How should Startups Manage Idle Funds?

Kartikeyan Khator
6 days ago
2 min read

Updated: 6 days ago

You’ve closed the round. The wire hits. Now what? Before the first big hire or campaign, the smartest founders make one decision that quietly extends runway: where to park the cash.

We handpicked 10 Unicorns which were flushed with accumulated funds of $1.8 Billion as on 31st March’24, and studied their strategy of dealing with idle funds. Here’s what it boils down to:

Source: Startup Indian analysis based on Financial Statements published by the 10 Indian unicorns for FY23-24

While this scale might seem out of reach for early-stage startups, the core lessons remain invaluable. Here’s how young ventures can apply this approach to manage their runway better and make every rupee work harder:

Keep a balanced split between operations and investment – Startups should earmark enough cash for the next 3-6 months’ spending in an operating account which covers immediate needs like salaries, rent, and software tools. Any surplus can be tucked away in secure, interest-bearing vehicles that provide a safety net and liquidity for moonshot opportunities.

Prioritize liquidity and safety over high returns – It’s tempting to seek high yields, but founders must avoid locking funds in long-term or risky products like listed equity shares. This means that debt instruments or FDs are your best bets.

Diversify across nature and liquidity of products – Choose between active and passive management of funds i.e. debt oriented mutual funds or directly investing in debt instruments, or a mix thereof. Further, based on your cash flow planning, you can adopt a laddering strategy i.e. invest in multiple instruments with different liquidity periods. For e.g. overnight mutual funds have a liquidity of up to 1 day. Liquid MFs have a tenure of up to 91 days, and bank FDs or unquoted corporate bonds can have even longer tenures. The unicorns were seen to avoid risky investments, spreading their cash across multiple products to balance returns and flexibility i.e. active + passive, 1 day tenure + up to 12 months tenure.

Regularly review and adapt cash allocation – Cash allocations must be revisited on a bi-weekly basis, adjusting the balance between spending and saving to reflect the company’s latest priorities.

In case you were wondering the impact of making these short-term investments, the 10 unicorns that we looked into made a cumulative annual income of $110M from interest income and profit on sale of investments, which was roughly 3.6% of their cumulatve annual revenue.

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This article featured in our Founder's Playbook which answers questions around startup fundraising - when, how much, at what price, and more. You can access the Playbook here.