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.