What Is Series B Funding? Definition & Process
Building a business from scratch requires many things — not least of all funding. For your startup to be successful, you need to have a reliable way to pay for the many expenses of creating and growing a successful company. Running out of money is the second most common reason that startups fail (after misreading market demand), accounting for 29% of failed startups.
Startup fundraising generally happens in rounds, or funding series, beginning with a seed round and progressing from there to a Series A, B, and C round (and sometimes even further). In other cases, a company may stop after the Series A round, or only raise a seed round.
What Is Seed Funding?
Seed funding is traditionally the first round of startup funding, although many startups also seek pre-seed funding. In essence, seed funding is capital raised to help founders with the costs of getting a business off the ground. It’s often used for conducting market research, building a prototype, developing the business concept, or other early business expenses.
As with every fundraising stage, seed funding can come from numerous sources. The most common ways founders access seed capital are through friends and family, angel investors, or startup accelerators.
- Friends and family are frequently the first investors in successful startups. Many of the world’s most profitable companies began with investments from the founders’ closest friends or relatives.
- Angel investors are wealthy individuals who use their high net worth to invest in startups in which they personally see potential. They often choose to invest in startups that align with an interest or passion of theirs.
- Startup accelerators are dedicated programs through which startup founders can apply to receive funding, mentorship, access to venture capitalists, and many other valuable resources. Accelerators are similar to startup incubators, but an incubator typically only accepts early-stage startups whereas accelerators accept startups at any point in their life cycle.
After a startup has received seed funding, the founders may choose to seek Series A funding next, and eventually Series B funding and beyond. If you’d like to learn more about how Series A funding works and what it’s used for, check out our previous article about the Series A funding round.
What Is Series B Funding?
For a startup, Series B fundraising represents the transition from fledgling business to thriving company. Whereas the seed round was for establishing traction and the Series A round was for turning that initial traction into steady growth, the series B round is for scaling the company even further.
By the time a founder is seeking Series B funding, their startup already has a successful track record and an established customer base. The reason for seeking Series B funding is typically to access additional funding to help the business reach new heights of success. For this reason, Series B funding deals are often much larger than seed or Series A deals.
Whereas seed funding can come from many different sources, by the time you reach Series B funding, you’re most likely working with venture capitalists. Venture capital firms (also called VC firms) invest large amounts of money into startups in exchange for equity.
While VC firms are the most common source of funding (U.S. companies raised $200 billion in venture capital in 2022) there are a few other potential sources of Series B funding, like private equity or corporate investors.
The Importance of Series B Funding in Business
Similar to Series A funding, Series B funding helps startups grow effectively. However, while Series A funding serves as the bridge between initial traction and growth, Series B funding provides the capital required for businesses to augment that growth and turn it into even further expansion.
Here are some of the most important ways a startup can use Series B funding:
1. Hiring Employees
One of the most impactful ways companies use Series B funding is to expand their staff. As most startups grow, they require a larger team to run the business. This doesn’t just include core business operations, but a whole host of other necessities as well, such as marketing, accounting, customer support, and much more. You can use Series B funding to make these critical additions to your startup’s team in order to enable further expansion.
2. Investing in Marketing
Many companies use Series B funds to refine their marketing messaging and improve or expand their marketing campaigns. Early in a startup’s life, much of the focus is on developing the product. Market research at the earliest stages is about validating a demand for the product and finding product-market fit, not about developing marketing materials. However, once a company has passed the seed stage, focus can shift toward customer acquisition.
3. Expanding Into New Markets
While Series A funding is generally used to fuel growth, a larger Series B investment can unlock the ability for a startup to expand into new markets entirely. Using series B funding, a startup that’s ready to expand could establish a presence in new geographic regions or explore previously untapped demographics. Looking towards this type of wider expansion is one of the best ways for a company to use Series B funding to enhance and diversify its revenue streams.
4. Developing New Products
Just as Series B funding can pay for expansion into new markets, it can also pay for development of new products. Founders often turn to a Series B round to fuel further product innovation once they’ve achieved success with their initial idea. Researching and developing a new product takes a great deal of time and resources, and may even require hiring additional staff. However, investing Series B money into product development is one of the best ways for a startup to improve its competitive edge.
5. Responding to Increasing Demand
By the time a company reaches the Series B stage of its fundraising journey, it will have already established itself among a core group of users or customers. As the business continues to grow and demand for the product or service increases, so do expenses. Not only does Series B funding help startups continue their upward trajectory of growth, but it also helps them keep pace with the costs of rising demand as the business becomes more and more successful.
3 Businesses that Benefited from Series B Funding
Dropbox, GitHub, and Airbnb raised some of the largest Series B rounds in history. Let’s take a look at who invested, how much, and what the companies did with the funds.
In 2011, Dropbox raised $250 million dollars in one of the largest Series B funding rounds ever, led by the venture capital firm Index Ventures. At the time, Dropbox had already gained widespread traction in the business world thanks to its easy-to-use file storage and file sharing solutions. The company used their considerable Series B funding to ramp up user acquisition efforts, hire key roles, and pursue new strategic partnerships.
GitHub raised another of the largest Series B rounds in history, also valued at $250 million, in 2015. The round was led by the VC firm Sequoia Capital. GitHub used its Series B round to accelerate growth and to expand its engineering team — but the company’s founder, Chris Wanstrath, also emphasized that the round would allow GitHub to “think bigger and take larger risks.”
Airbnb raised a $112 million Series B funding round in 2011, led by VC firm Andreessen Horowitz. Airbnb had already succeeded in disrupting the hospitality industry, and used the Series B funding to set its sights on new and diverse global markets.
What to Expect from Series B Investors
Investors who provide Series B funding are not interested in developing an idea — they’re interested in scaling a successful business. At the Series B stage, investors want to see strong proof that your company has a reliable customer base and is generating substantial revenue. You should come prepared to share a numbers-based overview of your company’s performance that includes information about revenue (current and projected), valuation, risk management, and more.
Investors at the Series B stage aren’t necessarily looking to take a risk. Of course, any investment comes with some degree of risk, and investors know this, but a Series B investment should be a much safer bet than a seed or Series A investment. Series B investors are looking to add fuel to operations that are already running smoothly and have room for even more growth.
When an investor decides they want to invest in a startup’s Series B round, the VC and the startup will typically create a term sheet that defines the amount of capital to be invested and the expected returns. One of the most common ways that startups provide returns to VCs is by issuing shares of preferred stock that pay out dividends.
How to Find Investors
Usually, venture capitalists are the most likely investors at the Series B stage. The best way to connect with venture capitalists is to build your network, since VCs are much more likely to consider investing in a founder who comes recommended by someone they already know. Finding someone in your network who can introduce you to a VC — preferably someone the VC has invested in before — is one of the best ways to make a positive first impression.
You can also connect with experienced VCs online to get feedback on your pitch deck or advice on where to find investors in your niche. Mentorcam can connect you one-on-one with real experts who can turn their expertise into tailored insights to help you get the funding your business needs.