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. Successive rounds of financing a business are consecutively termed Series A, Series B, and Series C financing. The Series B round generally takes place when the company has accomplished certain milestones in developing its business and is past the initial startup stage.

Key Takeaways

  • Series B financing is the second round of funding for a company that has met certain milestones and is past the initial startup stage.
  • Series B investors usually pay a higher share price for investing in the company than Series A investors.
  • Series B investors typically prefer convertible preferred stock vs. common stock due to the anti-dilution feature of preferred stock.
  • Series B funding can come from private equity investors, venture capitalists, crowdfunded equity, and credit investments.
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Explaining Series B Financing

How Series B Financing Works

In a Series B financing round, companies have advanced their business, resulting in a higher valuation by this time. Companies can seek various ways to raise funds in a Series B financing round. Series B investors usually pay a higher share price for investing in the company than the earlier investors through the Series A financing round.

Series A financing involves capital raising for startups with a solid business model. Series A funds are usually from private equity firms and are used to expand operations by buying equipment and inventory as well as hiring staff. Series A funding is considered seed capital since it's designed to help new companies grow.

Series B financing is the next stage of funding after the company has had time to generate revenue from sales. Investors have a chance to see how the management team has performed and whether the investment is worth it or not. As a result, Series B financing tends to have less risk associated with it versus Series A financing. However, Series A financiers get in at a lower share price to help compensate for that risk.

Series B Equity

Publicly-traded companies can raise capital or money by increasing the number of equity shares issued on the open market. However, one of the drawbacks of raising funds via the issuance of new shares can be share dilution. Dilution occurs when the existing shareholders see their percentage of ownership decrease as a result of new shares being issued. Dilution can lead to a lower stock price and valuation, which can be disconcerting for early investors.

To help mitigate the risks of dilution, Series B equity investors typically prefer to receive convertible preferred stock versus common stock. The preference stems from the various anti-dilution features that are available for preferred stock investors. Also, preferred stockholders are paid dividends before common stockholders. Dividends are cash payments from the company to its shareholders.

Series B Financing Resources

In addition to the public markets, businesses have an increasing number of fundraising resources for which they can obtain capital. In Series B funding, companies often utilize their previously pursued fundraising channels due to familiarity and reporting convenience. In some cases, the early investors from the Series A financing may want to up their stake in the company by lending them more money.

For startups and small businesses, Series B financing funding can come from private equity investors, venture capitalists, and credit investments. Direct capital raising from private equity investors and venture capitalists may require some specific investment constraints, such as a percentage of capital limit from each investor.

Overall, small businesses have a growing number of options from which to choose when raising capital at all stages of financing. In Series B financing, companies can select new financing methods that better fit their current situation or repeat similar funding methods as used in Series A financing.

Series B Financing via Crowdfunding

As companies grow and produce revenue, they can also attract new sources of funding through crowdfunded equity. In the crowdfunded market, businesses can offer their company for investment to an unconstrained market of retail, private equity, venture capital, and institutional investors.

Businesses can also receive loans from crowdfunded investors, including the general public. These investing activities transact through an internet finance platform operated by a crowdfunded internet finance provider. The provider connects companies with investors at low costs to both parties due to the minimized cost structures achieved through internet finance operations.

Crowdfunded investments have become popular in the small business sector, thanks to federal government support and the Jumpstart Our Business Startups (JOBS) Act. These investments also have limitations on fundraising levels and capital allowances per investor. However, crowdfunded investments provide a wider market from which businesses can receive money.

Real World Examples of Series B Funding

Although there are many examples of companies receiving private funding, two key sectors continue to be technology and healthcare. Below are three examples of series B financing.

Robotics

In February 2019, Mountain View, California-based robotics company Nuro raised $940 million in a Series B round from the SoftBank Vision Fund–giving it a valuation of $2.7 billion. The company, founded in 2016, previously raised $92 million in Series A funding co-led by Gaorong Capital and Greylock Partners.

Self-Driving Technology

Zoox, a self-driving technology development company founded in 2014, raised $500 million through Series B funding in July 2018. The Series B funding round was led by Mike Cannon-Brookes of Grok Ventures and gave the company a $3.2 billion valuation. In total, Zoox has raised $800 million.

Healthcare

Founded in 2017, Devoted Health raised $300 million through Series B funding in October 2018. The Waltham, Massachusetts-based insurance startup secured the funds from lead investor Andreessen Horowitz, Premji Invest and Uprising. Devoted Health serves seniors and offers various Medicare Advantage plans.