Although the mention of a company going through its series A or B round might bring a vague idea of what they are about to do, there is still no concrete definition of what the rounds entail. For example, Hopin raised a $125m series B, whereas for HubSpot this was $12m (source, CrunchBase). For companies that are supposedly at the same stage, such stark differences still cause confusion.
Having experience both as investors and entrepreneurs, the team at Knight Capital has had plenty of dealings with companies in various stages of growth. Therefore, in this article, we’d like to shine a light on what each round represents in our view.
Although there is no uniform definition, we generally see three schools of thought. For example, some define a series B round as the next raise after a series A round, while some use revenue thresholds. Others look at the maturity level of a company to determine in what (fundraising) stage a company is.
As software investors, we like to use revenue numbers to define Series A to C. However, as a generalizable framework, we prefer the maturity level perspective. Based on our own experience and research, as well as the interviews we held in the recent release of our book Leaders of Growth, we came to the following definitions.
The stages of funding
Raising the Seed & Pre-Seed round:
Entry point: You have an idea, product, or MVP with a vision.
Focus point during this round: You develop a product and demonstrate product-market fit. Afterward, you start commercializing your product and demonstrate minimal signs of replicability in terms of sales. In addition, you show that your solution can be generalized across your niche. From an HR perspective, you have attracted or lined up a few seasoned leaders.
Raising the Series A round:
Entry point: You have demonstrated product-market fit with your company. Retention and Engagement levels are good proxies to determine this.
To some extent, you can quantify the value proposition. You can explain well that you are operating in a large market, you have a competitive advantage and there is a clear path towards developing a defensible position. In addition, you have built a commercial process with initial signs of replicability. Moreover, you can prove that you can (initially) scale your product across certain dimensions (e.g., countries, verticals, distribution models, customer groups) in the niche you are active in.
Traditionally, the series A round is a major milestone in the trajectory of a startup, both in that it is the first major funding round, as well as signaling that your company is a viable business altogether (However, there is evidence that seed rounds are increasing in size as of recently). It is no surprise then that there is a phenomenon called the post-seed gap, where US numbers have shown that less than 10% of seed-stage companies make it to series A.
Focus point during this round: You will focus on scaling across your niche on the dimensions and show that you can win your niche. Commercially, you will transition from replicability towards predictability. Moreover, you will have to systematize your organization and establish your management team.
Raising the Series B:
Entry Point: You can prove that you do everything that you were doing before your series A at scale.
You can demonstrate strong traction levels with healthy unit economics. Moreover, you have secured a defensible and, arguably, a top 3 position in your niche. The market is large enough to, when you grow as planned, get funding from a Series C investor. You can demonstrate the path to continue scaling predictably. You have built an experienced leadership team.
Focus point during this round: Your focus shifts from winning your niche to securing market share in the broader category that you are active in. In essence, increasing your total addressable market. The company becomes more professionalized and continuous systematization is key. You must hire senior management for each functional department, and you continue building your mid-management teams. It is about doubling down on scaling sales in a smart way. In this stage, you increasingly start making capital allocation decisions towards customer segments, distribution channels, countries, and industries to generate the highest ROI levels.
Raising the series C:
Entry Point: You have won the niche as, arguably, a top-3 leader and you can provide proof points of successful expansion into a broader category.
Operating in a large market is crucial to secure series C funding. You can think of this round as what happens when you have a global go-to-market fit. Moreover, the company can show a realistic path towards an IPO. The company still has attractive growth rates and there is a path to profitability. Strong financial management processes are in place and predictability in terms of forecasting has gained importance.
Focus point during this round: Controlled growth (e.g., steering on the rule of 40 in SaaS), market expansion, and rapid scaling across geographies, industries, customer segments, and distribution channels. Also, M&A options to accelerate growth or expand the market become a possibility.
After raising a Series C companies stay focused on sustaining growth with profitable unit-economic levels. It remains to grow the total addressable market expansion via horizontal or vertical integration, or market expansion. As the company becomes bigger, it will continuously professionalize all aspects of the organization.
Please be aware that this framework mainly applies to software and internet companies in B2B and B2C environments. We like to stress that this framework does not apply to startups active in, among others, life sciences, hardware, quantum computing, or biotech.
Roles in the Finance Department related to these stages
In our recently released book Leaders of Growth, we had the opportunity to interview 47 founders and domain experts. As you professionalize the business, you also have to consider the development and professionalization of your team members. One of our contributors, Joyce MacKenzie Liu (Founder at Pegafund, Contributor to Forbes and Tech.eu) shared her view on the development of the finance role within a SaaS business:
“Thinking of Series A, you should have a Head of Finance. Someone who, in a traditional larger business would be called a Financial Controller; who is a qualified accountant, but also understands SaaS, and has scaled a SaaS business before in a high-growth environment; who can support operational needs and SaaS reporting; and ideally perhaps grow into a VP Finance role. They do not need to be well versed on go-to-market SaaS best practices, but they should have a commercial, customer-centric mindset and the aptitude to learn & pick up the SaaS revenue model quickly. This person should have strong financial knowledge of controlling cash because you want to have full governance over how money is coming in and out.
At Series B, you should start thinking about whether that Head of Finance has grown into a VP of Finance and is also the right person to become a CFO in Series C or whether you need to hire someone more experienced.
At the C stage, you need someone who is highly operational, good with data and business intelligence, and adept at thinking strategically and tactically. The key differentiation between a VP Finance and CFO is the understanding of financial markets and how to balance perceived risk-reward for investors and lenders, with the flexibility and cost of different forms of capital available for the business, while being able to systematically lead a fundraise, M&A or exit process. A modern CFO is able to lead external and internal stakeholders well.”