The third stage of startup financing or the second stage of venture capital financing
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Series B financing (also known as series B round or series B funding) is one of the stages in the capital-raising process of a startup. Essentially, the series B round is the third stage of startup financing and the second stage of venture capital financing.
How Does Series B Financing Work?
Similar to the previous stages of financing that include seed and series A financing, the series B round is a type of equity-based financing. In other words, investors provide capital to a company in exchange for the latter’s preferred shares. The majority of the deals include anti-dilution provisions like in the series A round. This means that a company usually sells preferred shares that do not provide its holders with voting rights. However, the shares often come with a convertibility option (i.e., the holders of the preferred shares can convert their shares into common stock at a future date).
Series B financing is appropriate for companies that are ready for their development stage. They are companies that generate stable revenues, as well as earn some profits. Also, such companies generally come with solid valuations of more than $10 million.
The proceeds from the series B round are primarily utilized to support the company’s growth to the next level. The capital raised can be used in various ways, such as sales, marketing, talent acquisition, and developing new technologies.
Participants in Series B Financing
The key players are generally the same as in series A financing. Some of the investors from the previous funding stages may be willing to increase their stake in the company. At the same time, new investors enter the financing round. They are commonly venture capital firms that specialize in investments in later-stage companies, as well as some private equity firms.
Investors from the previous financing stages can help attract new investors into the company. Also, the introduction of new methods of financing such as online equity crowdfunding platforms makes the process more democratized. For instance, equity crowdfunding platforms allow the general public to participate in series B financing.
Note that the new investors commonly purchase the shares at a higher price than the investors who injected their money in the previous stages of funding. Thus, their returns are lower. However, the risk associated with losing their investments is lower as well.
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