The Differences Between Series A and B Funding

Fundraising is a vital part of the startup journey. Not having enough financing, or not utilising their investment properly, is one of the primary reasons that so many startups fail. So, it’s safe to say that funding plays a pivotal role in a company’s success.

Ultimately, all startups want to achieve high growth, but this usually means they will have to burn through their investments. When the capital is about to run out, the company will move on to the next series of fundraising, leading to making a profit and the founder exiting the business. The series of fundraising cycles is to sustain growth: from the seed stage to Series G. In this article, we’ll discuss Series A and B: when is the right time to start fundraising, what investors are looking for at these rounds, and how to prepare for pitches.

What’s the difference between Series A and Series B?

Series A: After a business successfully goes through the initial pre-seed/seed funding phase, the company will generally initiate a series of funding rounds to obtain investment. Potential investors include angel investors, private investors, and high-net-worth individuals. The series rounds begin with Series A, after the company has some kind of financial backing already, and a position in the market. In the Series A round, founders should showcase a developed business plan and trajectory that will pique investors’ interests.

When is the right time to raise funding for a Series A round?

While the lines between seed funding and Series A funding are sometimes blurred, we are considering Series A to occur when a company is on its way to finding its product-market fit. The service or (some of the) products have already been made, and now it’s time to scale the business. The company will usually have established customers and 10+ employees. There isn’t a one-size-fits-all answer, but companies generally move from the seed stage to Series A in 18 months.

Learn more about the right time to fundraise from our conversation with a B2B software specialist from Octopus Ventures.

What are investors looking for in Series A startups?

At this early stage, investors want to see innovative and realistic ideas that they can genuinely get behind. Investors’ position in the company differs, but some might take a hands-on approach to help shape the company and navigate the startup maze.

Investors also want to see that companies have successfully acquired customers, but also want to see how that can be repeated multiple times over with a wider customer base.

How to prepare for a Series A fundraising pitch

Pitching to investors is your opportunity to demonstrate the potential of your company. A well-executed pitch deck will deliver a compelling narrative, and hopefully obtain investment. At this stage, fundraising pitches tend to be mission-driven, but it is also important to show traction. While proving traction will depend on your business, month-to-month growth of customer sign-ups or revenue is a good place to start. Having over 6 months of consistent month-to-month growth will really demonstrate sustainable growth, but if that isn’t the case, you can still win investors on side by proving scalability.

It’s crucial to demonstrate your understanding of product-market fit in a Series A fundraising pitch. Look at the data to show how the market is responding to your product and analyse retention curves. But remember to show the human side to finding your product-market fit, which could come from customer feedback, consistent users, and media buzz. Establishing your product-market fit is an art and a science – our article details the steps to finding it and understanding how to measure it.

Series B: At Series B, a startup will be more established and developed than at Series A. They will have advanced from their business model and having a ‘great idea’ will no longer cut it – they must show tangible results and forecasts. Investors will pay a higher price for equity in the business at Series B, as the risk is generally lower. However, it doesn’t come easy. At this stage, investors have more information to go on for their due diligence. Companies must show that they have effectively utilised the investment from Series A, that they have successfully run the business since then, and the effectiveness of their management team.

When is the right time to raise funding for a Series B round?

While there is no specific timeline for raising funding, companies generally wait at least two years before raising their Series B round of funding. Some companies will try to wait as long as possible in between rounds to wait for the optimum time: a pick-up in the market. However, cultivating investor relationships and nurturing the relationships you made in the Series A round should be a year-round strategy.

What are investors looking for in Series B startups?

There is no global benchmark for success, and what investors are looking for will vary across industries. However, Series B startups must prove that their business has had success, it’s evolved, and that there is still room to grow. Essentially, Series B startups must show that they are past the initial development stage, and it is ready to succeed on a larger scale. Startups at Series A might not yet know the marketing channels that work for them, whereas Series B should confidently know this. Similarly, startups at Series A might have not yet tested their product abroad, while Series B startups might be starting to test their product or service in another relevant market, such as the US.

How to prepare for a Series B fundraising pitch

• Firstly, Series B fundraisers should get potential investors excited before the pitch. Prepare your investors in advance by circulating your deck and sending key metrics at least 48 hours before the meeting.
• Be sure to consider every possible question that your investors might ask you and prepare an answer with confidence.
• You should also have impeccable commercial awareness at this point – know your competition inside and out, and explicitly show how your business outperforms competitors in your space.
• When fundraising at Series B, you might be presenting to established firms with a portfolio of successful investments. Your pitch should be tailored accordingly.
• Let successful metrics validate that you are worth the investment. Detail exactly how you used the previous round of investment and demonstrate a sustainable growth trajectory. Show significant growth metrics, such as year-on-year customer count. If possible, compare your growth data against that of your competitors.

How Finerva can help

Running a fast-growing startup or scale-up is a difficult task. It can also be unpredictable, with competitors, marketing strategies, employees, and finances to take into consideration. Preparing for the next round of fundraising can seem daunting. At Finerva, we’re passionate about helping fast-growing companies and offer a wealth of services for founders. From offering actionable advice on forecasting or valuations to working with an established and experienced Venture CFO, our team of dedicated accounting and financial experts ensures that your company is on the right path. For more information about how we can help, please get in touch.