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Series B funding takes the business past the development stage and supports the company’s growth in the next level. Companies that have gone through earlier funding rounds have developed substantial user bases by this stage and are now prepared for newer levels of higher demand.
The capital raised can be used in various ways: sales, marketing, talent acquisition, or research and development of new technologies. In this round, companies have a more advanced business and much higher valuations. This means that securing the Series B funding can be quite difficult.
Series B funding definition
The series B funding round is regarded as the third stage of startup financing and the second stage of venture capital financing, including private equity investors. It generally takes place when the company has accomplished certain milestones in developing its business and has had time to generate revenue from sales. Investors have a chance to see how the management team has performed and whether the investment is worth it or not.
How Series B funding works?
The key players are generally the same as in series A financing. Some of the investors from the previous funding stages may be willing to increase their stake in the company and other investors enter the financing round. They are usually venture capital firms that specialize in investments in later-stage companies, as well as some private equity firms.
Because the company has more history at this point, Series B financing is considered a lower risk and investors usually pay a higher share price for investing in the company than series A investors. Anti-dilution provisions mean that B equity investors typically prefer to receive convertible preferred stock versus common stock. Preferred shares do not provide their holders with voting rights, but they usually come with a convertibility option at a future date. Also, preferred stockholders are paid dividends or cash payments before common stockholders.
With Series B funding every parameter has to be supported by concrete evidence. It is no longer about positive assertions or ideal assumptions. Given that your company has reached this stage, investors would want to see how prior assumptions have turned into a reality and a working revenue model generating some actual revenue.
How to get Series B funding?
But the Series B financing round requires more than just proof of revenue. A few of the most important parameters for Series B funding are repeatability and scalability.
With profit generation as the primary investment objective, seekers of Series B funding should be able to present a concise allocation plan for the funds in their pitch and provide the following:
- Comprehensive business plan
- Performance against the sector average
- Future revenue estimates
- Investment agreements
You must raise the right amount in this round. You should be aware of how cash flow and revenue growth compared to current monthly expenses and projected expense growth. Most investors expect that after 18 months you should be reaching your growth metrics and preparing to raise another round of funding.
If a company is desperate for capital but does not have very promising growth, it may choose to raise at a lower valuation than in the previous round: a down round. When the valuation stays the same as before, it is a flat round. In both of these cases, the investors receive a discount on the price of the equity and the risk of investment. This negatively impacts current shareholders, as the market price for their shares has diminished.
In the case of companies with better growth metrics, early investors from Series A financing may want to repeat their investments, so attracting new investors.
Also, online equity crowdfunding platforms allow the general public to participate in series B financing. In the ever-growing crowdfunded market, businesses can present their company for investment to a market of retail, private equity, venture capital, and institutional investors.
You need to create a competitive environment before the actual process has even begun. Start meeting potential investors at least six months in advance and build a healthy relationship with them. Just as in previous funding rounds, it is important that you research the potential investors and their portfolios to find the one that will be better suited for your company.
Clarity about the future at this stage can act as a deciding factor in closing a series B round of funding. If you are unsuccessful always remember that there are other options such as crowdfunding that are always available to transform your dream into a reality. Have a look at the Finnovating challenges platform. There you can browse a listing of available challenges to directly connect with all types of capital investment.