The Series B funding round in startup funding is considered the third stage of startup financing and the second stage of venture capital financing. With that in mind, this round is all about taking your company to the next level beyond the development stage. At this point, investors are focused on helping startup companies grow their business through expansion.
Series B funding is beneficial because it allows startup companies to expand in a variety of ways. For instance, companies can hire additional employees, marketers, advertisers, or a business developer for the company. This may even be a good time to think about expanding to different market segments in order to diversify your customer base. Regardless of your expansion needs, Series B funding is designed to help you meet those particular goals so your startup company can continue to grow.
Investors for Series B Funding
Similar to seed and Series A funding, Series B is considered equity-based financing, meaning investors provide funds in exchange for a share in your company. It’s important to note that just like Series A, Series B deals include anti-dilution provisions. This means the company sells preferred shares that do not give shareholders voting rights. However, shareholders have the option to convert, meaning that shares can be converted into stock at a future date.
The main investors for Series B are almost identical to those in the Series A round. In fact, it’s not uncommon for your investors from Series A to be willing to increase their stake in your company. Along with previous investors though, expect new investors to enter this financing round.
For the most part, your investors from your Series A round will help attract new investors to your company. These new investors will most likely be venture capital firms that are experienced with investing in companies that are in their later stages.
Investors in the Series B round of funding are focused a lot more on your business plan as they want to know what you will be doing with the capital and what your exit strategy is. Additionally, investors want to know that your company can meet the specific goals and expectations outlined.
Who is a Good Fit for Series B Funding?
Essentially, startup companies who have proven that they are in a viable market and who now have a need to expand should pursue Series B funding. Along with this, companies should have reached specific milestones and have moved past the initial startup stage.
Your company should be ready for development, generate solid revenue, and have some profits underway. This also means that your company is now mature and is covering its own costs.
Ultimately, companies that are ready for the Series B round in funding have advanced their business, resulting in a higher valuation. A business valuation is simply a general process that determines the economic value of a business.
Reaching this funding stage is a success because it not only shows investors that your company is of value but it shows that there is sustainable market demand for the product you’re offering.
What are the Risks?
The risk in the Series B round is about the same when compared to Series A. This is primarily due to the fact that the same key investors are involved. As stated previously, you can expect investors from your previous stage to increase their stake in your company. Along with this, you can expect more venture capital investors to invest.
With that being said, as you move to your Series B round and need to raise more capital, you will need to dilute your equity in order to make room for the new investors. This can easily result in you losing majority ownership in your company, along with certain control and decision-making opportunities. The best way to minimize this risk is by only raising as much money as your company truly needs.
Another thing for companies to consider is that in the pursuit of finding new venture capital investors, managing the company can prove to be difficult. Finding the right investor is often time-consuming. In fact, it can take several months. At this stage, your company will likely be working hard to continue meeting demands, and finding an investor can slowly take away from that.
Along with this, it could actually be a lot more difficult to obtain funding for your Series B round. In general, funding can be scarce and difficult to obtain. More specifically though, obtaining capital during your Series B round is more difficult because you have to instill confidence in your potential investors.
Many investors prefer cheap and risky investments such as companies in the Series A round. In Series B, your company is particularly fragile as you are working to build your team and product but haven’t yet scaled your company.
Getting Started With Series B Funding
The great thing about Series B funding is that companies can pursue the same resources used in the previous stage. The benefit of this is that companies will already be familiar with the process and generally know how investors work.
With that said, this is not the time to settle on an investor. You want to ensure that you have access to the best investors at every funding stage. This means companies should cultivate a competitive environment and be open to investors with different backgrounds who offer not only capital but valuable insight into your company.
Along with this, it’s important to start building relationships with new investors before you’re ready to move into your Series B round. It’s a good idea to coordinate meetings with potential investors a few months ahead of time as this will help the process go a lot more smoothly.
This is also a good time for companies to consider crowdfunding platforms. Crowdfunding allows companies to market their business for investment to an unconstrained market that includes not only venture capitalists but private equity investors and institutional investors.
Remember, acquiring the funding you need for your company will boil down to your ability to show potential investors that you have a solid and accurate valuation for your company. Investors want to know that your company is worth risk and that they will see a high return on their investment.
A company that has made it to the Series B round has certainly made some great accomplishments and achieved important milestones that have contributed to its growth. Additionally, companies at this stage have proven that there is a high demand for their product and that there is potential for a sustainable business.
However, companies entering the Series B round of funding are focused on expanding different areas of the business to continue the growth trend. If you have questions about Series B funding or want to know whether your company is prepared for Series B funding, contact us to learn more.