Series B funding, also known as “late stage” or “second round” funding, requires more evolved, specialized strategies. Much of what can make Series B funding complex involves current economic conditions, rapidly evolving technology and shifting consumer and business trends.
At the first annual First Republic CFO Conference, a panel of CFOs and other experts convened to talk about how to approach Series B financing. Michael Tannenbaum, CFO of Brex; Sagar Sanghvi, VP of Finance & Strategy at Instacart; and Arvind Purushotham, Global Head of Venture Investing for Citi Ventures, shared perspectives and lessons. The panelists offered their insights on what VCs are looking for from CFOs in order to raise Series B funding.
The challenges of Series B funding
There are certain factors that make Series B and beyond more challenging than other rounds of funding. If investors expect a company to be further along in its development, a disconnect between expectations and reality can cause a level of uncertainty.
“Series B is an interesting stage because there are some companies that did a seed or A Round, so they may have quite a bit of traction already,” said Arvind Purushotham of Citi Ventures. “There's evidence of traction, sales and a working business model. Then there are other situations where the product is harder to build. Or it has been built but the product is still maturing. Then it is harder to convince investors of the thesis. So Series B can be a tricky financing stage for many companies.”
It’s no surprise that companies seeking funding can take different paths in their development process. But for VCs considering a Series B investment, it can be especially challenging to take a risk. According to Arvind, how you gauge a viable investment or valuation is often uncertain.
"We are actually looking at a company right now that has cumulative sales of under $7 million. Not revenue, but bookings. And the pre-money valuation is going to be well north of $500 million. And then there are other Series B companies where the thesis is still valid but it's not proven out. The product is not live, or maybe they have some pilot customers, but such companies may have a really hard time to raise capital.”
Planning for Series B
Preparations for the Series B round generally occur long before the funding is actually needed. Founders should take the time to research and identify the type of Series B investor (corporate versus institutional) who may be interested in their type of business.
First, consider if the investor’s mindset aligns with your company’s vision. Study whom they’ve invested in, whether those businesses are competitors, what terms they may have requested in terms of exclusivity or involvement, and how the companies have performed. All of this information will help inform the planning and pitching processes.
In many cases, the CEO will be spearheading the fundraising aspect and selling the company vision. Where does the CFO fit in? The panel recommends that CFOs support the CEO’s plan and make necessary financial decisions for that journey. As Michael Tannenbaum, CFO of credit card startup Brex, explains, that support role during Series B can play a crucial part for both parties.
“I've been in the backseat, sort of the mean person that does the terms, lets the CEO shine, and makes sure that (the round) closes on time. I've also done more of a support of the story, so I think it depends. You don’t want to kill ‘the vibe’ of a round. With a lot of venture capital investing, especially Series B and C, we’re talking about more of a mature business. A lot of it is selling vision. So I think the job of the CFO is to let the CEO do that and then to be able to support how you're going to get to that vision with the numbers. But you want to be careful. It's a delicate balance. You don't want to over-introduce that rigor into the process.”
The process should include comprehensive financial documentation to share with potential investors. These records should show past and current financial outlays, cash flow and more. They should also include detailed financial projections based on actual evidence from the company’s journey.
Knowing what investors want
There are some basics that every investor is looking for: sound unit economics, good growth and a strong relationship with customers. But CFOs and their teams have to get more specific. You need to know the data that specific investors want to see. Tailoring the experience for each investor is truly what makes your company stand out. And very often, the investor doesn’t just want to see the basics — they want to see your company’s progress in those areas.
Track that progress as early as possible, then show traction, says Sagar Sanghvi, VP of finance & strategy at Instacart. “Understanding your core metrics and the milestones you need to hit is critical. For our business, the big question during our Series D was around unit economics. It was on our team to understand what we needed to accomplish, how our older markets were performing, and how our ad business was growing. Managing against those metrics and hitting each milestone has been critical to us over our last few fundraises.
In most cases, investors are looking for connected, proactive company leaders that are enthusiastic about meeting benchmarks and milestones. They may also want to see other examples of businesses that scaled successfully in your niche. Such data may give them insight into your potential, and may help them feel more confident about investing in your space. Although investors sometimes do take leaps of faith, it’s a much better strategy to show them signs that your product is a viable solution that will deliver them a financial advantage.
Relationships with investors
Focusing on relationship building as early as possible may strengthen the chance that a VC invests. In the beginning, it’s not about key performance indicators or the money, but about getting to know each other, establishing trust and getting a sense of what it might be like to work together. If you think of Series B funding as an individual transaction, you may be missing out on the long-term potential for other opportunities, including more funding rounds, expertise and/or connections.
For example, an investor may be able to connect you with talent or customers. In fact, some of the best ways to build your network start with your investor, according to Sagar. "I see a lot of companies who don't use their investors right. For example, some of our best fundraisers are our investors. They're talking to their friends, they're talking to other people in the industry, saying, 'you guys have to see what's happening with this company.' And they are our best recruiters, sending us high quality talent."
In other words, look for ways to provide a mutual benefit that goes far beyond current and future funding rounds. Funding is only the beginning of a potentially long and beneficial relationship.
How to decide on money
While it’s best to ensure you are well capitalized to fuel your startup growth, there may be situations when you may want to say “no” to money. This circles back to your initial research. Does the relationship with the investor align with your company’s vision? Or perhaps the term sheet doesn’t match what you want.
"If you feel like it adversely changes the dynamic of your board room, I would be careful," says Sagar. “Also, as a business, we want to maintain discipline on how we operate. There's a tendency when you have a more than $1 billion in the bank to lose that discipline and to make bets that aren't the right bets for your business. I don't think that's a reason not to take the money. I think that's a reason to make sure that your job as the finance leader of the organization is to reinforce the right culture, maintain discipline in your investments, and take aggressive but thoughtful bets.”
So, take the time to do your due diligence. This includes agreeing on what you want as a company from an investor and identifying target investors. Establish and nurture relationships with investors early on before even asking for funds. From there, both you and the investor will know if it’s the right relationship to create a mutual benefit.
The views, opinions and recommendations in this article are those of the author and do not necessarily represent the views, opinions and recommendations of First Republic Bank.