Funding and investing on startups are on hot topic all round the year for the last few years. The discussions to raise funds from various sources is a never-ending topic among the startups. Raising B funds is much more difficult than raising seed funding or pre-series A round of funding. The actual task lies in raising funds after the Series A funding or after the product market fit. Most of the startups consider raising Series B round of funding to be the most difficult financing round. Investors and entrepreneurs lament over this round. Though the reasons may vary, it is mainly because the need for Series B usually happens at the crucial times between the idea and the actual hard reality of the marketplace.
Any company, while raising its seed funding or pre-series A round of funding, it hunts for investors to invest its idea, vision and product’s addressable market, which become easy to find investors. Investors if impressed with the idea and the business model, would be ready to invest in the business. But to invest in the Series B round, the investors or the venture capital firms, expect the startup to actually be a business and run its operations. Ideas and promising business models are not important anymore. They would expect the product or service to be available in the market and have a decent traction. Number and projections are much sought after.
In reality, during the time of raising Series B, the startup would generally be fragile with lower revenue numbers, few wrong hires, running low on cash and lot more. Investors do not accept any excuses for all the mistakes that had taken place. Sometimes, at the time of the Series B a young entrepreneur may feel like she has made amazing strides in the 18 months since the last round of funding but investors may not feel excited about investing in the business with a meaningful valuation step up. The main reason for this would be they need to have the proof and evidence for scalable business model. One of the common objection statement one would hear from an investor would be, “Yes, users and usage are strong, but you haven’t proven the ability to monetize. You should start testing some low-hanging fruit for revenue to prove willingness to pay.”
When the potential investors look at the negative cash flow or the business has not grown to any appreciable size, they only avoid to invest their money in Series B round. But for the new companies, their bank balance would have got zero and would not be in a situation to handle the instability of the business. They would have to tackle investors, customers and the company at a more demanding time than they have ever confronted with. Even if the investors know that their money could improve the situation of the struggling company, they would wait for the company to successfully manage the challenges and come out of it. These things make a startup very difficult to raise its Series B round of funding. Series B round is generally a danger zone for both the startups as well as the potential investors.
Overcoming the difficulties:
Series B round of funding truly separates the boys from the men in terms of operating business and fund raising ability. Tough situations of fundraising truly shapes the business and its entrepreneur, they instill confidence and sell the larger opportunity. There are a couple of points to success that one has to remember and learn from. They are:
– Firstly, the startups should have delivered what it has promised in its previous stages. It is important to hit the marks of achievement if series B considers it. It is ok if the company does not have 100 million active users at that time, but the business should ensure it is developing its product as planned, growing up on the graph and options to scale remains open and clear.
– Secondly, the confidence of the founder and the management plays a crucial role. The team should stand strong by the plan and ensure it is working and will continue to work. They should be confident that the data is awesome and the company is on track to nail its critical milestone. The confidence and the capability of the team matters a lot. This confidence should influence the investors as well. If the entrepreneur is able to demonstrate and justify their confidence and convince the investors, raising Series B or any other rounds would be no big deal.
Also, it is important to evaluate the key factors before looking out for investors.
– lead volumes of the business
– payment for qualified leads
– const incurred to acquire a customer
– length of the sales cycle
– average selling price of initial deal
– proof of high customer retention
– percentage that hits the quota
– type of the executive team built
If not able to answer everything, it is alright but it is important to have given a thought about everything. Experienced investors understand that it takes time to build a serious business in reality most of them are obsessed about early traction which makes raising Series B round of funding really intense.
Series B Trap:
When raising Series B, it is important to known about the Series B trap as well. It happens when a company raises a large VC round and spends on what it needs but fails to achieve the growth targets as promised because its fundamentals were not sound. The trap is a shorthand for a situation in which a company with meaningful revenue or customer traction raises a large venture round, most often led by a large venture fund. This could happen in Series C or other rounds as well where a fortunate growth situation can turn into an unfortunate one quickly.