Series B financing is the second critical round of funding for businesses through investment from private equity investors and venture capitalists. Successive rounds of financing—from Series A to Series B and Series C—help a company achieve specific milestones beyond the initial startup phase.
Key Takeaways
- Series B financing is the second round of funding for companies that have met certain business milestones and moved past the startup stage.
- Higher Share Price: Series B investors typically pay a higher share price compared to Series A investors.
- Convertible Preferred Stock: Series B investors prefer convertible preferred stock over common stock due to anti-dilution features.
- Diverse Funding Sources: This round can include funds from private equity investors, venture capitalists, crowdfunded equity, and credit investments.
How Series B Financing Works
In a Series B financing round, companies that have advanced their business reach a higher valuation at this stage. Series B investors usually pay a higher share price compared to those in the Series A financing round.
Series A financing involves raising capital for startups with a strong business model. These funds generally come from private equity firms and are used to expand operations, such as buying equipment, inventory, and hiring staff. It’s considered seed capital since it aids in the initial growth of the company.
Similarly, Series B capital typically comes from venture capital or private equity funds. Often, the same investors from the Series A round provide additional funds during Series B, while newer investors may come onboard, attracted by the business’ growing reputation and diminished risk.
Series B financing is the logical next step once the company begins generating revenue from sales. Investors at this stage have the advantage of seeing the management team’s performance, making it less risky compared to Series A financing.
Series B Equity
Publicly traded companies can raise capital by issuing more equity shares, but this can lead to share dilution. Shareholders’ percentage of ownership diminishes, potentially lowering stock prices and valuation.
To mitigate such risks, Series B equity investors prefer convertible preferred stock over common stock due to anti-dilution features. Additionally, preferred stockholders receive dividends before common stockholders, ensuring a more stable investment.
Series B Financing Resources
Apart from public markets, businesses today have a multitude of fundraising resources. Many utilize the same channels as Series A for convenience and reporting. Early investors from Series A might also increase their stakes.
For startups and small businesses, Series B funding can come from private equity investors, venture capitalists, or credit investments. Direct capital from private sources may be limited by specific investment constraints.
Companies have growing options at every financing stage. In Series B financing, they can opt for innovative methods that fit their current needs or repeat previous financing strategies.
Series B Financing Via Crowdfunding
As businesses grow, they attract new funding sources, including crowdfunded equity. They can present investment opportunities to a broad market of retail, private equity, venture capital, and institutional investors through crowdfunding platforms.
Crowdfunded investments have gained popularity among small businesses boosted by government support and the Jumpstart Our Business Startups (JOBS) Act. These investments, although limited by fundraising levels and capital per investor, provide a vast market for acquiring funds.
Real-World Examples of Series B Funding
Robotics
In February 2019, Nuro, a robotics company in Mountain View, California, raised $940 million in Series B from SoftBank Vision Fund, valuing the company at $2.7 billion. This follows their $92 million Series A round led by Gaorong Capital and Greylock Partners.
Self-Driving Technology
Zoox, specializing in self-driving technology, raised $500 million via Series B in July 2018, led by Mike Cannon-Brookes of Grok Ventures, placing its valuation at $3.2 billion. To date, Zoox has raised $800 million.
Healthcare
Devoted Health, founded in 2017, secured $300 million in a Series B round in October 2018, led by Andreessen Horowitz, Premji Invest, and Uprising. This insurance startup offers various Medicare Advantage plans to seniors.
Timing of Series B Financing
Typically, it takes companies around 10 to 18 months from Series A to B. However, only 66% transition successfully; the remainder either fail or don’t pursue further capital.
Equity Offered in Series B Financing
During Series B and C rounds, companies usually sell about 15% of their total equity.
Average Series B Raise
In 2021, the average Series B round in the U.S. raised $45 million, a 50% increase from the previous year.
Conclusion
Series B financing represents a crucial third round of equity financing for growing companies. By this stage, startups are usually well-established, with reliable cash flows and viable products. Investments here are less risky than Series A, making Series B an attractive option for both investors and companies looking to scale.
Related Terms: Series A Financing, Venture Capitalists, Private Equity Investors, Convertible Preferred Stock.
References
- U.S. Securities and Exchange Commission. “Spotlight on Jumpstart Our Business Startups (JOBS) Act”.
- Reuters. “Driverless Delivery Startup Nuro Gets $940 Million SoftBank Investment”.
- Bloomberg Businessweek. “Robot Taxi Startup Zoox Had $800 Million and a Wild Pitch”.
- TechCrunch. “With $300M in New Funding, Devoted Health Launches Its Medicare Advantage Plan in Florida”.
- Arc Ventures. “When Will Current Series A Startups Raise Their Series B?”
- Equidam. “Equity Percentages to Offer Investors at Different Rounds”.
- Crunchbase. “What Current Series B Trends Say About the US Startup Scene”.
