A Series B funding round follows a Series A and precedes a Series C round of funding.
The goal of the Series B round is for a company that, having utilized its seed money and earlier funding rounds, has established itself in a marketplace and needs an infusion of cash to dominate new markets, develop new product lines, and prepare for an exit – typically between $10 million and $50 million coming from new investors such as venture capital firms, sometimes investment banks, private equity firms, or, in more dire cases, hedge funds.
In this article, we’ll dive further into what a Series B is, why it’s significant, the steps you need to take to secure one, and an example of how it works.
Understanding Series B Financing
As a seasoned startup founder who has successfully navigated the challenges of early-stage startups (usually consisting of pre-seed funding or a seed round) and completed a Series A funding stage, the next milestone on the founder’s and board’s journey is the Series B round.
Having already established your company’s foundation and proven its ability to compete in the market, the Series B will allow it to grow into different market areas and build new product lines. In short, Series B represents the next critical step in scaling a company’s success, achieving its long-term goals, and preparing for an exit strategy or, in some cases, a Series C funding round.
Series A vs. Series B vs. Series C
As mentioned in our Series A article, the biggest difference between seed, Series A, and Series B is the strategic evolutionary position of the company.
- The seed funding stage helps prove the viability of a company.
- Series A funding is about fueling strategic growth.
- Series B funding enables a company to expand beyond its traditional markets, develop new products, accelerate general growth, and prepare for an exit.
Then, while Series B is about growing into new market areas, Series C is about growth in multiple global markets, acquiring other companies, scaling infrastructure, and all-around exponential growth.
Prerequisites for a Series B Round
To secure a Series B round of funding, there are several important factors to consider. First and foremost, you’ll want to showcase a solid track record of success, including evidence of strong market performance. Investors will want assurances that your business model is working well and that customers are embracing your product or service.
Another critical aspect is sustainable growth. It’s vital to demonstrate consistent, long-term growth rather than short-lived success. This track record should include financial stability and profitability or a clear path toward profitability, emphasizing responsible financial management.
Additionally, scalability is a key concern.
Investors want to know how you plan to utilize Series B funding to accelerate growth, whether by entering new markets, increasing production capacity, or expanding your team. Clearly outlining your growth strategy and the intended use of funds will be essential in attracting Series B investors.
What Documents Do I Need for a Series B?
When Should You Consider a Second Series B?
A second Series B investment, sometimes called a Series B-2 or Series B extension, is considered by a company when it has made significant progress and needs more funding to continue growing.
Common reasons for a second Series B round include capitalizing on exceptional growth, expanding into new markets, making strategic acquisitions, accelerating product development, scaling operations, or enhancing financial stability. It can also respond to competitive pressures or external factors impacting the business environment.
However, it’s important to understand that second Series B companies must consider their specific growth plans, investor relationships, and financial needs before pursuing this type of funding. Consulting with existing investors and conducting a thorough financial assessment is crucial to determining whether a second Series B investment aligns with the company’s long-term strategy and objectives.
An Example of Series B Investment
As mentioned previously, I was part of a high-growth company that went through seed, Series A, and Series B funding. Duo Security’s Series B funding round took place in September 2014. The company raised $12 million in this round, led by investors including Benchmark, Google Ventures (now GV), and Redpoint Ventures. This round came after a successful Series A round and marked a significant milestone in the company’s growth journey.
Duo Security used the Series B funds to accelerate its product development and expand its sales and marketing footprint across the globe. With the Series B investment, Duo Security continued to grow rapidly. The company expanded its product offerings, adding features to its multi-factor authentication (MFA) platform and introducing additional security solutions. It also focused on customer acquisition and building partnerships with other cybersecurity firms and technology providers.
Four years after the successful Series B, Duo Security was acquired by Cisco Systems in August 2018 for approximately $2.35 billion. The acquisition allowed Cisco to bolster its security portfolio and offer enhanced security services to its customers. Suffice it to say the participating venture capitalist and the company’s founders were quite happy with the acquisition.
Conclusion
In summary, a Series B investment represents a critical phase in a company’s growth journey. It follows a Series A round and typically involves raising between $10 million and $50 million. The goal of Series B funding is to help a company expand into new markets, develop new product lines, and prepare for potential exits, such as acquisitions or IPOs. The success of a Series B round depends on factors like a company’s track record, sustainable growth, scalability, and a clear plan for using the funds to drive further expansion.
To secure a Series B investment, companies need to provide a range of documents and information, including financial models, team biographies, a pitch deck, and a capitalization table. Additionally, they should gather customer references, legal documents, and growth metrics, and then demonstrate strong corporate governance and an effective exit strategy. Series B investors look for evidence of a company’s ability to achieve long-term growth and profitability while limiting their liability.