Why can I raise a Series A but not a Series B?
Raising any institutional funding is difficult. Sometimes we make it harder on ourselves.
One of the most frequent questions I get around fundraising by CEOs with some level of success is, “Why is it so much harder to raise a series B after my series A?” In the best markets, one-third of companies that raise a series A will go on to raise a series B. In down markets, that number can be substantially lower.
Product features and differentiation are great, but series B investors are taking a risk on your ability to execute on the GTM side, not if you can build a product.
Raising a series A is really about PMF. Can you cobble together some piece of technology with bubble gum and toothpicks that satisfies a particular customer’s need so that they would give you some money in exchange for it? That’s a series A. Series A investors are primarily concerned about whether it’s possible to build this piece of technology and if the dogs will eat the food. Scale is only a hypothetical checkbox to be proven later. The mere belief that you can scale the business towards profitability is generally sufficient for a series A.
However, when you get to a series B, that hypothetical has to turn into tangible proof. The series B presumes that you’ve been able to build your widget and that you’ve been able to get a handful of customers to part with cash to use it. What series B investors are looking for is a repeatable and scalable process to acquire customers. It’s your GTM motion. Prove that you can build a machine that will acquire customers over and over and over again in a cost-effective manner. Can you answer?
- Who is that ICP?
- Where do you find them?
- Which message resonates with them?
- How much does it cost to acquire them?
- What price are they willing to pay?
- What value keeps them?
- How many more like this can you find and close?
It’s no wonder that so many companies who successfully raised a series A find themselves struggling when it comes to a follow on series B. They dust off the old deck that did so well for them in the series A, update some of the numbers and features in the product, and go back out to talk to investors. That’s not what series B investors want to hear.
Series B investors are more interested in seeing a demo of your pipeline than a demo of your product.
Your investor deck needs to talk about CAC, CAC payback, LTV, churn, marketing efficiency per dollar spent, ACV, NDR, etc. Product features and differentiation are great, but series B investors are taking a risk on your ability to execute on the GTM side, not if you can build a product.
This is a hard pill for many founders to swallow. They spent a lot of blood, sweat, and tears building a beautiful product and they want to be recognized for it. They don’t want to see the spotlight shift from product to GTM. That’s not necessarily what they’re good at and it’s often disconcerting when the most significant area of impact is something that they don’t know well, or maybe even at all.
The successful companies figure this out, but the side of the road is littered with companies who had great products but couldn’t figure out their GTM motion.
So when you’re thinking about raising a series B, ask yourself these three questions:
- Is my ICP crystal clear and narrowly focused?
- Have I built a repeatable process to find, convince, and close those customers?
- Do I have the metrics to track that progress, either good or bad?
If you can answer yes to those questions, you’re most of the way there.
