What Is Series B Funding?

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.

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.

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.

In order to successfully achieve a Series B, similar to a Series A, a company needs to provide documentation that will allow investors, more than likely to be venture capitalists, to see how they will be able to grow their investment with you and how you will limit their liability as much as possible. 

The documents for a Series B will be similar to that of a Series A, as well as several new documents, as the company progresses towards a more traditional corporate entity:

• Business Plan
• Financial Models/Projections/Use of Funds
• Team Biographies
• Pitch Deck
• Capitalization Table

See our previous article on Series A for more information on what’s needed for a Series A round.

Some of the documentation that investors are looking for in Series B that differs from a Series A round of funding applications are:

• Customer references
• Legal documents, including previous funding round information and due diligence materials
• Growth metrics
• Corporate governance 
• Exit strategy

Customer References

First and foremost, Series B investors are looking to limit the liability of their investments. The best way to limit their liability is through external validation, and what better place than with current and former customers? 

The reason for this is threefold: 

Impartial Opinions

First and foremost, a customer will provide an unbiased opinion of the service and support they are receiving from the company. 

While a CEO or member of the C suite may say their customer support is exceptional, it is always biased, whereas that same statement from a current or former customer will carry a lot of weight and validity.

Referrals 

If a company has a strong customer base, it can always go back to those customers for new business referrals. If that company is engaged with its customers in gaining references and feedback, there is a greater chance they will be engaged to gain referrals. 

Also, referrals are usually like in kind, meaning if a company has a high volume of enterprise-level customers, they could expect a lot of enterprise-level referrals. For this reason, when trying for a Series B investment, it is best to get customer references from your biggest logos. 

Big Logos

There is an age-old adage: “Nobody ever got fired for buying IBM”. What this means is that IBM was such a solid company even if their product was far more expensive than their competitors, the executives in the company would trust the product being sold. 

Having customer references from big logo companies within the sales target industry, such as Facebook, Google, Amazon, Apple, for SaaS companies will ensure that if those companies trust the product, why shouldn’t other smaller, more fragile companies?

Legal Documents 

Following customer references, legal documents would be the next thing that Series B investors would be looking into. On top of the usual documents such as the articles of incorporation, ownership agreements, intellectual property rights, and any pending or past legal issues, Series B investors will also want to review contracts. 

This is key; the contracts, especially those with large logo companies and supplier agreements, are areas that could open a company to murky legal waters. To achieve venture capital financing and raising venture capital it is important that all the contracts don’t contain legal liabilities, where a few thousand dollars of revenue inhibits you from your ability to raise funds.

Growth Metrics

When moving from seed to Series A, a company should show its total addressable market (TAM) and how much it expects to capture. These numbers are mostly fictitious in nature and taken with a grain of salt. 

When moving from Series A to Series B, a company should have firm numbers on what their actual growth has been, broken down by market segments, industry, and territories. With these actual growth metric numbers, a company should be able to provide relatively accurate financial models that will project growth when adding new team members, growing into new territories, or adding more products to the line or whole new product lines, with the inclusion of forecasted expansion into established companies and churn. 

In short, the revenue model should be more accurate as it will be closely based in reality. 

Corporate Governance 

As the Series B round of funding is substantially higher than a seed or Series A round, the requirement proving that the right people are in the right positions is key. Investors will want to know that the team that will be managing their money will have had sufficient experience and expertise in their respective domains and the industry so that their investment will provide a significant return on their investment. 

The goal of having such an experienced team will be to take that series B investment and turn it into a lucrative exit, either to a private equity firm, through an acquisition, or an initial public offering (IPO). This leads us to the last key document that Series B investors are looking for.

Exit Strategy

Less of a specific document but more of a plan of attack is the exit strategy. Series B investors invest a lot of capital in a company; however, they also expect to see a sizable return on their investment (ROI). The time to exit after a successful Series B investment can vary. However, there are industry averages. 

For example, tech companies are expected to exit or IPO sooner than later after a Series B, within three to seven years. Biotech companies are on the opposite end of the spectrum expecting to have an exit in a decade or more. Between those two are consumer products and manufacturing companies on the five to twelve-year span from initial Series B investment to exit.

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.

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.

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.

Recommended: Learn more about series funding by reading our comprehensive guide.