Posted by sam_palus 9 hours ago
Launch HN: Palus Finance (YC W26): Better yields on idle cash for startups, SMBs
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 Freddie Mac). It's a $9T market with the same government backing and AAA/AA+ rating as the Treasuries in a money market fund. No investor has ever lost money in agency MBS due to borrower default.
It's worth acknowledging that many people associate “mortgage-backed securities” with the 2008 financial crisis. But the assets that blew up in 2008 were private-label MBS, bundles of risky subprime mortgages without federal guarantees. Agency MBS holders suffered no credit losses during the crisis, and post-2008 underwriting standards became even stricter. If anything, 2008 was evidence for the safety of agency MBS, not against it.
The agency guarantee eliminates credit risk. Our short-duration, floating-rate strategy addresses the other main risk: price risk. Fixed-rate bonds lose value when rates rise, but floating-rate bonds reset their coupon based on the SOFR benchmark, protecting against interest rate movements.
[2] This comes from the historical spread between MMFs and floating-rate agency MBS; MMFs typically pay very close to SOFR, while the MBS pay SOFR + 1 to 1.5%. This means that if the Federal Reserve changes interest rates and SOFR moves, both asset types will move by about the same amount, and that 1-1.5% premium will remain.
This post is for educational purposes only and does not constitute financial, investment, or legal advice. Past performance does not guarantee future results. Yields and spreads referenced are approximate and based on historical data.
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.
[1] https://claude.ai/artifacts/32bf6312-22b2-4d34-9840-bf33718f...
Your company gets classified as a PHC (and is subject to additional tax) if investment income, including interest, is more than 60% of its revenue. This isn't something most startups need to worry about if you have any revenue.
QSBS is based on intent, if the IRS thinks more than 80% of your assets are used for investment purposes and not for actively running your business. Basically it's so people don't use a small business tax exemption as a loophole for their investments. But the IRS absolutely considers idle cash in your company treasury as part of running your business, or else any startup that's raised money and didn't immediately spend it all would be considered an "investment vehicle," which they obviously don't.
Moreover, any of these potential issues would apply equally to a startup doing anything with their treasury, including putting it in a money market fund as most startups do. So we're not introducing any new tax risk. But of course, if any startup thinks these might be an issue for their business, they should talk to their tax advisor.
The active business asset test is about "intent and substance" and not balance sheet line items. I think it's very clear in this case that you'd be using it as a cash equivalent, since floating-rate agency MBS have a comparable risk profile to money market holdings (short duration, government-backed, highly liquid). And economically they're serving the same function: parking working capital safely until your business needs it. And frankly, I think accessing those assets through a treasury management platform, rather than a brokerage account, helps establish intent and substance.
That's my view on it at least, and I know many companies use these assets for long-term cash without issue. But I'm not a tax expert.
I do really appreciate you bringing this up though, and I'll reach out to our tax lawyer to get a proper written opinion we can share with our customers. Of course it's not a replacement for getting your own tax advice, but I think it'll be helpful regardless.
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?
The beauty of MBS floaters is that you’re relatively insensitive to prepayments because to a first approximation they’re always priced at par.
From an investor standpoint, as they say, you’re making maybe SOFR + 1.5%. That’s not a very sext return. But let’s say your banks repo desk is willing to finance the purchase at 5% down. Then you can lever up your investment 20x and now you’re a big shot making SOFR+30%, which is very sexy. But what’s that, when your lever like that, a tiny decline in price wipes out your entire stake (Welcome to 2008).
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.
I'm curious about your experience dealing with your board. We haven't heard that issue from our customers yet, but thus far we mostly just target up to Series B (mainly since, once companies are taking venture debt, they're typically required to hold their money at specific banks).
What were you trying to invest in, and what did they push back on?
Say you (like many startups) use Mercury Treasury, Rho Treasury, Brex Treasury, etc. Most of these list somewhere exactly what funds they buy into. Why not just open a fidelity account and by them yourself?
The answer is pretty clearly ease of use. Easy to move money from your bank account (likely also with them) to their treasury, easy to set up rules like ("if my bank balance falls below $X then transfer $Y from treasury"), stuff like that
We provide all of these features too! We are not at all asking people to bank with us or spend the time/friction of actively managing their deposits
So if the ease-of-use is the same and the yields are roughly 40% more than the generic money market wrappers out there, we think it's a no-brainer
(EDIT: adding mention that I am OP's co-founder)
But for the majority of founders who want to spend their time building, the fee isn't for ease of use just as this "nice to have", it's for the outcome that ease of use delivers: no need to hire for treasury operations, no manual reconciliation between accounts, no time spent on stuff that isn't your product.
We really think that in most cases, the tradeoff is worth it. But if it's not for you, we totally respect that too.
Also want to note that most treasury products start their fees at 0.6%, which we agree is quite ridiculous hence why ours is less than half that.
They're more of a traditional banking product. They seem to have a great high-yield checking account (3%), which is a great place to keep short-term cash. But for long-term holdings that you won't touch for months, a higher-yield product like Palus makes more sense, earning closer to 5%.
For what it's worth, we don't try to replace products like Crescent (or Mercury, Brex, etc.) at all. They're great for day-to-day banking. Instead we connect to your account there and optimize for really simple UX. We're working on setting up automatic sweep to/from Palus to make it even simpler.
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.
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.
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.
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!
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.