8 venture capital firms explain how they assess a startup before investing in a series B


Story by: Simon Thomsen Startup Daily

Congratulations! You founded your startup, survived the infamous "Valley of Death" for early stage financing between seed rounds and Serie A. Your company is on the streets now, with products and revenue.

But maybe your story is about growth (* waves at BNPL fintechs *) and the cash burn continues. There comes a time when you need a new injection of capital from a Series B round.

Check size is much larger – typically between $ 10 million and $ 20 million – as the company's valuation rises and early investors decide whether to duplicate your idea. Perhaps a more complex deal has to be put together by several investors.

So how do you land a successful Series B?

We asked some of Australia's leading VC investors what milestones they expect from a startup and what advice they have for founders looking to take the next big step in raising capital.

Here's what they said.

Dan Krasnostein
Partner, Square Peg Capital

Square peg partner Dan Krasnostein

Square Peg is a global venture fund with investment teams in Australia, Israel and Singapore. We are currently investing out of the $ 600 million we raised in 2020 and typically working with founders very early on a business's journey, often in the seed phase.

We prefer to do rounds and often invest in the same company over and over again. In the last few years we have invested in over 40 rounds in the A and B stages in companies, including Airwallex Zeller Rokt and FinAccel .

I hesitate to offer general fundraising advice, knowing the importance of context for good advice.

With this in mind and with a view to Square Peg's global perspective, there are some milestones against which founders can measure themselves if they consider their willingness to invest.

In the seed phase, an investment typically depends on the hypothesis that the founding team and their vision are exceptional. In the A phase I would look for the beginnings of the product market fit, and in the B phase I would assess if there are any signs that the team is building a scalable engine for all key functions: hiring, sales, product , Development, etc. You will find that none of these ratings are metric driven. There is no magic sales figure to beat.

For Aidoc an AI company that helps radiologists find critical anomalies, the transition between Series A and B was largely characterized by maturation in their sales process. In particular, Aidoc switched from founder-run sales to a sales team-run sales team and closed several tier 1 customers. But it will be unique for every company.

It is important for founders to understand that the distinction between the rounds is becoming blurred. We see a greater variance in the round size and evaluation in all phases and in all regions.

The most important aspect of fundraising is working with investors who align with your vision for your business and how you will get there. It is important that you prioritize relationships with investors who value your contribution as much as your company.

Ultimately, the best advice in fundraising is never to run out of money and develop a beautiful product or service that your customers will love.

Rachel Yang
Partner, giant leap

Rachel Young, partner of the Giant Leap Fund.

Giant Leap invests in early stage founders, typically in the Seed or Series A phase.

We continue to support and invest in our portfolio companies during the Series B rounds and beyond. This is an important part of our strategy to help these companies continue to grow, so let's take a close look at this.

To date, we have assisted a number of companies in this leap, including FutureSuper GlamCorner Amber Electric and Sendle who have it all have managed to scale their impact alongside their sales growth.

For us, the difference between a company ready for Series A and a company ready for Series B is an important shift in business focus.

The Series A phase is about finding product market viability – making sure your idea actually solves a problem for your customers and is commercially viable.

Series B is about consolidating this offer and shifting the focus to expansion. By the time you reach this round, ideally you should have a playbook on how to grow the business and you are reaching out to investors with a proven strategy.

Another perspective is the role of the founder.

In a Series A company, we would expect the founder to be fairly ingrained in the management, sales, and promotion of the product. They have to be practical in most respects.

However, at a Series B company, they should shift their focus to management and begin building their executive team to run the company. Still gripping, but steering rather than the driving force behind it.

In terms of what investors look for in a good Series B investment, it's solid sales and a good track record of hiring talent after your Series A round. You need more investors with a Series B round Provide numbers.

You will want to understand more nuanced details like your churn, unit economy, and customer lifetime value. This is simply because an investor wants to see a strong foundation in the business to allow for scaling.

Finally, it's worth noting that your Series A investors are there to help you – even if they're not investing directly.

They want to see your success and will coach you to do so. So have this chat with them early on, understand what you need to build your next deck, and work towards it together.

Richard Lin
Investor, Airtree Ventures

Airtree Ventures investor Richard Lin Photo: Ryan Stuart

At AirTree, we focus on making our first investments in start-ups early on, so Series B is rarely the first time we invest in a start-up.

Instead, most of our Series B investments are in our long-standing portfolio companies. Just as no two startups are alike, no two paths from Seed to Series B are the same.

Please take the following points as general guidelines and not as fixed rules.

With those two caveats out of the way, there are generally three things we love about startups that are on their way to run a Series B:

Signs of the development of a world class organization

Start-up investments often depend on the team, and Series B is no different. While Seed and Series A are about the founders and the early team, Series B is about how the company is prepared at an organizational level for the next phase of growth.

We are particularly pleased that the company is successful in hiring world-class talent – especially at the executive / vice president level. It is equally important that the organization offers an environment and a culture that can successfully retain these talents.

Our Series B investment in A Cloud Guru is a great example. Before the round, the company managed to successfully recruit a COO, VP Sales and SVP of Partnerships. In addition, the founders – Sam & Ryan – thought proactively about culture from the start.

Continuous evidence of product-market fit

With Series B, a startup should really demonstrate its suitability for the product market. Unique to the Series B phase is that there should be plenty of data to assess the level of product market fit from a quantitative point of view.

Some very rough rules of thumb would be that the income doubles year after year with a high deductible (both gross and net).

A great example would be the second time we have invested in LinkTree. At this time, the company grew well above forecasts and showed success in selling into new market segments.

Early indications of a scalable go-to-market engine

Series B-laps often reflect the opportunity to pour more fuel into a newly launched engine.

As a result, we often see the first signs that companies are successful with a broader range of channels (e.g. content marketing, channel partnerships, outbound etc.) as well as a sustainable unit economy (e.g. short CAC paybacks).

Justin Lipman
Partner, EPP

EPP partner Justin Lipman

Typically, a Series B investor is looking for a proven "engine" that can be scaled up. You're looking for a move to market that shows signs of profitability. If a company were to increase its sales and marketing efforts very significantly, it can be reasonably certain of growth in sales. Simply put, if I give you $ 1 for growth, I'll get> $ 3 back over time.

For EVPs focused on Series A investments, we are very pleased to take the execution risk at launch. Often, scalable growth channels are still identified and iterations through different acquisition efforts can be common. Experimentation is the order of the day. A Series A investor focuses on the early signals that a product or service really solves a problem for a young group of commercial customers, but not that the company has made its way into widespread acceptance or widespread adoption of its solution.

Series B investors also tend to have higher expectations for human capital and leadership skills. It is expected that an early C-suite or level of management has been established and that the company has the appropriate talents to understand the specific playbook for the next phase of growth.

After we have lived through the EVP portfolio, the over 750 million whether the team deployed probably has a long-term competitive advantage over the market.

Given that a Series B company is inherently later in its development, investors expect a more mature product. This is often investigated through cohort analyzes or analytical evaluations of product engagement and product use, which can provide an insight into long-term value creation.

While in a Series A phase investors may have limited long-term data to rely on to create metrics about customer loyalty and product usage, in a Series B phase a company is expected to have its customers with his offer can sometimes inspire for many years.

SaaS companies, for example, should now show that the use of their service by the companies increases over time or that customers are willing to pay for the service consistently over many years (and often to increase their expenses).

These signals serve to reduce the investment proposal of a series B investor who is looking for a certain level of protection in order to accompany the future upside potential.

EVP is an early-stage, Sydney-based venture capital company with over $ 150 million in assets under management. EVP partners with exceptional founders to build Australia's next generation of great software companies. The company manages three funds and has a portfolio of over 30 companies. These include some of Australia's most successful startups such as Siteminder Deputy Practice Ignition and Shippit .


Benjamin Chong
Partner, Right Click Capital

Benjamin Chong from Rick Click Capital

One of the most common questions I am asked is: What are you looking for in startups? I often answer by saying that our company evaluates three key criteria: team, market opportunities and timeliness. We like teams that have a combination of technical, commercial and professional expertise.

If a startup plans to build its competitive advantage based on leading-edge technology, it is crucial to have experienced technical co-founders on board from the start. The size of the potential market is an important consideration for investors. The bigger the market size, the greater the chance of building a bigger business. In the early days of a startup's life, traction is proof that things get done. Are promises kept? Have milestones been reached? As the startup evolves, the traction includes the demonstration of product-to-market fit, revenue growth, and scalability.

For startups that collect money in the pre-seed or seed phase, we place greater value on team over market opportunities and traction. For startups raising money in Series A and B, the order changes, with an increased emphasis on traction and market opportunities. Why? As more capital is invested in a company, investors want scalable sales growth. They want to add fuel to a missile that is pointing in the right direction.

Practice Ignition is one of the startups we supported on this journey.

Co-founders Guy Pearson and Dane Thomas lead a team whose software helps accounting firms of all sizes create powerful online client proposals and manage ongoing client engagements. On their way from seed to series A to B, they listened to their customers and refined their product range in order to achieve a high product market fit for different segments of the bookkeeping and bookkeeping market.

Through this process, they have experimented with different sales channels, examined the relative costs of each and the short and long term results with customers. You are now engaging (and satisfying!) New customers in a scalable manner.

Series B funding is comparable to rocket fuel. Startups need to have strong traction and metrics. If they point in the right direction, funding can accelerate their success.

Laurence Schwartz
General partner, our innovation fund

OIF general partner Laurence Schwartz

The transition from Series A to Series B is a crucial moment in a start-up's journey – companies need to demonstrate that they can acquire and retain customers on a large scale and that they have strong positive momentum on key metrics such as sales, customer acquisition costs Have Customer Lifetime Value and Product Engagement.

It is an important time to build the team, especially the senior management – important new hires at this stage can accelerate growth and product roadmap implementation as the company expands. Maintaining and strengthening the team culture and customer love in the course of business growth is extremely important – and often a challenge.

In this phase, we also see companies accelerating offshore expansion – from both a customer and a team perspective.

Expansion specifically into the US market is usually our focus and we seek the ambition to land and expand on large global markets.

We partnered with a number of founders and companies – Go1, Instaclustr, Kasada and Assignar, among others – who took this trip to the US between Serie A and Serie B to help them identify both opportunities and also address challenges and connect them with senior US VCs to lead the next round of funding.

Michael Tolo
Director, Blackbird Ventures

Blackbird director Michael Tolo

At Blackbird, we invest in wild hearts with the wildest ideas, right from the start and at every stage of the journey. We are increasingly investing in Stage B ANZ companies, including recent investments such as the Agtech startup Halter and the SaaS customer data platform Lexer.

For Series B investments, we are looking for companies that have increasingly demonstrated their suitability for the product market and the ability to efficiently acquire new customers (or to expand existing customer relationships).

We want to see the product have a core set of features that actually solve the problem it was trying to solve, and signal that customer love for the product doesn't wane with size.

We also look at the upcoming product journey: What does the product roadmap look like and which improvements can be made during the series B phase in order to achieve the next growth spurt.

Against this background, there is no central metric for startups that run a Series B round, and the measures of success differ greatly between industries and industries.

The best startups will build funding strategies around specific milestones that reduce the critical path to scale, while investors need to remain vigilant and flexible in how we set milestones that define success during a funding round.

Martin Duursma
Partner, Main Sequence Ventures

MSV partner Martin Duursma

The most important criteria investors look for when assessing a startup's readiness for a Series B raise are evidence of scaling and product market viability.

Regardless of what product, service, or solution a start-up is offering, venture capital firms are trying to determine whether the start-up is ready to move into the next funding cycle.

To demonstrate the scaling, this can look very different, depending on whether it is a SaaS company or a deep-tech company, the latter having a much longer sales cycle.

We also look at team make-up, specifically how they grow and whether they add and complement all of the skills required. On the sales side, we look for product market fit and clear evidence of a repeatable sales cycle.

We have three different companies in our portfolio, but all are planning or have launched a Series B round and beyond.

v2food, which pioneered the plant-based meat industry in Australia, closed $ 77 million Series B funding in October 2020.

We had seen clear customer demand for v2food and increasing sales both domestically and in Southeast Asia, with the product being available in fast food chains such as Hungry Jack’s and supermarkets. With the development of a production plant, v2food is really in scale-up mode.

Advanced Navigation produces inertial navigation systems that allow vehicles to navigate without external signals such as GPS.

For Advanced Navigation, we consider scaling sales both domestically and internally, with reorders from major Original Equipment Manufacturers (OEMs) integrating the product into their offerings.

These types of sales are a major growth driver as the OEM bases its product on a key capability provided by Advanced Navigation. Due to this scaling, Advanced Navigation is in the "zone" for a further capital increase.

Gilmour Space is on a completely different path than others. It builds rockets for launching satellites into low earth orbit, where the sales cycle is very long as the "sale" occurs every time the company launches a rocket.

A long, very complicated and capital-intensive process is required to get there. Companies in this space tend to do a number of capital increases, Series A, B, C, and sometimes more, before launching their first rockets.

In this case we see the strong technical progress on your platform and early orders from customers as evidence of the next round of capital.


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Source References: Startup Daily