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Series B Financing



Definition

Series B financing is the second round of funding for a business through investment, including private equity investors and venture capitalists. This stage comes after a company has achieved certain business milestones and is typically used to expand market reach, develop new products, or increase production capacity. Funds raised in this round are typically higher than those in earlier rounds given the company’s proven track record.

Phonetic

The phonetic spelling of “Series B Financing” is: ‘ˈsɪərɪz biː ˌfaɪˈnænsɪŋ’.

Key Takeaways

  1. Series B financing is typically about taking the company to the next level, past the development stage. Investors help a company expand market reach during this stage.
  2. This stage of financing is usually offered to companies that have shown consistent and solid progress. It’s also relevant when the business model is sound enough for a sustained return on investor’s capital.
  3. The amount raised during the Series B round is generally higher than the previous rounds. This is due to the larger stakes offered to investors and also because the company is seen to be less of a risk than it was during its early stages.

Importance

Series B Financing is a critical stage in the growth of a start-up company since it coincides with the phase where the business is moving beyond the developmental stage, transitioning into a fully-functioning entity. It’s typically the third round of financing after seed and Series A funding, marking an important milestone for a start-up that has proven its concept, achieved certain business metrics and now requires significant capital to scale operations and expand market reach. Thus, Series B funding is important because it aids companies in accelerating their growth and solidifying their standing in the market, often enabling them to hire more staff, invest in technological infrastructure, finance marketing and advertising initiatives, or even facilitate further research and development.

Explanation

Series B financing is a crucial phase in the funding cycle of a new or rapidly growing business. It serves a pivotal role in enabling the company to scale up, facilitating growth beyond their initial development stage and propelling them into a phase of expansion. This type of funding is used predominantly to finance major growth projects such as expanding their team size, business development efforts, sales and advertising, or even acquisitions, which are capital intensive but crucial for the company’s growth and profitability. The objective at this stage is not just survival but growth, and the funds are typically utilized to achieve business milestones and enhance the firm’s market reach. This level of funding is typically provided by venture capital firms, often with input from the same investors who led the previous funding round (Series A), along with potentially new investors that see potential in the company’s growth trajectory. Series B financing represents a higher level of confidence and greater risk-taking by investors since it assumes that the business model of the firm is working as anticipated, the product or service market fit is achieved, and the company is ready for expansion. By investing, they expect profitable returns once the company is either sold or goes public. Thus, Series B financing functions as a critical bridge between initial development and the pursuit of market dominance.

Examples

1. Uber: In December 2011, Uber Technologies Inc., a ride-hailing platform, raised $37 million in a Series B financing round. This funding was led by Menlo Ventures, with participation from Jeff Bezos’ Bezos Expeditions and Goldman Sachs. This capital was used to expand its service to more cities and to invest in technology and talent. 2. Canva: In January 2018, the graphic design tool company Canva secured $40 million in Series B funding. This round was led by Sequoia Capital, which valued the Australian-based company at $1 billion. This funding was used to support its goal of becoming a platform for all aspects of design and to fuel further international growth. 3. Peloton: In April 2014, the fitness company Peloton raised $10.5 million in Series B funding. This round was led by Tiger Global Management, and the funding was used to expand Peloton’s retail footprint, open additional showrooms across the U.S., and support the production of original fitness content for its users.

Frequently Asked Questions(FAQ)

What is Series B Financing?
Series B financing is the second round of funding for a business through investment including private equity investors and venture capitalists. This follows initial capital given in seed funding and Series A round.
When does a company generally go for Series B Financing?
Companies generally go for Series B financing when they have successfully navigated the initial startup phase, have a fully-functional product/service, and are now looking to expand their market reach.
How is Series B financing different from Series A or Series C financing?
Series B is generally a larger amount than Series A as it’s used for bigger tasks like expanding market reach, acquisitions, or significant operational scale-up. However, it tends to be lower than Series C financing, which is typically used for things like major acquisitions, huge expansion efforts, or to prepare the company for going public.
What are the common sources for Series B Financing?
The common sources for Series B Financing often include private equity investors, venture capitalists, and other institutional investors.
How much funding is usually raised in a Series B round?
The amount varies significantly depending on the industry and individual company needs, but on average, a Series B round can raise between $7 million to $10 million.
What do investors get in return for Series B financing?
In return for their investment, Series B investors receive equity in the company. They receive shares of the company’s stock, which can potentially be sold for a profit if the company increases in value.
What is the level of risk for Series B Financing?
Every investment round comes with its unique set of risks. However, Series B is generally considered less risky than Series A because the company is usually somewhat established and has a clearer financial track. Nonetheless, the risk remains as expansion plans may not deliver expected results.
What are the requirements for a company to qualify for Series B Financing?
The company must have a strong management team, a proven product or service (generally with strong consumer base), a clear business model, and substantial evidence that the business model is working successfully.

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