The Frustrating (but Ethical) Truth: You Can’t Invest Your Investment

It’s a definite high point for any early-stage startup founder: You’ve successfully wrapped up your initial round of fundraising and are sitting on a stack of cash.

Investors believe in you and your product. You feel on top of the world.

If you’re like many of the business owners we support, you’re probably wondering what you should do with the freshly raised capital. Certainly, if you were to come into money in your personal life, the wise thing would be to invest the money so that it continues to grow. But is that also the logical step for your business?

Can you invest your investment? Unfortunately, the short answer is no. 

We explain why investing your funds is not the right move and what you should do instead. 

Follow the money: the chain that led to your funding

If you trace your newly raised capital back to its source, the rationale for why you can’t invest your investment becomes clear. 

Seed funding typically relies on venture capital (VC) firms. However, these firms are not investing for themselves. Instead, they’re investing on behalf of their clients — wildly wealthy individuals whose assets are distributed broadly and intentionally. 

These clients have particular purposes for partnering with a VC group. Most likely, this investment falls in the high-risk, high reward category. 

If you take their money — given to you with a very specific investment purpose in mind — and place it in a different kind of investment market, you’re likely to negate your initial investors intention. For example, if they wanted their money in a public equities market, they’d have put it there themselves. 

It’s an unfortunate and frustrating reality because often, the individuals who possess enough business savvy to successfully launch a startup company are also people who would, generally speaking, make good investment choices. However, this pool of money needs to be used for its intended purpose: funding your business initiatives. 

So what can I do with all this cash flow? 

Instead, place your company’s seed money in an extremely safe security investment that gives you access to the cash in the short term. 

Yes, it’s frustrating, especially when interest rates are negligible. Still, you don’t have alternatives if you want to behave ethically and maintain a positive relationship with your shareholders. 

Instead, pack it away but keep it readily available for operating expenses. Use it for the VC’s original purpose — investing in your vision.

This article is based on an episode of the WTFAQ Podcast.

Get straightforward answers to all your startup questions from Wiss CPA Matthew Barbieri.

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