You’re looking for series B funding to grow your startup. Before you approach an investor, you need to get informed. If you ask for too much, you’ll be laughed out of the room. Ask for too little, and your company might not get enough funding to hit your growth goals.
What Is Series B Funding?
Series B funding is generally the third funding round after seed funding and Series A funding. At this stage, investor expectations start to grow. Investors will expect you to have a growing list of customers and a proven strategy to grow your customer base. For an investor to take the risk of writing a seven or eight-figure check, they will expect more. Also, your company’s prior investment history will be a factor. Previous investors may want or even expect the chance to invest more capital before you reach out to other venture capitalists.
Series B Funding: Data From 10 Startups
Your pitch for Series B funding is more likely to succeed when you can cite other startups. To help you succeed, check out these examples.
1) Arable Labs. $20 million in Series B funding. A startup building technology for the future of agriculture.
2) Connected2Fiber. $12 million in Series B funding. A Boston startup that builds network technology.
3) Idelic. $20 million in Series B funding. This Pittsburgh startup business is in the transportation safety and insurance industry.
4) Linktree. $60 million in Series B funding. An impressive feat for a social media startup in Australia.
5) Holberton. $20 million in Series B funding. This San Francisco startup offers engineering education.
6) StarkWare. $75 million in Series B funding. This startup company provides “scaling and security solutions to overcome the limitations of Ethereum’s existing technology.”
7) Wiz. $130 million in Series B funding. This cloud infrastructure startup has reached unicorn startup status with a valuation of over $1.78 billion.
8) Maxwell. $16.3 million in Series B funding. This startup is in the mortgage lending industry.
9) Camunda. $100 million in Series B funding. This business produces open-source software for sales and marketing.
10) PocketPills. $30 million in Series B funding. This startup operates as Canada’s largest online pharmacy.
These examples tell us that many companies can raise between $10 million to $50 million in Series B funding. According to Investopedia, the average amount raised in a Series B round is $33 million.
Key Questions To Review Before Talking To Potential Investors
Long before you walk into a room, virtual or otherwise, with investors, take some time to think through these questions first.
How did you use your Series A funding?
Series B fundraising is different because you will face questions about your track record. Let’s say you raised $3 million in your Series A round. Investors will expect to hear how you used those funds to achieve growth. Generally, it is wise to show a mix of product development and growing revenue by creating a repeatable sales process.
What does your internal data reveal about the company’s growth?
Early in the life of a startup, it is common to focus to emphasize external data. For example, you might point to a market research estimate about your total addressable market’s potential size. Such estimates have value in terms of grounding the startup idea in reality. However, as a company grows, general market trends take a back seat. Instead, investors will want to hear about your sales, lead generation numbers, and product utilization data.
Have you contacted past investors?
It might sound exciting to pitch venture capitalists cold and walk out with a check. In reality, investors are people! As much as your pitch and company fundamentals matter, a trusting relationship is even more critical. Therefore, start by talking to people who already know the company (e.g., seed investors).
Do you have reasonable valuation expectations?
You might have a goal to achieve unicorn startup status. However, that status is unlikely to occur in the Series B funding. Expect to have a valuation under $100 million at this stage. Of course, there are exceptions to every guideline. If a startup business venture has achieved a very high annual recurring revenue, you might aspire to a higher valuation.
What is your engine of growth?
By the time you reach Series B financing, you are far beyond the “business idea” stage of startup funding. Instead, you are now expected to have a real business. Therefore, you will want to give some thought to how you will grow. For example, are you going to leverage an app marketplace like the Salesforce exchange? Or will you offer your product free to individuals to create awareness and focus on selling to business users?
How do you engage with venture capital firms?
Put yourself in the shoes of people at venture capital firms for a moment. These investors are expected to deliver investment returns better than the stock market. Yet, they face challenges like assessing a startup business with minimal data. They may also face challenges selling shares when they desire (i.e., liquidity challenges). Similar expectations apply to investors at private equity firms in many respects.
With this understanding, you can give yourself an advantage by being easy for investors to work with. This includes providing clean, correct company financial reports on schedule every month and quarter. Further, you can also reassure your venture capital investor stakeholders by showing them how you are using prior rounds of funding to fuel growth.
How will you engage with the Board of Directors
The Board of Directors plays an essential role in providing advice and direction to the management team. In the case of private companies, the Board and the management team might have significant overlap. To maintain a positive relationship with the Board, the management team should proactively discuss potential transactions (e.g., acquiring another startup) and significant hiring decisions. Don’t assume that directors only want to hear from you during quarterly board meetings.
Tip: Involve the Board in the company business planning process. If you have qualified directors (e.g., business leaders from other companies), you will get great advice on how to use your startup financing effectively to grow.
What is the exit strategy?
The founders and the rest of the management team might want to run the company for years or decades to come. Investors have a different perspective. They need to deliver a return on a reasonable schedule. In most cases, the exit strategy takes one or two primary forms: an IPO or getting acquired by another company. Sure, some shares may change hands with institutional investors and hedge funds in the secondary market, but those transactions don’t count as an exit strategy.
Do This Before You Talk To Potential Investors
Imagine if you had a concrete marketing plan in place to bring in new customers. More than anything else, a predictable way to bring in new customers will convince investors that investing in your business is a worthwhile risk. Contact me today to request a marketing review for your business.