Getting to B: Running a Successful Fundraising Process
There’s a lot of advice out there about how to pitch your startup during your Series B round. This isn’t that.
This is about process. Specifically, the behind-the-scenes process of preparing your company for a successful Series B fundraising round. The pitch itself is just the tip of the iceberg. Under the waterline is a complex project that touches every part of your business--and competes with your attention as you continue to lead your company.
To help founders organize and prioritize, we put together this short guide to the Series B fundraising process. Wherever possible, we draw clear connections between investor expectations and tactics for preparing your company to exceed those expectations.
Scale published a template for the financials in a Series A/B data room.
The Big Picture about the Series B Fundraising Process
The best way to ensure a successful Series B round is to manage the fundraising process as carefully as you manage your business. The challenge is that you need to do so while in a race against time.
Startups tend to have about five to six quarters between their Series A and Series B rounds. And though it may be counterintuitive, the more efficient you are at deploying capital, the faster you’ll grow and the sooner you’ll need additional capital.
When it comes to Series B fundraising, everything takes longer than expected. And more than anything during this period, founders and CEOs are under pressure to find the time to do everything well. Resist the urge to cut corners: investors will look at your pitch (and the process that went into making it a great pitch) as one measure of effective leadership.
As you start gathering data and thinking about how to present, keep in mind that investors will prioritize 3 areas:
- A pitch that convincingly communicates how your product wins in a large market, and a clear path to leadership in that market
- Clean financials showing strong growth, backed by top-tier benchmarks on the “Vital Signs” metrics: growth, churn, efficiency, and cash burn
- A management team with the skills and experience to go the distance
Now let’s look at some of the tactics that can help you show off your company in the best light.
Timing Your Series B Raise
The first consideration is straightforward: don’t wait until the last minute.
Keep an eye on your cash position to give yourself the time to find the right investors for your company. Startups at this stage have about six months of runway following their Series A rounds. These days, a well-run Series B fundraising process can be as fast as a month, but budget a few months to be conservative.
You also want to raise on strength. Investors will be laser focused on your most recent performance. Sequential quarters of strong growth communicate that your company is performing well now and imply that it will continue to perform well into the future. Choppy growth leads to a lot of questions and distracts from your pitch.
This is another side to our earlier advice to manage your raise like you do your business. Don’t get caught flat-footed by a tough quarter. Plan ahead to give yourself the flexibility to raise at the right time.
Overview of the Fundraising Project
It can be helpful to look at your Series B like any other project, and apply project management best practices. Here are the key steps to plug into your Gantt chart.
Prepare your data room. This has the longest lead time, so start early. While the Series A round may be “metrics light,” expect Series B investors to place far more emphasis on financials and operating metrics. You can see what we look for in this template for the financials in a Series A/B data room.
Prequalify 10+ relevant firms. The universe of top-tier venture firms with in interest in your product category is probably smaller than you think. Set yourself up for success with thoughtful networking early in the process. One often overlooked tip: check your customer base for VC-backed startups that love your product, then try to get in front of their investors.
Research who is the best fit at your target firms. Venture firms are comprised of partners with individual interests and specialities. Handoffs between partners inside the same firm are rare so, again, do the legwork to determine which partner is most likely to be interested in your company.
Find champions. Leverage your team’s personal networks and connections-of-connections to identify contacts who can make introductions to your target investors. Venture investors always want to meet promising companies but, like most professionals, value introductions from people they’ve worked with previously.
Hone your pitch. Don’t pitch your top choices first. Instead, practice, practice, practice then take a few initial meetings so that you can iterate on your presentation and optimize your answers to common questions.
Once you’ve launched the process, try to keep your target investors at the same stage. What you don't want to happen is to have one VC so far out in front of the others that they’re ready to bid before you anyone else. The best outcome is multiple investors ready to issue a term sheet at the same time.
Storytelling in Your Pitch
How you tell your story is certainly critical to a successful B, but not in the brand marketing sense. Start by asking: What do you want investors to walk away thinking? How will they describe your company to their own partners? A good pitch delivers clear takeaways and a compelling story.
Complexity can kill a good Series B story. Early in your process, develop a clear narrative that trims out anything extraneous. Founders and their teams are deeply engrossed in every last detail about their market and business. Investors have more narrow interests.
The true test of a strong pitch is how well select the facts and data that say the most about your company’s long-term prospects. Aim for the smallest number of details necessary to explain your market and how your company impacts it. That will include an explanation of unit economics, verifiable market size calculation, and strategically selected KPIs moving up and to the right.
One good way to test whether you’ve successfully reduced your story to a compelling and orderly presentation is to pitch to people outside your industry.
Demonstrate a Path to Leadership
Investor expectations in a Series B company are context-specific. A startup establishing a new market faces different expectations than one disrupting an established vertical. That aside, practically every investor is going to want to see you demonstrate a clear path to market leadership.
One of the key changes to investor expectations today versus just a few years ago is an increased focus on data showing your company is already far along the path to leadership. When Series B rounds were $20M or $25M, investors would accept a certain amount of aspiration. Today that’s rarely the case.
The logic from a venture perspective is straightforward. Early market leaders attract more capital, deploy it efficiently to advance their leadership, then attract additional capital to scale operations further.
Founders are often surprised just how early investors decide whether or not a company is on the path to market leadership.
Series B Investors Look at Your Hiring
Series A rounds emphasize founders. Series B investors want to see how effectively those founders attract and retain a highly qualified team who is already executing on a successful go-to-market strategy.
Different firms and investors will emphasize different aspects of the management team, but two factors are pretty universal. First, investors want to see that practically every member of your senior management team knows the market and, ideally, has a track record of success within it. Second, there shouldn’t be too many unhired senior roles. Where there are, investors want to see that you’ve thought through the profiles of your remaining key hires. Smart hiring is a core requirement for successful scaling.
When Presenting Metrics, Less is More
Metrics are key, but that doesn’t mean a wall of metrics is what investors want to see. You can make life easier on prospective investors with a clean data room. The data you disclose should mirror the metrics that you use to track your business. We want to see that you have a firm grasp on your unit economics.
Your data room should also allow investors to calculate your company’s Four Vital Signs: growth, sales efficiency, customer retention, and cash burn rate. Investors really appreciate when a company has done the work to benchmark their relative performance using a tool like Scale Studio.
Yes, there are a lot of moving parts with a successful Series B fundraising process. Remember that getting it right--the right investors, the right timing, the right amount of capital--will be rocket fuel for your company’s growth trajectory.
And help you and your company develop expertise needed for future fundraising.
Susan Liu contributed to this article
Originally published October 21, 2019.