How to raise your Series B round?
Thoughts and learnings as part of the most active Series A investment team in Europe
The Series B round is often considered as the most challenging round to raise in the life of a startup. You are really joining the big boys when raising a B round. In 2018, there were 244 Series B rounds in Europe and there have been 125 rounds since the beginning of the year (as of May 2019).
I can’t agree more with Tomasz Tunguz, Partner at Redpoint Ventures, when he wrote “the Series B is the last milestone before proving cash is the business’ limiting factor”
Your Series B round is going to be successful if you find a VC able to take a risk at that moment of truth for your startup because “it has one foot on either side of Geoffrey Moore’s chasm”. This moment is just before entering the confidence zone, the growth capital, the world of mature companies.
The number of Series B rounds is accelerating, paving the way for the emergence of international champions born out of Europe. Investors are also getting increasingly confident and entrepreneurs more ambitious. However, Series B models are still scarce.
Today, our portfolio company Ornikar is announcing a €35m Series B a year after we led the Series A and only few months after other Series B rounds raised by other Idinvest portfolio companies: Lunchr (€30m), Heetch (€34m), Malt (25m€), Lumapps (€20m), Botify (€18m), Peakon (€18m), Wefox (€110m), Ontruck (€25m) etc.
We had a ringside seat as Series A Lead Investor in all those companies and we are happy to share some examples, anecdotes and pieces of advice of what we have learned along the way!
1. What is a Series B today in Europe?
The Series B landscape has evolved drastically since 2013 in Europe with a strong increase in both the number of rounds and the total amount raised. In 2018, there were 244 Series B transactions in Europe worth a $4.8bn, i.e. twice as much in number of rounds and 4 times as much in amount compared to 2013! That growth is much faster than that of early stage rounds (Seed and A).
The average duration between a Seed round and a Series A is 18 months compared with 20 months between an A round and a B round. The average time lapse reaches a maximum at the B and C stages and decreases afterwards.
Looking at average amounts raised in B round, there is an increase in the average size reaching $15–20m compared with $10.6m in 2013.
2018 A rounds are about the same size as 2013 B rounds, and B rounds are getting increasingly bigger. Why is that?
- There is more and more local and international cash in the market. The increased presence of US investors on European Series B rounds is evidence of this (Battery in Dataiku, Accel US in Algolia, Sequoia in Tessian,…)
- There is a concentration of the VC cash available in the best companies
- As VC competition increases, these startups tend to ask for more fresh money and are more on the fundraising conditions
To note: the most active Series B investors in Europe remain European VCs.
2. The right mindset to raise a successful Series B
On average, the Series B new investor will inject a $20–30m ticket in the round. A VC fund leading this type of round is not just getting a foot in the door: they must be convinced that the company is no longer too risky (I will most likely not lose my money) and that it still has a great growth potential for it to achieve a 10x multiple or more.
The fundraising pitch must focus on why the company’s momentum will make the leap inevitable.
Here are the 3 things VCs need to be convinced about in order for you to raise a successful Series B:
Part I: I have proven that I can become one of the market leaders
Part II: I have proven that I can recruit and retain quality talents with a strong corporate culture
Part III: I can show that the story is just starting
I’d like to add a fourth part which is key not to forget. Part IV: each fundraising is unique
Part I: I have proven that I can become one of the market leaders
You proved during the Series A roadshow that you had a product that resonated well with live customers. These customers were already willing to pay a certain price, they were recommending it to other potential customers etc. I’m not going to come back on the process to raise a nice Series A , there are tons of articles and documentation on the subject — a few articles are available here.
When it comes to the B round, you must have a decent traction: $4–15m ARR for a SaaS, > $50m annual GMV for a marketplace. You are able to show robust growth rates: ideally much higher than 50% per year, the ideal growth trajectory for example in SaaS being T2D3: once you reach $1m ARR, let’s say on Y1, you triple on Y2 ($3m), triple on Y3 ($9m), double on Y4 ($18m), double on Y5 ($36m) and double on Y6 ($72m).
Funds will first chase you and consider backing you on your Series B round if they hear about above par (past) growth, recent achievements, … They will write you a big cheque on promises of future growth and big plans.
A. Few recent examples
B. Healthy Growth
Growth is key, but not at any cost! You have aggregated a huge amount of data and metrics on your customers and you need to show a clear plan to grow your business in a scalable and profitable way (at least on a cohort basis: LTV > CAC). If you are a money-losing startup with no clear path to profitability at scale, you won’t be able to attract a Series B investor (if yes, hello tech bubble).
You should master the following topics with data points:
- CAC: what are the acquisition channels? What’s the Sales cycle (of every channel)? What is the CAC by channel?
- LTV: what’s the margin per client (with client segmentation: by type of client, geo etc.)? How do you generate repeat and upsell in order to get a healthy LTV/CAC ratio for each channel (payback <12 months, LTV/CAC > 3x)
- You have demonstrated that several paid acquisition channels work well and are scalable at the moment you raise the Series B
- Your net churn is ideally very negative, negative or close to zero. Visual impact of churn on your revenues below.
C. Your startup in the Benchmark
Investors are strong at recognizing patterns and models of success (it’s our job). In a B round, there are generally already many data points on the metrics which are specific to the market you address: this data will allow VCs to rank you vs. your compset (top 1%, top 10%, etc.).
Your job is to convince them that you are part of the top 1% of the opportunities they see. You can either demonstrate that you already have metrics that fit into the top 1% bracket or that you have a very clear plan to get there. Be aware that these metrics will be compared to industry benchmarks and hundreds of other opportunities screened every month. Here a a few market references.
Tip: have a look at public comps to get a better understanding of their growth path and the unit economics at scale.
D. Your Market Positioning
At this stage, you know your company’s USP (Unique Selling Proposition). Depending on the size of the market, the VC may be comfortable with a relatively large number of competitors (e.g. the self-service scooter market is potentially huge, so many VCs have agreed to take the bet despite the emergence of fierce competition).
The VCs who will look at your company need to understand how you are gaining market share, clients & deals (i.e. understand the USP) against competitors:
- Legacy competitors: old but big. Most of the time, the startup has a better product with a nice UX and a stronger technology, etc.
- Modern competitors: are there any direct competitors? The investor must be convinced that you will be the market winner: better execution, ability to raise more money, (data)-network-effect potential. Be honest and explain what the key success factors will be in the market you are addressing.
Part II: I have proven that I can recruit and retain quality talents through a strong and specific corporate culture
Team quality is generally 90% of the investment thesis in Seed rounds. It’s still 80% in Series B rounds. You need to demonstrate that you have been able to attract stellar profiles at key positions (VP Sales, CMO, CPO, etc.): to put it simply, a stellar profile is usually a senior person who has “already done it” in a company that was successful.
The management team as it is on paper often plays — consciously or unconsciously — an important role in VCs’ analysis : show your ability to attract more and more senior talented people, complementary profiles, a solid technical/product team (isn’t all of this about product?), an increasingly international team, etc.
When you’ve reached your product market fit, your economics are working and you have a good vision on the product & technology roadmap, the bottleneck will often be recruitment. The best entrepreneurs understand it and are able to scale and industrialize HR in the early days:
- It is key to show that you have a recruitment roadmap over the next 6–12 months and that you know how to recruit these people (process)
- The attractiveness of your startup to would-be employees will be assessed with what’s available: reference calls with employees, rating on Glassdoor-like websites, happiness / commitment of your employees if you measure it with tools, feeling of the work sessions carried out with you and the management during due diligence, slides / presentations of All Hands, onboarding employee process…
If you want to build one of the leaders in your field, your employer brand must be strong and you must show new potential investors that you have understood this dimension is key to the development of the company. More and more studies show it, HERE are some slides I presented during a Saastr conference on that very topic and I recommended a simple framework.
Part III: I can show that the story is just starting
You have demonstrated (part I Leadership and part II Team) that the fundamentals are all in place. Now it’s time to sell a dream (that hopefully will be come a reality) about what’s coming next…
On the total market size and addressable market, you have proven to your Series A investors that the market was large enough. Show to Series B investors that the market is large enough to reach valuations above $500m-$1bn on an exit (to make at least x10 on the post Series B valuation). In other words, you have to prove that this is just the beginning of the story and that there is still tremendous room for growth:
- By selling to large enterprise customers (show logos!)
- By entering new countries : show recruitments or a beginning of product market fit
- Showing strong upsell potential or releasing a new product your customers are interested in
Your BP should reflect this ambition and aims for a growth rate that is ideally > 100% over the year. Unlike a Seed round (and sometimes even a Series A), the Series B is also based on the metrics…
…and fundraising roadshows take more time. During the funding process, don’t mess up with your monthly BP targets — even if it means setting slightly less ambitious targets during the weeks you are fundraising. Not reaching those targets can send a bad signal to potential new entrants who generally ask frequently during the process how the current month is trading (Sales growth, KPIs,…).
You can also earn brownie points from investors with:
- Well-known customers, “the cool logos”: if you have succeeded in convincing Airbnb, Spotify, Netflix, the government, Société Générale… it gives the impression that the product is better than the competition. These companies don’t pick providers randomly.
- Diversified clients: startups certainly but also large companies, large tech companies, both in the home country and abroad
- A strong virality in your customer acquisition
- Integrations and partnerships with established or rising companies
Part IV: each fundraising is unique
There is no one fundraising that looks like another and no investment opportunity is perfect, even in Series B, C, D, E…
You certainly have more data in Series B than in Seed but never forget that you are pitching a story: we have seen in our portfolio some companies closing whopping Series B with €0 revenues and others having trouble getting a term sheet with which they are comfortable despite exemplary SaaS metrics.
Don’t forget that fundraising is a sales exercise (… and very similar to a major account sale). Like any process, it must be well prepared and well timed:
- Choose the right time to raise: momentum also counts in Series B. Fundraising at the end of a very good quarter is not a bad idea.
- Build a pipe of VCs that make sense : who has recently invested in similar startups? in a similar geography? on similar business models?
Below are the most active Series B VCs in Europe since January 2017.
- Prepare the fundraising with a great growth story to tell (train with the VCs already on board).
- In a Series B, you know that you are expected to provide as much data as possible: prepare analyses beforehand to build a data room quickly, be ready, it will be very difficult to change a bad first impression…
- Start the process with funds you like less (“tier 2”) to train
- Try to be on the radar (without spending all your time taking coffee with every VC) with check-writers in about five to ten funds you are interested in.
- Do not disregard Associates who contact you directly: they can push your company in their organisation, and they are the first filter
Even if there are benchmarks, each Series B is unique, and many factors will influence the success and valuation of a funding round. As for a Seed or Series A, it is important to create competition on a deal. Let’s be honest: the hype, the perception that there is competition on the deal, having received several term sheets, FOMO… will play a part.
Examples of recent European Series B
At Idinvest, we like to back entrepreneurs early on (Seed / Series A). And we typically support them throughout their entire journey (Series B and beyond!). Feel free to contact me if you are building an ambitious project: ju@idinvest.com.
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Thanks to my colleagues Alex, Max, Bao and Nico for helping on this post!
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