Posted by sam_palus 12 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.
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%
We know that the main barrier to switching is just time and ease of use, so we deliberately built this to have the same operational burden as using your current treasury product
Palus links straight to your bank account just like Mercury, and we'll also allow you to set up rules for moving money around!
That said, if there's any other features that really keep people tied to their current products we want to know about it. Our goal here is to build something that actually cares about the fact that you're a startup with limited time to care about yields, and not just throw your money in a generic fund and forget you exist
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.
It's actually "we found a way better set of instruments for long-term cash that allow us to offer better interest rates without giving up the cut altogether"
That being said, we do think the current treasury products can be a little predatory with their rates. For example, Rho charges a variable rate that peaks at 0.6% for any deposit of $2M or less. We think that's crazy so our margin is a flat 0.25%, no asterisks or fine print.
We have a pretty comprehensive blog post about these assets (floating-rate agency MBS) and why we think they are a much better fit for startup treasuries. I encourage you (and anyone else reading this) to give it a read so that you understand exactly how they work and what the tradeoffs are: https://www.palus.finance/info/safety
That said, we understand not everyone wants to spend their day reading our blog posts. So the best tl;dr we can give is that the higher yields do not come with a credit risk, but instead with 1-2 days of liquidity cost versus same-day for MMFs. Which is much more ideal for a startup's idle cash
It helps that even if from Palus' perspective there is no increased beta risk compared to the market standard of treasury instruments, even if your thesis that the alpha comes from an inefficiency due to bad 2008 reputation, as a buyer there is still a non-systemic risk associated with going for a niche provider and trusting you.
So when you consider that in the eyes of a buyer there's already a non-systemic risk inefficiencies based on lack of distributor trust, then it doesn't really make sense to keep systemic risk low, I think the play here would be to increase the systemic risk of the play to something manageable, since the customer is already paying a last-mile risk of trusting you as a distributor of the federal products.
All of this might make it more tempting for clients to switch and choose you, otherwise if the choice is between 3.5% and 5%, it's not really a significant difference, however if the difference is 9% vs 3.5% and the risk is minimal, then maybe startups will bite, founders are already making wild bets, it isn't crazy to bet that there will not be a housing market crisis and that a provider won't scam you. If that happens tough luck, I guess.
I would go even further and say that this bet could be tied into the vision or industry of the founder, for example if the founder thinks that things are basically the same as they always were and that AI won't change the market dynamics much, then that's not a strong sale because lightning may strike twice on the same spot.
Or to put a simpler example, the industry itself might make it a good fit, if the industry is Real Estate that's the most obvious example, they are going bust anyways if there's a housing crisis. But if it's entertainment, or any other industry that depends on consumers having large discretionary income, they are probably going to fail anyways if there's a large consumer crisis.
So yeah, tl;dr I think that the better play is to lean into the risk rather than trying to communicate that there is no risk.
We've had discussions about offering products in the future with higher yields that carry more risk. Most founders we've talked to are very risk-averse on their company treasury, but if our users tell us they want access to different instruments with different risk profiles, we're happy to meet them where they are.
Name suggestions are appreciated
1% spread is in fact, pretty small, so yeah, it probably isn't very risky.
But yeah, any time you put those two words together it inspires skepticism, which is totally understandable. I think this comes down to a lack of education, most people think the only two dimensions in this space are yield vs risk when in reality there is a third one (liquidity) that is balancing out the spread
Super open to suggestions for alternate framing. Maybe something like "optimizing" yields?