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How to raise a Series B

Late-stage investors tell us what makes startups stand out.

By Connor Bilboe

If you thought that landing your seed or Series A round was painful, think again. Securing a Series B is often harder.

“You are still early in the maturity curve but need to be able to evidence that the company is well on a path to becoming a global leader,” says Nicola McClafferty, a VC investor at Draper Esprit. 

While Series A investors expect a startup to show evidence that its product has true potential, at Series B investors want to see a proven track record of new business milestones and progress, backed up by stacks of metrics showing impressive growth.

That means not all startups make it to Series B. According to Dealroom data, European companies landed 200 Series A funding rounds in Q3 2020, but just over half that managed to scrape a Series B, with 107 rounds reported. 

There are, however, many ways to improve your chances of raising a Series B. Sifted spoke to a bunch of top late-stage VCs to find out more.

Be crystal clear on your go-to-market strategy

In most cases, startups have already proven their product by the time they come to raise Series B — but they often continue to focus too much on the product and fail as a result. 

Instead, your focus should be on your go-to-market strategy, say both Elina Berrebi, founding partner at Gaia Capital Partners and Lucile Cornet, VC investor at Eight Roads Ventures.

Be clear on what moving into new markets means for your company. “International expansion is usually sold as an essential part of the use of proceeds, but most times the go-to-market strategy is unclear,” says Berrebi.

When pitching international expansion plans to late-stage investors, be pragmatic and precise instead of too ambitious. “It is more convincing to elaborate on one or two key geographies with a granular and precise approach, instead of speaking of 10 countries and being too simplistic for each,” adds Berrebi.

Present investors with plenty of data on markets; if they realise you’ve misunderstood something, it won’t look good. “Not having a strong grasp of market potential — whether inflated or too low creates a challenge for fundraising,” says Dave Rosenberg, head of marketing, business development and private equity for EMEA at Oracle NetSuite. “Lack of data and detail in this area will leave open questions for investors about your product and category.”

Finally, make sure you’re ready to act on your-go-to market strategy too. It should be “functioning and ready to scale,” Cornet tells Sifted. 

“Don’t become overly focused on metrics. Series B is about finding the balance between the narrative and the metrics.”

Get a good business management system

Optimising your tech stack at this stage could reap big rewards. The key is to have a sophisticated set of tools that shows your next potential investor valuable and promising information about your business. But what kind of stuff are they keen to get their eyes on?

Having a fully optimised tech stack is not essential at the Series B stage, says Draper Esprit’s McClafferty, but the “management team [should ideally] have good visibility and access to all of their business data to support key decision making, people management and the fundraising process”. 

The sophistication of this data varies between business-to-consumer (B2C) and business-to business (B2B) companies, adds McClafferty. Nevertheless, important tools and software for most companies include sales customer relationship management (CRM), customer analytics, enterprise resource planning (ERP) and integrated financial reporting.

Rosenberg agrees that financial data and CRM systems are imperative to help a company scale when wooing investors. He also reminds business-facing companies that managing data and metrics is just as important as it is for consumer-facing companies, even if it might not seem as essential on the surface. “Your business management system is a core part of your business infrastructure and an extension to your product, even though it is not consumer-facing,” Rosenberg tells Sifted.

It’s also worth adding a business intelligence (BI) tool to your tech stack, to compile data from finance, marketing, sales, team and more — and then sharing that with potential investors. “A few startups actually give direct access to their BI tool during due diligence, which is a great proof of transparency,” Berrebi says.

On the operational side, Cornet recommends tools like Funnel.io to centralise marketing data, or Spendesk for spend and management tracking.

Mesmerise investors with metrics

Having a good business management system is just the tip of the iceberg. Companies often fail to show enough data to demonstrate their chance to dominate the market, says McClafferty. So what kinds of numbers do investors want to see from them and what should you be tracking?

Cornet says some important metrics don’t make it into pitch decks often enough. “Details about the sales cycle, win/loss ratio and conversion rates of the pipeline are all highly important indicators that I rarely see.”

Don’t forget to highlight how you’ve managed your money either. “It’s easier to prove you have a sound business model when you can show you’ve been capital efficient from seed and Series A, while small and nimble,” says Berrebi.

Meanwhile, demonstrating that your business is sparking international interest and customers are returning will earn you brownie points in Cornet’s eyes. “It is always positive to see international traction, which proves that the product can work in another geography. [At Eight Roads] we focus a lot on topline growth combined with customer retention and satisfaction, which — especially in times of Covid — shows the resilience of the business and proves that the product is ‘mission critical’ as opposed to ‘a nice to have’.”

“Not having a strong grasp of market potential — whether inflated or too low creates a challenge for fundraising.”

Other metrics for startups to keep track of include revenue growth, annual recurring revenue (ARR), market growth and customer acquisition cost (CAC). “Basically, any metric that can go up and to the right should be going in that direction,” says Rosenberg.

Investors aren’t fools, though, so be realistic with the numbers you pitch. “On metrics, startups tend to be overly optimistic and not rigorous enough about their lifetime value projections, with only 1 to 2 years of cohorts history. A good understanding on why we are where we are today and an explanation of where we could reasonably land tomorrow (accounting for churn) is already a good ground for discussion,” says Berrebi.

“Don’t become overly focused on metrics. Series B is about finding the balance between the narrative and the metrics. Companies still need a compelling pitch around why they are best positioned to win a very large market,” adds McClafferty.

Be resilient — especially now

Raising a Series B at the moment isn’t necessarily harder than it was pre-Covid, but it might take more time, says Rosenberg. “[Fundraising] just takes a lot longer due to proximity and scheduling. For companies, there are a lot of distractions right now so you have to be highly aware of the fundraising process and make sure you are marching down the path to success everyday.”

Demonstrating how you’ve adapted over the last year could help you stand out, says Berrebi. “How companies have reacted in the lockdown period with regards to things like strategy and layoffs tells investors a lot about management resilience and vision. Developing a strong environmental, social and corporate governance (ESG) policy is critical right now.” 

Investors are really eyeing those resilient startups that have shown great results in this tough climate, says McClafferty. “The best companies — those that have shown exceptional execution, growth and good cash management even through this difficult year — continue to raise really strong B rounds from top investors.”

Oracle NetSuite’s software is already used by over 22,000 companies to make quick and efficient decisions. Join Sifted Talks and Oracle NetSuite for a virtual panel on November 5 where we’ll be discussing the financial decisions every fintech should be thinking about. Sign up here.

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