Series B Funding
In the previous articles, we have already learned about the seed funding stage as well as the series A funding stage. We know that entrepreneurs raise seed funding in order to be able to build the prototype of the product. After the prototype is in place, they raise Series A funding to build the actual product and get the team in place which will help them in the future.
A typical series A funding helps a startup company navigate anywhere between 18 to 24 months of time. Depending upon the speed at which the startup plans to capture, this time could be much less.
However, once the company has successfully reached its goals outlined in Series A funding, they begin to raise money using Series B funding. In this article, we will have a closer look at what Series B funding is and how it is different from other stages of funding.
What is a “Series B” Funding?
The biggest difference between Series A funding and Series B funding is that Series A funding is aimed at product development whereas Series B funding is always aimed at accelerating the rate of growth. In order to be eligible for Series B funding, the company should already have a working product that they may have launched in the market on a small scale. Ideally, they are supposed to have a stable team of employees as well as some paying customers.
At this stage, the company knows that its product is working and providing value to its customers. Hence, they want to scale it up very quickly so that they are able to capture a large portion of the market. A typical Series B funding witnesses investors pump in large dollar amounts in the company. This is because investors are now confident that the company already has a foothold in the target markets. Also, since the business model of the company has been proven, the valuation provided to the company is also quite high.
Why is Obtaining Series B Funding Considered to be Difficult?
A lot of entrepreneurs believe that once they have received seed funding and Series A funding, they will be able to obtain Series B funding quite easily. However, people who have this point of view might be in for a shock. There are several entrepreneurs who have expressed their difficulty in obtaining this round of funding.
This difficulty is because of the change in investor mindset which takes place as the firm moves from Series A funding to Series B funding. At the stage of Series A funding, the investors consider the company to be an idea. They are just evaluating whether or not the abstract idea will be able to deliver value in the marketplace. However, when it comes to Series B funding, investors now believe that the company is in existence. Hence, instead of evaluating the idea, they begin closely evaluating the company itself. At the series A stage founders are selling a vision to investors. However, when it comes to Series B funding, investors begin evaluating facts.
Investors often look at the revenue or costs of the company in comparison with other companies which exist in the same field. Also, investors carefully evaluate the projections and estimations that the founders gave at an earlier stage. They check to see whether the projections have been met and whether the assumptions being made were reasonable. During the Series B funding, investors try to find out about how much of the entrepreneur’s vision has actually turned into reality. Based on the progress till then, they make an educated guess about what is likely to happen in the future.
Also, in most cases, investors would want to see a working revenue model. This does not mean that the company has to generate huge revenues before it can be eligible for Series B funding. In fact, many investors may provide funding without asking for revenue. However, if investors are able to validate a working revenue model, then they are much more likely to provide a better valuation to the startup company.
How Startups Should Approach Series B Funding?
It is important for startups to be proactive when it comes to approaching Series B funding. This is because they need to ensure that funds are raised well before time. If a company is too close to running out of funds before it approaches investors for Series B funding, it is likely that it will have to settle for a sub-optimal offer. Time is a crucial factor and startups must ensure that they use the time to their advantage.
It is also important for startup firms to build a healthy pipeline of investors. They should not be dependent upon one investor even if they have given rights to this investor to acquire more shares at later stages. It is quite possible, that the current business model of the company may fit better in the portfolio of another investor and they may be willing to offer a better valuation. The existing investor might not be able to match the offer and may have to forego the first right to invest.
The point is that if a startup company has successfully navigated the first two stages, its chances of failure get reduced drastically. As a result, a lot more investors are willing to invest in the company. Hence, entrepreneurs must ensure that they check out the market before settling with one investor.
Authorship/Referencing - About the Author(s)
The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
- Seed Funding - Introduction
- Why is it Difficult to Raise Seed Funding?
- Documents Required for Startup Financing
- How Co-Founders Split Their Equity?
- Proof of Concept
- Minimum Viable Product
- What is Prototyping?
- Asset Light Business Model
- Advantages of Asset Light Business Model
- Disadvantages of Asset Light Business Models
- Cash Burn Rate: The Basics
- Managing the Cash Burn Rate
- Startup Financing and Term Sheets
- Key Terms and Conditions in a Term Sheet of Startup Funding
- Red Flags that Investors Need to Look out for in Term Sheet
- The True Cost of Owning a Property
- Valuation of Early-Stage Startups: The Mindset of Investors
- Pre Money and Post Money Valuation
- Start-Up Valuation: Advanced Concepts
- How Pre-Revenue Companies are Valued?
- Valuation Divergence - Meaning and its Importance
- How Do Option Pools Work?
- What are Capitalization Tables?
- Asset Sale vs. Stock Sale
- Financial Models for Startups
- Key Performance Indicators for Startups
- Restricted Stock Options (RSU’s)
- Veto Rights - Meaning and its Importance
- Financial Benefits of Incubators
- What are Unicorns?
- Why Startup Companies are Staying Private?
- Why Unicorn Companies Fail?
- Building a Startup Team
- Bootstrapping: Meaning and its Advantages
- Disadvantages of Bootstrapping
- Revenue Based Financing
- Convertible Notes and Startup Funding
- Pros and Cons of Convertible Notes
- Simple Agreement for Future Equity (SAFE)
- Keep It Simple Securities (KISS)
- Series A Funding
- Series B Funding
- Series C Financing
- Venture Debt in Startup Funding
- Pros and Cons of Venture Debt
- What is Venture Leasing?
- The Freemium Model - Different Types of Freemium Models
- Pros and Cons of Freemium Model
- Scalability and Startups
- Pros and Cons of Scalable Business Models
- Why Do Start-ups Fail After Receiving Funding?
- Start-ups and Arbitration
- What is a Revenue Model?
- Understanding Investor Focus on Burn Rate
- How Investors Evaluate Start-up Ideas?
- Government Regulations Which Impact Start-Ups
- What is a Start-up Accelerator?
- Managing the Operational Metrics of a Startup
- Different Types of Investors
- The Founder’s Dilemma
- Role of Social Media In Start-Up Funding
- Start-Ups and Public Relations
- Red Flags for Start-Up Investors
- IPO: An Exit Route for Start-Ups
- What is Acqui-Hire?
- How to Build a Start-Up that gets Acquired?
- Legal Issues Faced by Start-up Companies
- Corporate Venturing
- How Reverse Pitching Works?
- Aggregator Business Model
- Marketplace Business Model
- Difference between Aggregator and Marketplace Business Models
- Product as a Service (PaaS)
- Benefits of Product as a Service (PaaS) Model
- Disadvantages of Product as a Service (PaaS) Model
- The Co-Working Business Model
- How Co-Working Spaces Make Money?
- Peer to Peer (P2P) Business Model
- The Instacart Business Model
- The Goodleap Business Model
- The Twitter Story
- How Tesla Reinvented the Automobile Industry?
- How Epic Games Changed the Gaming Industry?
- The SpaceX Success Story
- The Stripe Business Model
- The TikTok Business Model
- Zillow Story - The Real Estate Marketplace
- How Business Cycles Affect Start-Up Companies
- Managing Start-ups During an Economic Downturn