you'd use in the next couple of months. This is where most companies might use a savings account (or even put it in a money market fund), where you know you can get the cash into your checking account in ~1 day. This pays between 2.5% and up to maybe 3.75%. Each business will structure their cash differently, and some might not even bother having this bucket.

3) Long term reserves, which you won't touch for months. This is where companies try to optimize yield, and where Palus is valuable. Even here, your money is safe, and in Palus's case can usually be in your checking account within a couple of days, but getting extra yield on long-term reserves can be super valuable.

quickthrowman
You’re still exposing yourself to duration risk, right? What’s the average duration of your short-term MBS portfolio?

MBS bonds pay a risk premium for a reason, you’re virtually free of credit risk, but you’re assuming interest rate/duration risk (not particularly relevant if duration is low, I’m not familiar with the duration of short term floating rate MBSes)

Also, what happens in a Silicon Valley bank type scenario, let’s say you have lots of withdrawals and you have to liquidate at under face value. Who eats the loss?

yarrowy
What's the advantage of this versus opening a Fidelity account and buying the same product?
collingreen
Startup founder: at this point you need to overcome the stigma of fly by night fintech wrappers sitting on top of banking and the exceptional, outsized risk that creates for consumers a la synchrony and things like yotta essentially losing millions of customer money with no recourse because a discrepancy between those two layers. 1% higher yield is nowhere near juicy enough for me to literally bet the company on and that's close to what would happen if you lost my entire last round (or locked it up 6 months beyond when I need it). Starting with yc companies as a trust indicator is helpful although yc switching to a shotgun "fund hundreds of companies per batch" approach means the yc label carries a LOT less weight than it used to (since they are no longer paying much attention to any one investment).

I like smart finance plays and I hope you can do that and stand out from the glut of finance bros who have (and continue to) muddied the water (poisoned the well?) with this approach of "tech on top if actual finance companies".

Good luck out there!

uniclaude
Far from me the idea of criticizing a founder starting something to help other startups. That's amazing. However, the post is not really accurate! Are you sure that all these MBS pools have the same government backing as Treasuries? Ginnie Mae, Fannie Mae, and Freddie Mac are not equal. Are the additional risks (spread risk, liquidity mismatch, and risks related to the mortgage structure that even Regan discloses!) worth the tiny extra yield above money market funds? Startups have to deal with uncertainty all the time, that's the nature of business. Principal loss, and liquidity issues are not things you should have to deal with as a startup. However, providing options to startups is always great, and I think this is a great direction!

Again, I hope this doesn't come as negative, but I'm not sure this is making the risk clear. I am not sure I would suggest my portfolio companies to risk their treasuries unless I am sure they're fully understanding the risks associated. Do you intend to provide anything else?

andrewljohnson
We use Mercury’s treasury account to get yields on cash, and what appeals to me is it is easy to manage. I don’t have to worry about setting up processes to move money around and it’s integrated with my bank account, and we wouldn’t want to switch even for a higher yield… the operational burden is more important to us than yield.

I think the yield is about 3.2% based on how we set it up to be as liquid as possible. We could have accepted less liquidity for more like 3.8%

zie
At .49% expense ratio, plus whatever your cut is, it won't be a very cheap product. Even SPAXX, the default holding of cash at Fidelity is cheaper at .42% ER.

There is no free lunch in investing, so that extra yield comes with extra risk. Be that duration, credit, etc. That's not to say MBS's don't have their place, but I would never claim people's mortgages as equivalent to cash in any shape or form. Your website claims MBSF is safe for 3+ month durations, but that is not the avg duration of MBSF held securities, so you are encouraging duration risk.

I haven't read the full prospectus on MBSF, so I'm not an expert on that product, but it seems expensive and complicated, which is not what you want for cash and cash-like things. This should be a hard pass for literally everyone.

Meanwhile you can hold something like ICSH[0] or SGOV[1] with expense in the .09% or lower range(i.e. for every $10k we are talking $9/yr or less in fees). SGOV is 0-3 month max duration, so it's perfect for holdings in the 3 month time-frame. If you need longer time frames you can buy govt bond ladders in whatever time frame you want.

What your product should have been: You specify duration for each of your buckets, and then you pick appropriate, cheap index-based investments that are cheap and easy to reason about for each of the buckets.

0: https://www.ishares.com/us/products/258806/ishares-liquidity... 1: https://www.ishares.com/us/products/314116/ishares-0-3-month...

I_am_tiberius
Did YC finally stop investing in AI companies only?
mogonzal
Haha just wait until we add a chatbot in the corner of your window that's constantly pinging you to deposit more money

Name suggestions are appreciated

kjksf
Anyone can buy STRC with 10-11% yield, paid monthly. Full liquidity (i.e. can sell anytime).

5% return is not competitive.

verteu
STRC is much riskier (I'm having trouble imagining any scenario where it does NOT default.)
notpushkin
Congrats on the launch!

Do you work with non-US companies? I have a company in Estonia, and hold some reserve cash (mix of dollars and euro) on a Wise account. It pays 2.20% variable APR, but I’m starting to explore other options :-)

kristianp
> Agency MBS holders suffered no credit losses during the crisis, and post-2008 underwriting standards became even stricter.

I suppose the Agency MBS holders still had losses during the GFC. Would your clients wear any losses in MBS price of there's another housing downtuurn or recession? Why not diversify into other bonds as well?

d--b
Dude, don't put safe and high-yielding next to each other. It makes your post look like a scam.

1% spread is in fact, pretty small, so yeah, it probably isn't very risky.

tjpd
Isn't the issue of products like this that they present PHC risk, jeopardize QSBS - particularly at the earliest stages where revenue is de minimis?
jdndbdjsj
Good luck! Not being startupy or American I don't understand. But sounds like a schlep problem (see pg essays).

If you ever want to pivot an idea I am suprised no one does is why don't long term bets e.g. 2028 president pay interest. When you bet on something almost certain in 5 years you always lose due to lost interest. Maybe bets can include interest or even be chucked in SP500 for duration.

amluto
Is the income generated exempt from state taxes?
random3
Good luck! Fintechs targeting SMBs is a go-to-market strategy template that makes sense until you go to market and realize that if you have a better product, there's a better, bigger market and that market is the mid-market...

The thing with startups, like with SMBs is that most times are fragile, not-financially sound institutions. At least for startups, those that don't die, usually grow and need the larger scale features anyways.