Series B Financing
A funding round that takes place after a company has successfully completed its seed and Series A rounds.
What Is Series B Financing?
Series B financing is a funding round for startups or early-stage companies that have already gone through a Series A round of funding and are searching for extra capital to help them develop and scale their business.
In a series B financing round, an enterprise will commonly seek to raise a larger quantity of capital than in the series A round, commonly starting from tens of thousands to hundreds of millions of dollars, relying on the business enterprise's size and growth trajectory.
This investment is normally provided by means of Venture capital companies, private equity firms, or other institutional buyers, who may additionally require a big ownership stake in the organization in charge of their investment.
The budget raised in a series B financing round is generally used to amplify the corporation's operations, rent more personnel, broaden new services or products, and invest in advertising and income efforts to force growth and increase the market proportion.
The successful final touch of a series B financing round can assist a business enterprise in setting up credibility and appeal to further funding down the road.
Investors in a series B round have better expectations for the corporation's future growth and profitability. They might require a stronger control team and extra detailed financial projections to support their investment.
Successful completion of a series B financing round can assist a company in setting up credibility and appeal to similar funding, leading to persevered growth and fulfillment.
Key Takeaways
- Series B financing is typically the funding round that takes place after a company has successfully completed its seed and Series A rounds.
- Companies use Series B financing to scale their operations, amplify into new markets, invest in product development, and hire additional workforce.
- Companies can seek capital from various sources in Series B funding, including private equity investors, venture capitalists, and credit investments.
- Series B equity investors often prefer preferred stock due to the anti-dilution features available for preferred stock investors and the fact that preferred stockholders are paid dividends before common stockholders.
How Series B Financing Works?
During a Series B financing round, companies make significant progress and achieve key milestones, leading to a higher valuation than previous funding rounds. Companies have several options to raise funds during this stage.
Typically, Series B investors pay a higher share price to invest in the company than earlier investors did during the Series A financing round.
In contrast, Series A financing involves raising capital for startups with a solid business model. Private equity firms often provide Series A funds, which startups use to expand their operations by purchasing equipment and inventory and hiring staff.
Series A funding is usually considered seed capital intended to help new companies grow.
1. Company Preparation: The company prepares by showing growth, building a management team, and creating a growth plan.
2. Investor Interest: The company will then approach potential investors, typically venture capital firms or institutional investors, and pitch its business and growth plan to gauge their interest.
3. Term Sheet Negotiation: The organization and investors will negotiate a term sheet, which outlines the terms of the investment, together with the amount of capital to be invested and other relevant phrases and situations.
4. Due Diligence: The buyers will conduct due diligence at the organization, which can also encompass reviewing financial statements, interviewing management and employees, and comparing the company's market position and growth potential.
Note
Series B financing provides a startup or early-stage company with the additional capital it needs to continue scaling its business and achieving its growth potential.
5. Investment Agreement: If due diligence is successful, investors and the company sign an investment agreement, and funds are provided.
6. Use of Funds: The company will use the funds to continue scaling its business, which may include expanding its team, investing in research and development, and increasing its marketing and sales.
7. Future Rounds: Successful Series B financing can help establish credibility and attract future investment.
Series B Equity
Publicly-traded corporations often seek ways to elevate capital if they want to fund their growth and expansion plans. One way to accomplish this is by issuing additional equity shares on the open market.
One of the primary drawbacks of raising funds through issuing new shares is the possibility of dilution. Share dilution occurs when a company issues new shares, decreasing the ownership percentage that existing shareholders hold.
Because of this, every shareholder's stake in the organization is decreased, which can cause a decrease in stock price and valuation. This can be particularly concerning for early investors who may have invested when the company was valued at a lower price.
To help mitigate the risks associated with dilution, Series B equity investors often prefer to receive convertible preferred stock over common stock.
Note
Convertible preferred stock is a type of security that can be converted into a set number of common shares at a predetermined price.
This type of stock typically comes with anti-dilution provisions, which protect investors against the dilution of their ownership percentage if the company issues additional shares in the future.
In addition to anti-dilution provisions, preferred stockholders benefit from receiving dividends before common stockholders.
By receiving dividends before common stockholders, preferred stockholders have a more stable income stream and a higher priority for receiving investment returns.
To minimize this risk, Series B equity investors prefer convertible preferred stock with anti-dilution provisions and priority in receiving dividends.
Series B Financing Resources
While the public markets remain an important supply of funding for groups, many other sources are now available for companies trying to increase capital.
In particular, startups and small businesses have a growing number of options for financing at all stages, including Series B funding.
One common approach in Series B funding is for companies to utilize the same fundraising channels they used in earlier rounds, such as Seed and Series A funding.
This can be beneficial for companies since they are already familiar with these investors and the reporting requirements, which can make the fundraising process more efficient and streamlined.
Additionally, early investors from preceding rounds can be willing to lend extra money to the company to boost their stake in the business.
In Series B funding, businesses can seek capital from various sources, including:
- Private equity investors
- Venture capitalists
- Credit investments
Note
It is crucial to observe that each investment supply might also have precise funding constraints, such as a restriction on the percentage of capital that may be invested by using each investor.
Companies should carefully consider their options and select the funding methods that best fit their current situation.
Typically, numerous financing options exist for companies seeking to raise capital in series B investment. By carefully evaluating their options and selecting the most appropriate financing methods, businesses can position themselves for continued growth and success.
Series B Financing Via Crowdfunding
Crowdfunded investments have emerged as a viable financing option for businesses, especially small businesses that have traditionally struggled to secure funding through traditional channels.
The JOBS Act signed into regulation in 2012, opened up a new road for corporations to raise finances from traders and non-accepted buyers via online structures.
One of the principal advantages of crowdfunded equity is that it provides companies with a more diverse pool of investors than conventional equity funding.
This is because agencies can get admission to buyers who won't be available through traditional channels, increasing their chances of securing the investment they want.
Crowdfunded loans can also be more accessible for businesses that may not meet the stringent requirements of traditional lenders, such as banks. Additionally, the lower prices related to crowdfunded investments make it a more attractive option for buyers and organizations.
Overall, the developing recognition of crowdfunded investments highlights businesses' desire to diversify their investment assets and discover opportunity financing alternatives.
With the rise of online systems and the help of government rules, crowdfunding has emerged as a possible and accessible option for agencies seeking to raise capital.
Series B Financing Examples
Private funding continues to be a popular way for companies to raise capital, with technology and healthcare being two key sectors. Here are some examples of companies that have raised Series B funding:
1. Robotics
Nuro, a robotics organization based in Mountain View, California, raised $940 million in a Series B round from the SoftBank Vision Fund in February 2019.
The organization, founded in 2016, had previously raised $92 million in series A investment from Gaorong Capital and Greylock companions.
2. Self-Driving Technology
Zoox, a self-driving technology development company founded in 2014, raised $500 million in series B funding in July 2018.
Note
Mike Cannon-Brookes of Grok Ventures led the funding round and gave the company a valuation of $3.2 billion. In total, Zoox has raised $800 million.
3. Healthcare
Devoted Health, an insurance startup based in Waltham, Massachusetts, raised $300 million in Series B funding in October 2018.
The funds were secured from lead investors Andreessen Horowitz and Premji Invest and Uprising. Devoted Health serves seniors and offers various Medicare Advantage plans.
Other Series B financing sources include venture capital firms, private equity firms, and institutional investors.
Companies that have successfully completed a Series A funding round and have achieved significant growth since then are usually attractive candidates for Series B financing.
Conclusion
Series B funding is a pivotal phase in the development of startups and early-stage businesses, giving them the extra funds they need to expand and realize their full potential.
This round, which involves obtaining more money from venture capital firms, private equity investors, or institutional investors, usually follows a successful Series A round.
The money received is used to develop new goods and services, hire additional staff, grow the business, and fund marketing and sales initiatives.
Companies that accomplish important milestones and show great success during Series B financing are valued higher than those that have come from earlier stages.
In exchange for paying a premium price per share, investors may receive convertible preferred stock with anti-dilution clauses and first dibs on dividends.
Series B finance can be obtained from various sources, including crowdfunding and more unconventional avenues like private equity and venture capital.
When a Series B round is completed successfully, it lends credibility to the company and may draw in additional funding, which helps the business develop and thrive in its particular industry.
Free Resources
To continue learning and advancing your career, check out these additional helpful WSO resources:
or Want to Sign up with your social account?