Agency MBS holders who weren't levered or forced to sell never realized losses during the GFC. There were short term paper losses on some MBS, but it was overwhelmingly on long-duration fixed-rate MBS and incurred by people who held 5+ year duration bonds and had to sell early.
Short-duration floating-rate MBS, like the ones we use, were fine. And since regulations have gotten much stricter as a result of 2008, that was very much a worst-case scenario.
We specifically chose agency MBS because their yield and risk profile fits startup long-term cash needs very well (no credit risk by definition, stable NAV preventing principal risk, consistent premium over money market, and easy but non-instant liquidity). Essentially their safety reduces the need to diversify across bond types. It's also worth pointing out that MBS already are quite diversified, since each one is a pool of thousands of mortgages spread across different locations, borrowers, and property types.
We might offer non-MBS options in the future, if customers ask for it, but we're not there yet.
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.
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.
Very well put. And yes, to your point, we don't lever up.
And yes, SOFR + 1.5% isn't very sexy, but we're competing against existing treasury product that use money market funds and pay SOFR (or less, after fees). So that 1.5% is meaningful.
That's fair. But to your point, the problem we see is that banks' treasury products take advantage of founders who (rightfully) don't want to think about their treasury yields.
That's why we designed Palus to be as simple as possible to use. If you check out our demo video, you'll see it's super straightforward. Setup takes <5 min and then you don't have to think about it anymore. We're also building out automatic sweep functionality, so then you REALLY won't have to think about it.
Given the significant increase in returns on a large treasury, we think it's worth the small amount of effort.
> Given the significant increase in returns on a large treasury, we think it's worth the small amount of effort.
Isn't that the point he was making though? It's a large treasury in aggregate, which is why it makes sense for a new entrant to come in, but it's only a 1-2% problem for founders, which is why they don't bother with it much (why fix what's not broken, etc.).
By the time founders raise significant sums of money (which is usually Series B onwards), they might be better suited to deal with a fractional CFO service which provides the full spectrum of services instead.
Even for a Series A company, putting $5M into Palus yields them an extra $50k-75k per year, just for letting their money sit in a smarter place. It's a five-minute optimization which essentially gets you half a junior engineer's annual salary for free.
This is mathematically possible, but not for certain (market performance et all). Moreover: practically -- onboarding and taking on the risk of a new system and having to manage that is definitely not worth the 1-2 weeks of the founder, or an ops person's time. That 50-75k is more like $5k/month out of what is typically a ~200-400k monthly burn, within which there are almost definitely other ways to save more than 5k if you pay a similar amount of attention (e.g. cloud costs, wrong go to market strategy wasting time, etc). But optimizing deck chair placement on a burning ship is ultimately a distraction anyways -- everything should be focused on growing revenue. Startup founders need to think in 6-month increments to get to the next rung.
I'd totally agree, if it took 1-2 weeks to onboard and manage! But it really does just take a few minutes.
And it'll get even easier once we add our auto-sweep features in the next few weeks, and you'll be able to just set it up once and truly never have to touch it again.
We certainly don't claim that Palus will transform your startup. But it's a worthwhile piece of very low-hanging fruit.
It may take 2 minutes to click the button, it definitely takes weeks to diligence your company and the offering and compare it to what else is possible through the market.
Fair! Growing user trust is definitely one of the biggest challenges building in this space.
For what it's worth, we don't hold users' funds ourselves; we use an SEC-regulated custodian (Alpaca) with the assets legally held in your name. And we're working on building transparency measures, like detailed views into your account's specific holdings of underlying assets with verifiable attestations, third-party auditing, and frankly any other measures that our customers would want us to.
I know putting company money into a new product requires a lot of trust. Like any product you're still exploring, I'd encourage you to start small, try us out, and grow your position over time as we earn your trust. And if it helps you trust us, I'd be happy to get on a Zoom call or meet IRL.
STRC has only been around for less than a year. I don't know too much about what assets it holds (and maybe it's worth me looking into it), but those kinds of returns are generally a sign that you're taking on a lot more risk than you think (even if it hasn't had a major price decrease yet).
We're competing against long-term cash held in a money-market fund (an instrument optimized for short-term use with same-day liquidity) earning 3.5%. In that context our yields definitely are competitive.
The 4.5-5% yields we quote are net of expense ratio. Then our cut is 0.25%, comparable to the 0.15% to 0.6% charged by Mercury, Rho, etc. And we're working on bringing that expense ratio down as we scale.
Functionally speaking, short-duration floating-rate agency MBS trade at such a stable NAV that they're perfectly sufficient for long-term cash, and many large companies trade these.
MBSF is complex in the way that basically any fund is complex, but the strategy it employs is actually quite simple since it only trades a single asset class. Yes the expense ratio is higher than some other funds but the additional yields more than make up for it.
ICSH and SGOV are great funds too, and make sense for shorter-term cash, but they pay significantly less than we do.
Broadly speaking, our product is meant for exactly the kind of cash strategy you're thinking about: multiple buckets with duration spread accordingly. At the moment, our platform is just for the long-term bucket. But in the future, we might add additional shorter-term buckets too (maybe even with ICSH or SGOV).
The risk you are hiding will eventually show up. Charging .25% ER means you probably can make some decent money in the meantime and since the customer holds MBSF directly, you aren't on the hook for the risk. Smart.
It's a great business for you, if you can get enough customers. That said, I would never ever recommend anyone invest with you, since you are either purposely withholding the risks or not smart enough about the product you are trying to sell to understand the risks involved and share them with your customers. Either way, people shouldn't use your service.
On the government backing: it's a fair nuance to point out. In a technical sense, Ginnie Mae has the explicit full faith and credit guarantee while Fannie/Freddie are GSEs with an implicit one (and are under government conservatorship). But in practice, the distinction isn't really meaningful. In practice, the federal government has always guaranteed these loans (even in 2008, when they were under the most stress they've ever been, and there have been significant reforms as a result). There's no reason to think they'll ever stop. The scenario where the GSE guarantee fails is essentially the collapse of the US economy well beyond anything we saw in 2008 (in which case frankly we all have much bigger problems).
On the risks you mentioned:
1) Principal loss: given the guarantees re credit risk, and the fact that we use short-duration floating rate instruments to protect against price risk, this shouldn't really be a concern.
2) On spread risk: there can be slight variation in spread, mostly affecting yields; this is why we say "4.5-5%" yields given there's some variability in that range (but all far above money market).
3) On liquidity: agency MBS is the second most liquid fixed-income market in the world after Treasuries. In nearly all circumstances, liquidity is 1-2 business days. This product is really meant for long-term cash reserves; our idea is that companies should stop treating 6+ month cash the same as next month's payroll.
Ultimately we encourage founders to do their own research and understand what they're doing with their money. We wouldn't ask anyone to put short-term cash in a MBS portfolio (in the future we'll probably offer some other options too). But for long-term cash they're sitting on, the extra yield can be meaningful to the business: on $5M, it's an extra $50k-75k per year, or half a junior engineer's salary. Given the minimal risk, I think it's worthwhile for a lot of companies.
You should write more pieces like this and display them more prominently than an HN thread.
Your market is founders who have put money in an MMF and stopped thinking about it, not the people evaluating different optimization strategies day-to-day. So acknowledging the risks and saying "here's exactly when you should consider us" is exactly the kind of thing that helps overcome that uncertainty hurdle that results in choosing the simplest, safest option.
Founders should obviously do their own research, but that's asking the customer to proactively expend effort digging through future marketing copy to evaluate your product. They're not realistically going to do that as well as they should and the people who don't need to probably aren't your target market.
Short-duration floating-rate MBS, like the ones we use, were fine. And since regulations have gotten much stricter as a result of 2008, that was very much a worst-case scenario.
We specifically chose agency MBS because their yield and risk profile fits startup long-term cash needs very well (no credit risk by definition, stable NAV preventing principal risk, consistent premium over money market, and easy but non-instant liquidity). Essentially their safety reduces the need to diversify across bond types. It's also worth pointing out that MBS already are quite diversified, since each one is a pool of thousands of mortgages spread across different locations, borrowers, and property types.
We might offer non-MBS options in the future, if customers ask for it, but we're not there yet.