Each round of scaleup fundraising brings its own unique challenges. So for the second part of our series ‘What to Expect from Each Round of Scaleup Fundraising’, we are talking about managing your series B.
It’s not feasible for us to provide everything you will need to know in one article, but hopefully with this as a basis for your research, you will be better prepared in your fundraising – so that you can go into your series B with as much confidence as your series A. If you want to catch up with our series so far, you can get the lowdown on series A fundraising here.
One of the biggest problems we find in businesses preparing for their Series B, is a misunderstanding about how much each round of fundraising differs from one another. We talk about it a bit here, in our article ‘The Top 5 Misconceptions CEOs Have When Raising Startup or Growth Capital.’ That’s why it’s important that you do the research, so that you don’t go chasing your Series B with a Series A pitch.
The jump to series B
The most important thing for a business approaching series B is steady revenue growth over the last few quarters. The specific growth rate will vary somewhat by industry. For example, Neeraj Agrawal, general partner at Battery Ventures, summarised the ideal YoY growth path for a SaaS scaleup as triple, triple, double, double, double.
By now you should have a working business model that can predictably bring in revenue and appropriate unit economics and it’s time to focus on growing and scaling your business. Businesses approaching their series B need to be accelerating into a good competitive position in the market, if not emerging as a leading ‘new entrant’. This means brand awareness ought to be high, with good product reviews and vocal brand advocates in your customer base. It’s time to step up sales, marketing, and customer success so you can start dominating your market.
The product should also now be more established. Investors will want to see data proving that it is beginning to show ROI (return on investment) and that there is some form of defensibility protecting your product and hard-won market space from being too easily captured by another business. This can be demonstrated through analysis of proprietary technology; market entrance costs; branding etc.
One key form of defensibility for many businesses, particularly SaaS businesses, can come from network effects. This is particularly evident with products with social network functions, where the value to each user goes up as more people join the network, as this results in the production of more content and potentially valuable connections. You can measure this effect using Metcalfe’s law, which argues that the value of a network (specifically in the original context a telecommunications network) is proportional to the square of the number of users. Even outside of social and telecommunications networks, however, network effects can drive value. For example, cryptocurrency is one of the most recent industries to identify strong network effects determining the value of their currency.
Businesses tackling their series B also require much more established and experienced teams than earlier stage businesses. At seed and often series A, a business can usually get by on a star founder, whose drive and experience carries the business forward and dazzles the investors. By series B though, the business will require other experienced hands at the helm to convince investors that the same quality of decision making can be carried out as the company scales. Getting the right talent into your business will take time, but your c-suite and upper management will be vital to both maintaining momentum and demonstrating expertise to investors.
With this increased investor attention on your management team, you need to make sure that they really have the credibility you need. You don’t want to find out from investors if members of your team have some dubious experience, so do the research yourself and be prepared to address any problems you find so you are not blindsided after a pitch. On the other hand, if team members have really valuable experience, highlight this to investors to make sure you are getting maximum credibility from your team.
If you have gaps in your team, either in capability or credibility, you should consider bringing in expert support. External specialists can help you temporarily fill roles, such as with interim CFO’s, and will plug knowledge gaps. Even though these relationships are temporary, they really give investors comfort when they can see you are aware of what is needed to run your business efficiently. Hiring advisors, like hiring great team members, adds their credibility to your own organisation’s, and ensures your business will be well-managed throughout this challenging period.
Investors will be looking much closer at your GTM in this round. Series B businesses need an established GTM that is both repeatable and scalable, and you will need metrics and evidence to prove this. One of the most frequent mistakes we see in pitch decks at Invigorate is a failure to properly address unit economics and therefore cost scaling. It’s not enough to be showing good revenue streams now, you will need data evidence to prove that this can be turned into long-term profit growth.
A good data room is indispensable at Series B. By now, your company will have been operational long enough for there to be significant growth history for investors to review. Making sure you have an operational data room, which collates all of the documentation and figures for your business in one place, will allow you to seriously cut-down on back and forth with investors and reduce any time spent desperately trying to source information. This makes the process much less onerous for both you and your potential investors and helps your business appear a great deal more professional and organised.
You may have stumbled along without a properly organised data room before, but due diligence requirements are much more onerous at series B, demanding more information and in more detail. You will also want to provide detailed financial data, with revenue predictions demonstrating how your firm might perform in different market conditions. With Covid-19, Brexit, and supply-chain difficulties making our current markets so volatile it is particularly important that you can show how your business will be impacted by and tackle different market conditions.
Series B also comes with different metric requirements. While investors will still be interested in your LTV (customer lifetime value), CAC (customer acquisition cost), and other key series A metrics, your business is now at a different stage requiring new focuses. For example, investors will likely be interested in your CAC payback period, ARR (annual recurring revenue) and gross margins. Churn, both net and gross, are also very important, as they measure how effectively your business is actually servicing and keeping customers. Good customer retention is cheaper than acquiring new customers, making it much easier to scale effectively.
These metrics must not only be provided, they need to be woven into your business narrative. One of the things which separates a good pitch from a bad one, is the way in which it tells a story about your business. The data your metrics provide should form vital evidence for your narrative and should be applied accordingly – not just inserted in a big chunk.
Series B amounts range widely, but tend to sit anywhere between £10m and £100m depending on team size, marketing and advertising spend and operational complexity (e.g. investment in legal and finance departments). In the third quarter of 2021, KPMG recorded median deal size for series B at $29.2m across Europe.
At this stage, your existing investors are likely to contribute again and invite new participants as well – making maintaining good investor relationships integral. Many businesses struggle with their investor relationships. If you haven’t established good inbuilt reporting procedures, it’s not unusual to see businesses taking whole weeks out in a mad scramble to find the right information to satisfy their investors – a disturbance of BAU that benefits neither party. Instead, if you can establish better data collection and reporting procedures, you can seriously reduce the onus, while warming your own investors up. VC investing is a small community, and maintaining these relationships with your current investors will often pay wider dividends.
Typically, at series B two VC funds will split the majority of funding and a few smaller investors will pick up the remaining cost. The narrative your pitch tells should be tailored towards the investors you are approaching – making it vital that you find investors who will be a good fit for your business. You can accomplish this by researching potential investors – from their LinkedIn to podcasts, blogs, or speaker events. Current investors should also be looped into this narrative, so they can support it when they make introductions.
This is also the stage when you can expect to be left with a smaller share of the business compared to your investors. After series B, founders are commonly left with a 35% stake while investors get 65% (the remainder generally goes in employee options). This isn’t a hard and fast statistic, and can vary according to your valuation versus how much you wish to raise, as capital will have a cheaper equity cost the higher your valuation, but is a useful rule of thumb. It will also obviously vary according to how much equity you have given away in previous rounds.
It is worth considering whether a series B is the right solution to your funding needs at this time. VC funding is onerous and expensive, and if your business is not in the right stage it may well be worth exploring other options to provide runway while your business develops.
For example, many businesses choose to use venture debt between funding rounds. Venture debt is simpler to apply for than VC funding, and is often well suited to businesses with the revenue history necessary at series B. Venture debt is also cheaper than VC investment, as it does not come at the cost of equity, allowing businesses to pay off the debt. This often makes venture debt a much more cost effective option in the long run.
There are also various other kinds of financing that may be appropriate, such as revenue based financing. You won’t be able to raise such large amounts from these sources as from a successful VC raise, but they can provide vital capital so that when you do hit your series B you will be in a better position to maximise your valuation and capitalise on funding.
After your series B is a great time to take a step back and focus on company strategy and culture. As your team grows you will face new operational challenges around everything from knowledge sharing to communication. Taking the time now to develop a hiring and organisational structure for your scaleup can save you a lot of time and money later when change will be harder.
Your company is growing from a small group of employees and early supporters whom you will have high contact with, to a much wider network that will need structure and cohesive values to support it. Make sure you have high-quality talent at all levels of the company and spruce up your hiring criteria and processes, to ensure you can maintain that quality as other people take responsibility for parts of the hiring process. While your company is growing at speed, it is particularly important that you are hiring team members who will be able to grow with you. Otherwise, you will be filling the same roles again in six months, or worse, find your growth increasingly limited by staff capabilities.
A common mistake to avoid is being too conservative with your spending on growth. While you may have been used to watching every penny as your company foundations were laid out, now is the time to aggressively acquire market share. Invest in line with your company stage or risk losing momentum and being pushed out of the market by a competitor. Just make sure you have a proven distribution channel and working sales process in place first, else you risk throwing money where you can’t capitalise on it.
2021 has seen a huge amount of VC investment, but also a lower deal volume, as investors concentrated on larger deals with fewer businesses. It is likely that this trend will continue for the moment, as uncertainty encourages investors towards businesses with good traction and established profitability. In this landscape, there are big rewards for firms that can differentiate themselves in the market and identify themselves as promising investment opportunities.
If your business needs a hand raising its series B, Invigorate can help you. From assessing investor readiness, to finding advisors or interim CFOs to provide you with the expertise you need to navigate this tricky period, we offer a range of services to help you ace this round. For more information on what Invigorate can do for you, check out our website here or contact us for a chat to work out just how Invigorate can best help your business.