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.