Anyone who has ever stumbled upon an article in Bloomberg or TechCrunch has probably already heard the phrase "Series B funding". Some of us might even remember way back in 2011 when Uber raised a whopping $32 million during Series B or when Airbnb raked in $112 million, but what does it mean? How are companies raising so many millions during Series B and why? As it turns out, this specific round happens at a pivotal point in the life span of most startups.

Series B funding may not be as make or break as a Series A financing round, but it’s still a wildly important step in the life span of a young company. A little more than 20% of startups get there, and about 14% wind up getting acquired during this round, but the failure rate swiftly continues to sink after that. Only around 10% of companies are still standing by Series C.

If a company is going to make it, it’s likely going to happen before or during Series B, so startup owners should know how to maximize their chances of success.

How Funding Works

All funding starts with an idea — an idea so brilliant that the founders sink their own savings into it. This early-stage round is called the preseed round, and like you’d expect from people launching a new company from nothing, preseed money generally comes right from the co-founders’ pockets (or their family, a credit card, a bank loan and a crowdfunding campaign on a website like Kickstarter).

The next phase is the seed round, which is typically fueled by angel investors or seed-funding hedge funds. This gets the startup out of the garage and into an office and is followed by the first round of venture capital funding, Series A. After that comes a Series B funding round and, if a company is lucky, a Series C round.

Throughout this process, potential investors are hoping to eventually earn a profit. Investors, particularly venture capitalist investors, generally get partial ownership of the company in the form of equity when they put money down. Before each round, analysts evaluate a company on everything from track record and market share to management, size and risk in order to give it a valuation, which helps new investors gauge what to spend.

What Companies Get Series B Funding?

Series B financing is different from Series A funding because the company is already past the development stage. During Series A, companies will only get around $2 to $15 million and may turn to equity crowdfunding because an anchor investor hasn’t yet taken a bite. Investors can be skittish during Series A because these kinds of startups haven’t really had time to grow their consumer base, are still working on market research and can’t prove that their business plan is ultimately going to work.

This isn’t totally the case with Series B, where companies should already have a substantial customer base. For example, Airbnb was already operating in 89 countries and had booked a million overnight stays by the time it got Series B funding in 2011. Generally, Series B is used to grow a company that has an increasing demand that it can’t meet. Costs go toward:

  • Product development
  • Talent acquisition
  • Business development
  • Advertising
  • Sales
  • Technology
  • Additional support

On average, companies raise $32 million in the Series B round, which is well over twice what the average company makes from Series A, and there’s good reason. Series B companies are valued at an average of $58 million.

Who Are Series B Investors?

Funding generally has two parties: the company that hopes to get money and the people who are giving it to them. In Series A, B and C rounds — the most popular VC funding rounds, though it can expand through later stages like E, F and beyond — investors generally include venture capital firms, private equity firms and occasionally angel investors or crowdfunding. In this regard, Series B doesn’t function much different than Series A.

Like the first round of VC funding, Series B is equity financing, and it’s generally led by an anchor investor who helps break the ice for other investors. These are all generally VC firms, private equity firms and institutional investors that specialize in late-stage funding, though investors from Series A may choose to further invest. Companies at this phase are usually selling convertible preferred stock that can be changed into common stock (this helps protect the investors' investment), and the shareholders do not all get voting rights.

Series B and Crowdfunding

Though investors during Series A, Series B and Series C funding rounds are usually VCs and private equity firms, companies have been increasingly turning to equity crowdfunding platforms, which allow the general public to participate and protect their ownership from being held by one or two VC firms. This has been made possible by the Jumpstart Our Business Startups Act.

There are pros and cons to equity crowdfunding. The levels are limited per investor, but there’s a larger pool of investors from whom to pull than the usual late-stage VCs. There are a number of online platforms that specialize in connecting series-level startups with investors at a low cost, so it's generally a bit easier to navigate for someone who has never been through the process before and may not have access to top VC firms.

The Pros and Cons of Series B Funding

When you’re presented with the potential of getting millions of dollars — money that is seemingly handed to you for free — it’s hard to say no. Though that cash can indeed take a company to the next level and help it meet a demand it otherwise would not be able to meet, money never, ever is free, especially not in the cut-throat world of startups.

If you take any form of equity financing, you run the risk of losing control of your company — at least a little bit. Many VC firms insist that a company have a certificate of incorporation that includes provisions about which actions require a vote from the board of directors. That means you will no longer be able to freely do things like launch another round of funding, fire or hire a C-level executive or, in the case of Elon Musk, even remain on your own board (yes, BlackRock voted to remove the Tesla founder from his own board).

When Series B begins, most companies have one VC investor on the board with voting rights, and they usually have to add another one once they take the Series B money. Most companies at the Series B phase have a board that includes:

  • Two voting investors
  • Two founders
  • Two independent directors chosen by the board

At this point, a company is half owned by someone else, and founders only lose more ownership in Series C (unless, of course, the company is acquired, in which case it doesn’t matter).

The Path to Series C

Many companies in the Series B round face a huge dilemma: Do they want to grow to be the type of company that can one day acquire other companies, like Facebook, or do they want to be the company that is acquired? If it’s the former, companies will need to move on to a Series C round, the main purpose of which is to scale a successful company as quickly as possible.

There’s a lot to look forward to in Series C, but a Series B company will likely have to grow to an average valuation of around $115 million to get there. It’s a lot less risky to invest, so hedge funds, investment banks and secondary market groups step up to the table. A company can also start acquiring other companies or merge with a like-minded competitor who has a large share of the market. Most commonly, once a Series B company makes it to Series C, it will stop running external equity funding and gear up for an IPO, which is often seen as the end game in the startup journey.