This is a short and sweet topic but it’s something that is incredibly important to remember when you’re managing a startup: Don’t buy stocks with your VC cash! Venture capital-backed startups should not be buying stocks, as a method of cash management.
Stocks are too risky
The bottom line is, buying stocks with the cash your startup’s raised from your VCs is far too risky. The stock market can easily go down by 20-30% in a few months, and if you’ve bought into those stocks then you’re immediately in trouble with your VCs.
You should absolutely not, under any circumstances, ever buy stocks in anything like Google, Apple, or Starbucks with the cash you have raised from your VCs. It is simply not in the risk profile. Even mature companies can face setbacks, and you can’t afford to lose any of your cash reserves.
This money is there to help build your startup and any method of cash management that risks you losing that cash is not a good form of cash management!
What Should you buy with your cash reserves?
Instead of risking the loss of your venture capital, you need to invest your cash in conservative, liquid, and short-term securities such as:
- US Treasury Bills, which have maturities from four to 52 weeks
- Money market funds that hold short-term government bonds
Essentially, you need to invest your cash into securities that are very low risk and easy to cash out if you find you need the funds. If these securities provide some yield, that’s great too. And right now T-Bills are providing about 5% return.
We recommend creating an investment policy statement, and having your board review it. This is a document that outlines where you can and can not put your company’s money. Create one – and follow it.
How can you invest in securities?
At Kruze Consulting, we recommend buying treasuries directly. You can do so though Treasure FI, Meow, Arc or one of the other cash management services available (note that we have financial relationships with those companies). Furthermore, all the big banks provide really sophisticated cash management services that will get you into the right securities. But never buy stocks with your VC’s cash!
