Myths about Series B

7 min read

Hi, I am Jonathan Hayashi. After graduating from University of Rochester with double degrees in Optical Engineering and Financial Economics, I worked in one of the top 3 investment banks in Japan, SMBC Nikko. Later on, I joined one of the largest VC firms in Japan, SBI, and took charge of growth stage investments in Blockchain, Fintech, and AI Sector. I joined Cornerstone Ventures in 2020.

Target audience of this article:

  • Startups who have raised their Series A from VC and are planning to raise their Series B
  • Startups who have been trying to raise Series B, but it’s not going well

Purpose of this article:

  • As I have made investments in Series B deals as both lead investor and follow investor, and as I also exchange views with other growth stage VCs, I would like  to reduce the misunderstanding or wrong idea that some startups might have, when it comes to Series B.

Basics of Series B:

  • If you are my target audience, I assume you already understand the basic concepts such as Series, Valuation, Pitch, Due Diligence, Closing, etc.
    • If not, these articles and some Google search might be helpful.
    • Yet, lots of information online are not written by VC, but by journalists or researchers, so they might be describing how Series B in general looks like to them.

Myth: A company is “supposed” to raise about XX million USD in Series B

  • There is no such thing as a generally appropriate range of amount to raise in Series B. They can be any number.
    • Airbnb, for example, raised a massive $112 million Series B in 2011. Snapchat’s 2013 Series B was also notable, coming in at $80 million. But Palantir only raised $10.52 million in Series B in 2006 and even Uber, well known for its capital intensive moves, only raised $38 million.
      (Source: Techcrunch)
    • Ant Financial raised $4.5B in Series B! On the other hand, Paypal only raised $23M
  • There are several ways to make sense of how much to raise, and the following are the most common among the pitches I have heard
    • The company is growing rapidly and will hit the next Series C milestone in 12~18 months, and the amount of fund that needs to be raised in Series B should be sufficient to fuel the company’s growth and expansion for 18 months.
    • The company will have a second product, so it needs to raise an amount that is enough to cover R&D or obtaining licenses/approval.
    • The company can break even in a foreseeable future, let say 10 months, and it just need to raise 10 months of working capital to cover the short term cash burn.
  • There isn’t one generally accepted way to calculate how much a startup should raise. It depends on the industry, the market, the competition landscape, the business model, etc.  Also, different entrepreneurs and investors believe in different philosophy on this topic.

Myth: Lots of VC firms invest in both Series A and Series B, so Series B investors pretty much have the same mindset as the Series A investors

  • Even if a venture capitalist does regularly invest in both Series A deals and Series B deals, he/she values very different aspects of the startups at different rounds.
  • Of course, different investors have different investment philosophy, and I cannot tell in general what Series B investors care about the most. However, below are some observations that I would like to share with you:
    • At this point, the investors are not investing in the Team, but in the Business.
      • If necessary, they might even appoint a different management team to run the business.
    • CVC (Corporate Venture Capital) love Series B, as it appears to be the perfect stage for the startups to work on synergy with large corporates.
      • CVC do not care much about financial return or exit of the equity investment per se. Instead, they conduct intensive technical due diligence and arrange many meetings between the business unit teams and the startup.
    • Financial investors like independent VCs, however, would want to hear a clear path to exit in your Series B pitch

Myth: If I raise a massive Series B from prestigious VC, I can start relaxing a bit

  • If anything, it’s the opposite. You need to arm yourself even more.
    • According to CBInsights, there were 322 rounds of Series A in US in 2019, but only 208 rounds of Series B.
    • It might be human nature to loosen up after a intense battle and a great achievement.
    • However, in fact, the more your raise, or the higher the valuation you set, or the more prestigious your investors are, there will be more pressure sitting on your shoulder to achieve growth and exit.
    • To make matters worse, now you are famous, people will start critically looking for bugs or imperfections in your service
  • Here are some examples of startups that failed, after raising successful Series B:
    • Juicero, which raised $70M from GV and KPCB in 2015, shut down in 2017, as Bloomberg and Youtubers posted videos showing how its juice machine was a fraud.
    • NextVR had a great product, with a decade of experience marrying virtual reality with sports and entertainment and provides these VR experiences on headsets from PlayStation, Oculus, HTC, Microsoft, Lenovo. It raised $80M in Series B from CITIC, Comcast Ventures, Time Warner Investments, but failed to raise its Series C later on, and sold itself to Apple at a valuation of $100M, which is even lower than the total amount of fund it has raised.
    • Betterplace’s $350M Series B was the largest venture funding round in 2010. Yet, it was close three years later. There are lots of great articles online that analyze why Betterplace failed while Tesla is going great.
    • OneWeb, a company with great vision to build a space-based global communications network, raised $1.2B from Softbank Vision Fund in Series B, filed for bankruptcy in March 2020.

One piece of advice:

One of the best ways to have a correct understanding on Series B, might be developing a close relationship with VC that have invested in your Series A, and think about how to raise your Series B in together with them.


The Future Is Unwritten.

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