A Series B valuation is a critical period in your startup’s history. That’s why you need to be careful at this stage not to make a mistake that could sabotage your fundraising efforts.
In this article, we’ll go over these three main points:
- The significant challenges of a Series B valuation
- What you should do if you can’t close the round
- How much cash a Series B brings in
Financing stages
To see where a Series B valuation fits in the scheme of things, it’s helpful to think of startup funding going through three distinct stages:
Birth stage (pre-seed, seed, and angel funding)
This is the stage where ideas are born, and nebulous ideas become living, breathing realities. Pre-seed funding is any fundraising that happens before official fundraising begins.
Seed funding is the money that helps get the company off the ground. Much of this cash comes from the founders themselves or friends and family members. Angel funding is additional capital that allows a business to begin marketing and acquire customers.
Growth stage (Series A, B, and C)
At this stage, capital is injected into the enterprise to scale the business and ramp up operations until the company becomes viable. At this phase, much of the cash comes from venture capital firms.
Series A funding is an early part of the growth stage where investor capital is used to field test if the business model works.
Series B money helps fine-tune the business model and further develop the service or product. Organizations that have survived seed and Series A funding rounds now have robust customer bases. They have also proven to potential investors that they're prepared for success on a much grander scale. Series B cash can grow the company to meet this higher demand.
With Series C funding, the team, product, and a robust customer base have been established. Now, it’s time to scale up. An organization raising series C capital means it’s achieved the critical mass needed for viability.
Exit stage
At this point, venture capital firms capitalize on their investment gains by funneling profits back to their fund’s investors. This can be done in one of three ways:
- MERGERS & ACQUISITIONS (M&A): Mergers and acquisitions (M&A) is a term used to describe the consolidation of enterprises through various types of financial transactions, including mergers, acquisitions, tender offers, and the purchase of assets.
- INITIAL PUBLIC OFFERING (IPO): Some startups choose to remain independent while seeking higher valuation and liquidity by offering secondary shares through an Initial Public Offering (IPO). This means the organization is now in the public eye. Because it is, there's increased regulation and scrutiny.
- PRIVATE: If a startup opts to remain free of the public markets, it might raise further funding rounds so that it becomes profitable on its own. Once the company is on sound financial footing, it may raise debt instead of equity financing to limit how much dilution occurs with existing shares.
The major challenges of a Series B valuation
The Series B round is often considered the most challenging round to raise in the life of a startup. That's because all the cash you'll need combined with your probable burn rate since Series A can make this round stressful.
This funding round can be treacherous for startup founders and potential investors alike. Because the enterprise most likely hasn’t fully realized its full potential, it could be strapped for cash. For these startups, failure to raise series B money could be a death knell from which they can never recover.
Some investors withhold their cash because they want to see if the founder can successfully surmount the challenges of this stage of the company’s existence. These are the people who get in early with seed money or the series A round and then wait and see if everything goes according to plan.
If things look promising, the venture capitalist might feel confident enough to invest in a series B. Because of investor trepidation, you must make sure that you know how to entice backers to pump money into your enterprise.
What if you can’t close the round?
If your startup fails to raise a Series B round, you’re going to run out of cash quickly. However, this isn’t the time to panic.
Think of every trick in the book to close the round. If you believe that your startup deserves to get funded, you’ll find a way. Every enterprise that eventually achieves success has what are known as "near-death experiences."
For a determined founder, these are merely wake-up calls. This is the time to either recommit to your original vision or give up. The thing that most entrepreneurial superstars would recommend is to fight every day until you run out of cash.
Look everywhere you can think of to close out the round. Besides pitching to other venture capital firms in your vicinity, here are some other things you can do:
- VCs OUTSIDE YOUR GEOGRAPHIC AREA: If VCs in your vicinity won’t fund your dream, try pitching new firms in new places.
- COMPETITORS: Competitors (particularly public companies) sometimes invest in startups. Reach out to them if you think you can fill a hole in their strategy.
- FAMILY OFFICES: Someone once described these groups as “angel investors on steroids.” These are ultra-wealthy families who have tons of money to invest in a promising startup. They can help breathe life into your vision while you ensure that their intergenerational wealth remains intact.
- VENDORS OR DISTRIBUTORS: They might have been enviously eyeing your company, hoping for a chance to get in on the ground floor. You’ll never know unless you talk to them.
How much cash can a Series B bring in?
According to Fundz, "An analysis of 38 Series B deals in June 2020 showed the mean Series B in the U.S. to be $33 million; the median was $26 million."
What’s the average series B valuation for a startup?
Companies undergoing a Series B funding round are well-established, and their valuations tend to reflect that. Most Series B companies have valuations between around $30 million and $60 million, with an average of $58 million.
The post-money valuation of a startup raising series B investment is anywhere from $30 million to a billion.
Examples of series B funding
Here are several companies who received series B funding:
- NURO: This California-based robotics company raised $940 million in a Series B round. The cash came from the SoftBank Vision Fund, and the enterprise ended up with a valuation of $2.7 billion. Previously, Nuro raised $92 million during a Series A round co-led by Greylock Partners and Gaorong Capital.
- DEVOTED HEALTH: Waltham-based Devoted Health raised $300 million in a Series B round in 2018. This insurance startup that serves seniors and offers Medicare Advantage plans got the funds from Andreessen Horowitz, Uprising, and Premji Invest.
- ZOOX: This self-driving technology development company raised $500 million in a Series B round back in July 2018. Mike Cannon-Brookes led the round, giving the business a $3.2 billion valuation. To date, Zoox has raised over $800 million in startup cash.
- FINTECHOS: In 2021, FintechOS, the global technology provider for banks, insurers, and other financial services companies, raised $60 million in Series B funding. Draper Esprit, a leading venture capital firm, led the round.
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