If you’re ready to move your startup out of the development stage and into a more mature phase of its evolution, it’s critical to secure series B funding.
In this article, you’ll learn about these three things:
- What a series B round entails
- Sources of series B funding
- Tips on how to get series B funding
Let’s dive in!
What’s a series B round?
The Series B round is a type of equity financing. Equity financing is when a startup sells preferred shares of stock to venture capitalists in return for investment in the company. When a startup company raises money from venture capitalists, it doesn't do so all at once.
Instead, the company raises money in stages. Each round is signified by a letter that moves sequentially through the alphabet. The first round is the "Series A" round, and the second round is the "Series B" round. It goes on to infinity (at least theoretically).
When it comes to startup funding, the least talked-about stage is series B. Many companies find this round to be the most difficult of all.
That’s because a company ready to secure series B money is at a critical stage in its growth—halfway between the nebulous idea that first sparked the business and a fully functioning enterprise.
The product exists, and there are most likely some early adopters out there enjoying it. However, the enterprise remains small. This is the hazy twilight zone between the business’s potential and the ability to scale it up to where it needs to be.
Scalability is the primary focus of a B round. In other words, can you go from 100 users to 1,000? How about from 1,000 to one million? Series B funding also helps a company grow its team, achieve national and global expansion, and acquire other companies.
Successfully raising a series B round is about implementation just as much as series A was about a concept.
To invest in a Series B round, venture-capital firms expect a startup to be a real business and not just a wisp of an idea. Because the product is now a living, breathing reality, it should have some easily seen traction.
Series B funding often comes from the same investors who led the previous round. Because each round comes with a new valuation, previous investors frequently choose to reinvest to keep the value of their equity share high.
New investors might also want to get involved. New investors will buy their shares at a higher price than earlier investors. Although later-stage investors will have lower returns, their risk of losing money is lower too.
How investors mitigate their risk
Because startup investors incur substantial risk by financing new businesses, they rely on the built-in protections of preferred stock and convertible debt to mitigate these dangers.
If a liquidation occurs, preferred stockholders and convertible debtholders can recover the total amount of their investment before common stockholders receive anything. This is commonly referred to as having seniority over common stockholders--usually the startup's founders and employees.
How likely is it that your startup will get series B cash?
Some founders believe that a series B will inevitably follow if their enterprise secures seed and Series A financing. However, that's not always the case.
Series B funding is only given to companies that are generating consistent revenues and can turn a profit. These companies usually have valuations of around $10 million. They have proven to investors they’re prepared for success on a much grander scale.
The Series B round is different from the others because this is where the startup goes from merely being given money to creating investor equity.
Investors now have a chance to see how the management team performs. This way, they can judge whether their investment in the company is worth it.
Investors want to see a working revenue model that generates real-world cash. The revenue doesn’t need to be massive, but there should be some money trickling in.
The idea is that an infusion of Series B cash will help propel a company to the next stage of its evolution. At this point, it will significantly increase in value, enticing more investors to put money into it.
This creates the potential for enormous profits for series B investors.
A few tips on how to get series B funding for your startup
Series B is often the first round where you’ll have to prove yourself with real-world achievements. That’s why it’s crucial to show your investors that you’ve done what you promised you would do all along.
Show them, in very concrete ways, that everything is going according to plan—that you’re generating the results you’ve always hoped for.
You and your management team must also demonstrate confidence. This can go a long way towards convincing people that your startup is worth their investment. If you manage to do this, you’re more likely to get the cash you need.
Sources of series B funding
Startups have an ever-increasing number of options from which to choose when raising capital. In Series B financing, organizations can choose new ways of funding that better fit their current situation. They can also repeat the funding methods they used in the Series A round.
Here are a few ways to generate series B cash:
Private equity firms
Private equity firms create investment funds that raise most of their cash from outside investors. These can be insurance companies, high-net-worth individuals, or pension funds.
Instead of buying individual stocks (like a mutual fund), these firms make significant investments in either private companies or public businesses they take private.
The private equity firm will then try to increase the value of their fund by taking control of these companies and actively managing them.
Equity crowdfunding is another method you can use to secure series B funding. You do this by raising capital through the sale of securities to people online. Equity crowdfunding has democratized Series B financing because it allows members of the general public to participate.
Potential investors visit a funding portal website to explore equity crowdfunding opportunities. However, there are some restrictions. Investors must be 18 years of age or older. There are also restrictions on how much they can invest based on their net worth and income.
The differences between equity crowdfunding and regular crowdfunding are what’s being sold. With Kickstarter campaigns, entrepreneurs raise cash through product presale. Backers either get various perks or a discount.
Once an investor receives their bonus, the partnership between the startup and investor comes to an end.
With equity crowdfunding, startups sell equity in the form of debt, revenue shares, or convertible notes.
Equity crowdfunding investors don't participate merely to buy a product at a discount before its release date. They're hoping that the company is wildly successful so they can profit handsomely.
Crowdfunded investments have become popular with startups because of the Jumpstart Our Business Startups (JOBS) Act.
Here are some equity crowdfunding sites:
- ANGELLIST: AngelList has been around since 2010, which makes it one of the oldest of all equity crowdfunding websites. It was created as a sort of Match.com, hooking angel investors up with founders.
- FUNDABLE: Although this site has crowdfunding based on perks, it also has equity crowdfunding. Its easy-to-use intuitive profile builder makes it easier to hit your fundraising objectives. However, you won’t be able to conduct transactions on the site.
- EQUITYNET: Unlike some other equity crowdfunding platforms, there’s no pre-screening process with EquityNet. This means your enterprise can quickly get started raising cash. The site uses Title II rules, meaning you can raise money only from accredited investors.
A credit investor is an individual or company that grants loans to the public and private sector for profit. Credit investors include banks, credit card companies, and private investors.
Increasing the number of equity shares
Publicly traded companies can raise capital by increasing the number of equity shares issued on the open market. Unfortunately, one of the disadvantages of doing this is share dilution.
Dilution is when ownership percentages decrease because a startup issues new shares. This can lead to a lower stock price and valuation.
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