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The InterPrime Newsletter - Issue #1 Snowflakes in September

The InterPrime Newsletter
The InterPrime Newsletter - Issue #1 Snowflakes in September
By The InterPrime Team • Issue #1 • View online
Welcome to the first edition of the InterPrime Newsletter, a periodical where we share our thoughts on the financial markets, corporate treasury & preview product updates.

“Wall Street people learn nothing and forget everything.” Benjamin Graham
Most Interesting Read
Snowflakes in September
Snowflake IPO’d as the hottest new company to come public in 2020. Salesforce and Berkshire Hathaway invested in the IPO, knighting Snowflake as “best of breed”. Let’s dig into Snowflake’s S-1 to see how they manage their corporate cash!
If you are a Founder, CFO, or manage your company’s corporate cash, take note. The lessons here are applicable to companies of all sizes.
Before IPO Snowflake had $886.8mm in “cash” on their balance sheet. Did they keep all that in a Bank of America checking account? Of course not. They know once you have more than $250k in a single bank account, you lose FDIC insurance protection. Instead, they focussed on maximizing the safety & security of their cash by investing it and earning a reasonable rate of return on their capital.
This line comes straight from their S-1:
“Our investments consist of U.S. government and agency securities, corporate notes and bonds, commercial paper, certificates of deposit, and asset-backed securities.”
Some back of the envelope calculations show that they have approximately:
  • Cash ~$83M
  • Cash Equivalents ~$55M
  • Short term investments (3 months to 1 year) ~$423M
  • Long term investments (1 - 3 years) ~$295M
Breakdown of Cash & Cash Equivalents, Short & Long term investments
Breakdown of Cash & Cash Equivalents, Short & Long term investments
The lion’s share of these “investments” are in U.S Government Bonds for safety, security and liquidity. They even go a step further by sprinkling in high quality investment grade corporate bonds and some bank certificates of deposit. These assets help to increase the “interest income” on the cash they hold. They have earned ~$4.1M in interest income alone in the first 2 quarters of 2020 (source: S1). Not too shabby!
Breakdown of US Government & Corporate Bond holdings
Breakdown of US Government & Corporate Bond holdings
From a structuring standpoint, Snowflake appears to only keep enough liquid cash on hand to keep things rolling near term. Everything beyond that is invested out into the future to earn them more on their money.
Now, you may say, “Hang on. Snowflake is a multi billion dollar business. Of course they need to invest that capital, my business is only a fraction of that size” To that we say it is never too early to start managing your cash like the best. Even if your numbers are much smaller, you’ll establish good practices that will serve your business well as it grows.
Our goal at InterPrime is to help all companies operate like Snowflake or a Fortune 500 business. You may not need to use every asset class they use. But it’s best to consider what they are doing and leverage some of their techniques to make the most of your capital..
Do not consider this a prescription but a simple illustration on how you can follow their lead.
  1. Be wary of having more than $250k in any single bank account. Amounts beyond that put your cash at risk.
  2. Amounts beyond $250k can be directed toward US Government securities. Those offer next day liquidity and unparalleled safety.  
  3. If you have cash visibility out to 6 months or longer, you can explore Bank certificates of deposit and high quality investment grade corporate bonds to increase the income on your excess cash. Think of them as a “no touch” until 6-12 months.
Again, this is not a prescription but a way to think about how to keep your cash safe and earn a reasonable rate of return.
Financial Markets Update
From the Markets Desk - “TINA”
No we are not going to talk about that adorable llama from Napoleon Dynamite. TINA is an acronym that stands for There Is No Alternative.
TINA was first used by the British intellectual Herbet Spencer. It revolved around Spencer’s belief in a hands-off government and technology to improve society. TINA saw a resurgence with Margaret Thatcher as prime minister of the UK in the 80’s. Now we have a third coming of TINA but it’s circulating in the 2020 financial markets.
Global interest rates are near zero and negative in some countries. The US Federal Reserve recently said they plan to keep rates “lower for longer” and 2023-2025 gets tossed around as the end date. This assumption is forcing cash managers and investors into a tough spot.
The U.S. Yield curve
The U.S. Yield curve
Managing cash and investments always tiptoes around risk versus reward. The more risk you are willing to take, the higher the expected return. 
In the past, risk averse individuals & corporations could always count on the safety of fixed income to pay them a reasonable rate of return. These days the interest payments are not what they used to be, and will likely continue to go even lower. We believe this distortion may be producing odd actions in other markets.
One school of thought says that because interest rates are so low, one needs to incur more risk for cash earmarked for “safety”. The thinking goes like this:
A risk free US 10-year bond is paying you 0.67% yearly if you hold it to maturity. The S&P 500, on the other hand, is currently paying 1.71% in dividends with the potential of price appreciation.
What do you do?
Some believe the easy mental math is to take your more “conservative” dollars and now put them in the S&P 500. You will get paid 2x that you would in the 10-year treasury bond investment AND you get equity exposure to heavyweights like Apple, Microsoft, Amazon. Tough to find someone who believes they go out of business.
The above thinking is what some attribute to the rally from the COVID March lows to the recent new all time high. The assumptions also believe the equity rally can continue until the Federal Reserve adjusts rates higher.
We try not to discount any theory until proven otherwise. Still, it is impossible for us as asset managers who focus on safety and security to say - YOLO!
As a responsible steward of capital one must always remember that one invests in specific assets for a specific purpose. Here are the key assets when one is focussed on Capital Preservation:
  • T-bills and government bonds are for next day liquidity and unparalleled safety. 
  • Bank Certificates of deposit are for safety and slight yield enhancement.  
  • High grade corporate bonds for even greater yield enhancement, while having a primary focus on capital preservation.
An asset manager is only as good as the toolbox they have. Throwing away the hammer to use a wrench to put in a nail will only get you so far. That is why the safety and predictable nature of fixed income is so wonderful. You may be getting paid less currently but you know what you get and stretching for yield in equities and risky fixed income securities can backfire and cause portfolio ruin.
There are no free lunches in the markets, so please be skeptical when you hear people talking about TINA.   
An update from InterPrime
SIPS - Standard Investment Policy for Startups
Last month we unveiled a project we have been working on since the beginning of 2020.  We call it the SIPS or Standard Investment Policy for Startups.
One of the most important pieces of business cash management is an investment policy.  You may have read our blog post on them.
Investment policies outline how to keep your cash as safe as possible.  They also say how much cash to have on hand and how to invest the rest to earn income.  Unfortunately, they take time and money to create.  Because of that, we created one that any company can use with no effort.
SIPS is open source and has the support of  VCs, Law Firms, CFO groups, and CPA’s.  You can read the full release here and review the growing list of supporters here.
If you currently do not have an investment policy for your company, please consider using the SIPS.  You can use it on your own or reach out to us for our help to get it in place.
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The InterPrime Team

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