Coming up with an idea for a startup isn’t as difficult as coming up with funding. Even with a plethora of venture capitalists looking for businesses to fund, not understanding Series A funding vs Series B funding and how investor requests change over time can stop the growth of many startups before they get off the ground.
Luckily, with the right understanding of where your company is in its growth and fundraising, you can feel confident walking into a pitch knowing you’ve got the right prep. Hopefully, it goes better than the Seed Round too!
Both the Series A and Series B funding processes unlock capital for companies at different stages, but most fundraising is alike in that you are raising capital to accomplish a milestone, whether that milestone is related to a product, customer, or revenue metric. Series A investments are typically used to identify channel strategy, nail down metrics, and grow your team. By the time you raise your Series B, the expectations will be that all of the above are dialed in and that you’re prepared to scale your customer acquisition and revenues substantially.
What do these types of funding consist of, though, and what differentiates them?
Series A Funding: The Basics
You’ve got your Seed Round done, your team built, you’ve identified your product and market. If you’re showing strong traction in figuring out your channel strategy, then you’ll want to seek out Series A funding to keep growing your business. Series A funding helps establish your startup’s initial growth ladder through funding for additional headcount, product development, and acquisition channel investments.
When you invest time and resources to secure Series A funding, you’ll be talking to established venture capital firms. The VCs you speak to should ideally have a proven track record of successful investments in startups and getting those startups ready to scale.
Investors expect that your startup is far from the profit-earning stage, and they should work with you to secure a capital stream with growth in mind. Any VC can invest in your Series A, the key differentiator here is what they can bring to the table in addition to capital. As a founder, identifying VCs that will help with hiring, making connections and strategy will be worth their equity stake in the long run.
All investors who want to contribute to your Series A funding have to complete the due diligence and valuation process. This means that you will have to supply your investors not only with your financial ambitions for your business, but with the underlying operational structure through which you plan to achieve those milestones. In short, you’ll have to prove to your investors that your business is worth their capital – and they, in turn, will have to verify their willing support of your endeavor and the value they bring to the table.
Series A funding is when things start to become fairly formal, as it’s necessary for investors and startups to benefit from additional protection during this fragile stage. Those protections, which can seem tedious, will serve you well as you move on from your pre-profit stage. Make sure you work closely with a legal team that understands early-stage fundraising and deal terms, as every financing round will inevitably impact the next.
Series B Funding: The Basics
Once your startup has a team, product-market fit and a repeatable sales process, you’ll be able to further your runway with Series B funding. This stage of funding is about executing on revenue growth and developing traction in other revenue streams. Any time you’ve spent seeding or networking to establish Series A funding should have resulted in a significant professional, consumer, and VC following. As a result, you’ll be able to better network during this stage to secure enough funding to support your business’ growth needs.
That’s what Series B funding is all about, after all – filling a need to help you scale. As your startup finds its feet, you may realize you need more engineers to build that perfect customer interface, or that you’ve found an experimental marketing channel to double down on that would supplement your main revenue drivers. To fill the gaps, extend your runway, and continue growing you’ll need to reach out to Series B investors. This way, you can better secure long-term growth, and eventual profitability, for your startup.
Series B funding will also help you with:
- Talent acquisition
- Business development
- Sales research and training
- Advertising and marketing
- Engineering support
- Employee costs and additional benefits
It’s important to note that every startup has different needs. There is no ‘right’ funding amount. In today’s market we’ve seen some companies simply double their Series A funds, or really hit the pedal and raise eye-popping multiples of what they raised during their Series A. Look up other companies in your space and try to find out the economics of their deal-making. For example, knowing how much equity was exchanged for cash is always a good place to start in order to get a sense for the market.
It’s also worth noting that, while you can return to your Series A investors during your Series B transition, you should expand your horizons, as most investors invest out of a fund which is earmarked for investments into a certain stage. They may also have a Series B fund, but the more diverse your investor pool, the more potential value you are adding to your business. Any of the following can provide you with the Series B funding you need to expand your business:
- Venture capitalists
- Venture debt financing
- Traditional debt financing
- Alternative Financing Sources: Revenue Sharing, Acquisition LoCs, etc.
- Private equity investors
Series Funding: A Comparison
Series A and Series B funding are both funding stages that take place in a startup’s early days. Series A funding will help you get the right people and resources to identify your growth path and generate measurable traction, while Series B funding will be used to invest heavily into scaling your sales channels and growing your team.
You’ll need to lay your Series A foundation before you’re able to progress to Series B. That means identifying and measuring the metrics that mean the most to your business and investors, generating quality revenue and customer traction, ensuring that the right people are in the right seats in your organization, and achieving the milestones you set when you raised your Series A.
While your runway may be the biggest indicator of when you need to raise money, bridge rounds can help you ensure that you have the right traction and narrative to approach Series B investors with an attractive pitch. In either case, you want to start your process 6 months in advance of when you run out of capital and put out feelers to your current investors even earlier.
There are several different steps on a financial funding ladder, and not every startup has the same journey. Series A and B funding are both steps that’ll transform your business ambitions from wireframe to reality. As you’re getting started, be sure to research potential venture capitalists and investors who’ve made investments of similar size to what you’re seeking, can add value from a industry or vertical perspective, and have been proven partners to to the teams they’ve invested in. That’s the way to powerfully set your startup up for success.