Why Companies Should Not do a B or C Round with a VC

Entrepreneurs and VCs talk as if a B and even C round is a given.  I believe many companies would be better off without them.  B rounds cause more dilution for all shareholders.  B rounds take management time and focus.

So why are B rounds so popular?  VCs and angels like them because they often re-value their portfolio based on the latest round so an up round can make their portfolio returns look good.  But these are only paper gains.  At Canrock we are not concerned with paper gains because we are the source of most of our cash (with a few freinds) – so not a “traditional” venture fund who is simply playing with other peoples’ money.   At Canrock, our goal is real returns long term.

VCs and entrepreneurs like them because they can make the company more stable.  More cash means more runway and therefore more comfort.   They also reduce risk or share it.

So what should companies do if they should not do a B round?  Very simple – they should make money.  There is no shame in making a profit. One of my claims to fame with my technology distribution company was we had 99 consecutive quarters of profit.   And even after SYNNEX bought my company, they would not have been happy if we were not continually profitable.

Most of my favorite investments were companies that made a profit.  Building a company to sell without having a plan to make profit is a very dangerous plan.  It is the plan that will cause a company to continually have to raise cash (and not always with up rounds).

Companies should mature to the point where R and D, marketing, new markets initiatives are simply a % of their profit.

A B or C round can simply be a patch or laziness for a business that should be profitable.  Taking the time and energy of cash raising and focusing it on sales and running a profitable business is a good business decision.

So when is it acceptable to do a B round?

1 – If the company is truly an R and D company developing the next rocket science.

2 – If the company needs working capital (and I never cease to be surprised at how some entrepreneurs think working capital is to pay for losses.  Working Capital is to fund inventory and receivables.  The longer the cash conversion cycle is, the greater the need for working capital.  Losses should be funded with equity – or perhaps that defeats the purpose of this article which is to argue that companies should not have losses.)

3 – In the rare case that the company has found the replicable formula to create profits then sometimes it makes sense to accelerate it with a B round.

Jim Estill

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