When a startup company raises money from venture capitalists, it doesn't do so all at once. Instead, the company will raise money incrementally as it's needed. Each round, as it's called, is notated by a letter moving up the alphabet. The first round is the "series A" round, the second the "series B" round, and so on.
Many startups find the series B round to be the most difficult financing round to secure. The reasons vary, but fundamentally it's because a company in need of series B financing is almost always at a critical juncture between the idea and the cold, hard reality of the marketplace.
Why the series B round is different
When a company is ready to raise its series B funds, it has probably already raised seed money and a separate series A round from venture-capital firms. Those two fundraising rounds are driven in large part by the founder's idea and vision and the product's addressable market.
To invest in a series B round, the venture-capital firms expect the young business to actually be a business, not just an idea or promising concept anymore. The product should now exist and have some initial traction in the marketplace. Successfully raising a series B round is about execution just as much as the series A was about an idea.
The series B round is no-nonsense
Part of the challenge of the series B round lies in the inherent nature of a business' life cycle.
The product exists. Hopefully there are early adopters using it. But as of yet, the business has not yet grown to any appreciable size. The business is sitting in a dangerous gray area between the product's potential and actually deploying it at scale.
Because the company most likely doesn't have any revenue yet, there will be a significant negative cash flow. That means that failing to raise the new money is effectively a death sentence for the startup. Without the new money, the bank account will just drain to zero. For the entrepreneur, it's a lot to handle. Investors, customers, and the company are more demanding at this point than they've ever been before.
While the entrepreneur is grappling with all of this pressure, the venture-capital firms are most likely trying to avoid participating in the series B round if they can help it. The investors would rather wait before investing money at this point to see whether the entrepreneur and management team can successfully overcome the challenges I've mentioned.
Of course, if funding fails to materialize as the startup runs out of cash, then it's irrelevant anyway. But from the venture capitalist's perspective, the highest probability of investment success is getting in early with a startup with seed money or in the series A round, and then waiting to see whether everything pans out. If it does, the venture capitalist will happily invest more money in a series C or D round. The series B round, however, sits at the inflection point between those two investor sweet spots.
The series B round really is a danger zone for both the company and the investors.
The two keys to succeeding in series B
Even though the series B round is a challenge, top startups successfully get the funding they need all the time. There are a couple of keys to that success to learn from.
First, the entrepreneur must deliver on what was promised. If the series B is the first round where cold, hard business results matter, then clearly it's paramount to hit those marks. That doesn't mean the company must have 100 million active users, but it does mean the business is building the product as planned, growth is moving along, and the path to scale remains clear.
Second, the founders and management team must exude confidence. Yes, the entrepreneur is certain that the plan is working and will continue to work, and yes, the data is awesome, and yes, the company is on track to nail all its critical milestones.
Those on the management team knows it. They live it every day. The team running the business must have this confidence, or the business will never succeed, but there's more to it than that. That confidence must transfer to the investors as well.
It's the entrepreneur's job to demonstrate and convince the investors that this confidence is justified. If the investors recognize it and buy into that spirit, then they're far more likely to cut that series B check.