VCs on VCs: what VC investors are looking for at Series B

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Post Series A, tech companies are constantly auditioning for Series B investment. But Series B is not just about attracting investors, it’s about attracting the right investor.

Our research report found that CEO-founders tend to meet with at least 12 potential Series B investors before finding an agreement and the average Series B investment pipeline spans seven months. To help find the perfect match, it’s important to focus on what tech-focused VCs are looking for: alignment, potential and resale value.

Alignment

“Founders should only be looking for investors who have a track record specifically with their type of business and product in their type of market.” – Partech

VCs are known for their ‘ruthless spreadsheet’ model: where companies in a portfolio fund compete for the VC’s resources to eventually become ‘the one company’ to return the fund. On the one hand, that means it’s not the be-all and end-all for VCs if your company flames out as their risk profile is pooled via the portfolio, whereas the risk is total for the founder. On the other hand, VCs really do want you to succeed and this interest increases when your company is more closely aligned to their goals.

Given VCs are good at selling themselves, scaling companies need to understand that alignment is the starting point for finding the right Series B investment. For example, Octopus Ventures recommends founders look for a fund with long-term approaches, who are less likely to make knee-jerk decisions over leadership changes and expectations, and reference the fund beforehand by reaching out to companies that are not on the logo page of the VC’s website.

Partech agrees, noting that investors with a long-term vision will be less driven by revenue at all costs and more likely to support customer value, distribution or footprint if they’re not focused on rapid growth and resale.

Potential

“Market size and potential is probably the most important thing to VCs in their decision to invest at Series B.” – Episode 1

VCs are not democratic: they will allocate more time and follow-on money to the companies that have the best chances of success. At Series B, therefore, VCs will be looking for well-run companies with efficient business models that simply require capital funding (not wholesale changes) to grow even further.

Between Series A and B, founders need to implement scalable systems, have a thorough grasp of their unit economics and use metrics wisely to show the company can earn repeatable revenue. Founders also need to spin the right narrative around these numbers, so they can sell a convincing growth story to investors. But, none of this matters if there is no market opportunity. VCs invest at Series B in the aim of either growing the business to be sold at later rounds or take them through to IPO at a high valuation. If they’re not convinced there is considerable market opportunity in the long-run, then revenue potential is under threat and VCs are unlikely to invest.

Resale value

“The way I see our role is helping to make sure our companies run a super tight fundraising process and making sure that they raise the next round.” – Notion

Remember why VCs are in this game. Like you, they have their own business models, challenges and goals. Like you, VCs want to grow your company and see it succeed. Unlike you, VCs might not be in it for the long haul.

VCs tend to specialise at various stages of investment: some with smaller funds try and find unicorns at Series A, while others pile in during late-stage rounds when the risk is smaller, but the price could be 100x higher. As such, Series B VCs are not just looking for long-term potential, but also the ability to grow significantly over the subsequent fundraising round and excite larger VCs that will typically get involved in later rounds.

A mutually-beneficial collaboration

VCs care about their reputation. They don’t want a bumpy ride, so founders looking for Series B investment should be aware of VCs’ intentions and make it as easy as possible for them to work with you for a mutually-beneficial partnership. For more insights on VC investment at Series B from CEO-Founders and leading tech-focused VCs – including Episode 1, MMC, Octopus Ventures, National Capital, Partech, Next47 and Beringea – download our research report: How to get from A to B with the benefit of hindsight. 

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