If your business is ready to pursue Series B funding, you’ve likely found solid product-market fit and have seen notable customer or revenue growth. You may have completed Pre-Seed, Seed or Series A funding rounds, and proven that your startup can execute and achieve ambitious milestones.

Series B fundraising is the next big step for your company if you’re looking to maintain momentum, increase market share, refine your product, and grow the team. In this piece, we’ll cover key details about Series B funding including:

• What Series B funding is
• How Series B funding works
• Where Series B money comes from 
• How to approach investors

What Is Series B Funding?

If your company has reached a level where you’re making moves to pursue a Series B in earnest, you deserve a solid pat on the back. Most businesses—as many as nine out of 10—don’t make it past their first few years, and the fact that you’ve made it past the early stage shows how much you’ve endured. Your business has survived, but can you keep it afloat?

Series B funding is typically used to help businesses that are already showing signs of success continue to execute on their vision. It may also be used to add new product features or increase marketing efforts to attract more customers.

Series B fundraising is usually allocated only to companies that have reached performance and growth milestones set out by the founders or previous investors. Other factors, such as market share and cash burn, can also help give new and existing investors confidence that the business is on the right track. Since most businesses seeking Series B funding have already generated significant traction, valuations tend to be higher than in previous funding rounds, which means equity in the business will be more expensive for investors.

How Does Series B Funding Work?

A company ready for Series B funding has likely built up something of a presence in its sector. The business has probably been operating for at least a year and is seeing consistent revenue, and might even already be profitable without any additional funding.

Investors participating in Series B rounds are likely to be more risk averse than those from previous raises, and may expect more in depth financial reporting or accounting due diligence. 

However, investors at this stage are also more likely to have significant capital available to invest, which a growing business can use to acquire customers more quickly or tackle a greater number of business initiatives simultaneously.

Series B funding rounds may also attract investors from larger or more sophisticated institutions, who may be able to provide founders with guidance or unique insights into the market in which they operate. Networking is important during any capital raise, and Series B rounds are no different.

Preparing for Series B Fundraising

Founders preparing to seek Series B funding should expect another round of pitching the business and a thorough due diligence process from new and returning investors. Pitch decks should be updated to reflect customer or revenue growth and other traction, as well as the current financial position of the business and plans for expansion.

You should also be prepared to detail any equity stakes in the business resulting from previous funding rounds to give new investors a more complete picture of existing allocations and how valuation has changed over time.

Both new and existing investors will also want to know how the business used previous equity capital, so it’s important to maintain meticulous accounting records. If you haven’t already hired an accountant by this stage, raising Series B funding will likely require taking that step.

Approaching Series B Investors

Once you’ve perfected your pitch, it's time to approach investors about funding. The best thing you can do is position yourself to have multiple offers on the table. This allows you to be selective and winnow down offers until you land on the deal with the most favorable terms for the business.

If you’re thinking about raising Series B funding, it’s usually a good idea to start reaching out to potential target investors a few weeks to a few months in advance of having a complete pitch presentation, depending on your existing relationship. This will give them time to let other potential investors know you’re planning a raise, and gives you a chance to better understand the state of the funding ecosystem to help size your round.

When you have a complete presentation and are ready to approach investors for Series B funding, a wise first step is tapping your network of existing backers. This will give them the leading opportunity to provide more capital, and they might even refer your business to other investors in their own networks.

If you’ve already been through the process of raising funds from investors, consider reaching out to prospects that may have turned you away before. Now that your business is more developed, they may be more willing to make an investment. It’s also typically a good idea during any funding round to seek out investors familiar with your industry who might be able to provide valuable insights that could give your business an edge.

Series B Fundraising: Where Does the Money Come From?

Series B funds can come from a variety of sources, including:

Venture Capital Firms

Venture capitalists raise funds through limited partners (LPs), which may include family offices or institutional startup investors. Depending on their existing portfolio and past activity, VCs may take a less hands-on approach compared to private equity investors, or offer guidance that is less specific to your particular industry. 

Equity Crowdfunding Platforms

Equity crowdfunding rounds raise capital from many different individuals, without requiring they be accredited investors. Raising a Series B through a crowdfunding platform can help founders quickly expand their network, and will usually allow them to maintain greater control over strategic decision-making and day-to-day business operations.

Mezzanine Debt

Mezzanine debt is not backed by the assets of the company and is typically considered “junior debt”, or lower priority debt that will only be paid back after existing equity agreements have been satisfied. Mezzanine debt may also come with restrictions on raising additional funds until some or all of the loan has been repaid, and will usually carry a higher interest rate compared to secured debt. In return, founders don’t have to give up any additional equity in the business.

Private Equity Investors

Private equity investors often raise funds through limited partners (LPs). Wealthy individuals or organizations like angel investors, insurance companies, and endowments are potential LP candidates in a private equity investment firm. Private equity firms may seek to improve operations by strengthening management and searching for opportunities to optimize customer acquisition, revenue, or profit.

Disclaimer: Past performance is no guarantee of future results, and there can be no assurance that the future performance of any specific offering, deployment, or due diligence performed will be equal to any corresponding indicated historical success level(s). The experience of the issuers named herein may not be representative of the experience of other issuers and is no guarantee of future performance or success.