Navigating the Evolving Cash Management Landscape for Startups in the Era of Rising Inflation

For a very long time, especially in 2021, the fundraising market for startups was red-hot. Startups were raising a lot of capital and that money would typically sit in the startup’s bank, because startups weren’t motivated to engage in more sophisticated cash management techniques. That lack of motivation was due to two things: startups wanted their money to be safe, and it is very safe in a bank, and yields (interest rates) were super low. In 2021 specifically, interest rates were almost nothing.

However, as we entered into 2022, the tides began to shift. Inflation started rearing its ugly head, and suddenly, the value of that cash in the bank started to decrease. Startups began to realize that leaving all of their cash in the bank was not the best strategy for maintaining the value of their funds. This led to a renewed focus on cash management techniques, such as investing in Treasury bills, bonds, and other low-risk investments.

One of the main challenges for startups when it comes to cash management is balancing the need for safety and the need for growth. Startups are often focused on growth and expansion, but this can lead to a lack of focus on cash management. In the past, startups would often leave their cash in the bank, because it was safe and yielded very little in terms of returns. But as inflation began to rise in 2022, startups realized that they needed to start thinking more strategically about their cash management.

One option that many startups began to explore is investing in Treasury bills, which are short-term debt securities issued by the government. Treasury bills are considered to be very low-risk investments, and they yield slightly higher returns than a traditional savings account. This makes them an attractive option for startups looking to balance the need for safety and growth.

Another option that startups began to explore is bonds. Bonds are similar to Treasury bills in that they are debt securities, but they tend to have a longer term and a higher yield. However, bonds also come with a higher level of risk. Startups need to carefully evaluate the risk and return trade-off when considering bonds as a cash management strategy.

In conclusion, as the fundraising market for startups was red-hot in 2021, many startup left the money in the bank, because it was safe and yields were low. But as inflation started to rise in 2022, startups realized that they needed to start thinking more strategically about their cash management. Investing in Treasury bills and bonds became an attractive option for many startups looking to balance the need for safety and growth. As a result, they began to explore these options and other sophisticated cash management techniques to ensure that their funds remain safe and continue to grow.