What is Series B Financing?

Series B financing is the second round of funding for a business through investment, including private equity investors and venture capitalists. Successive rounds of financing a business are consecutively termed Series A, Series B, and Series C financing. The Series B round generally takes place when the company has accomplished certain milestones in developing its business and is past the initial startup stage.

In a Series B financing round, companies have advanced their business, resulting in a higher valuation by this time. Companies can seek various ways to raise funds in a Series B financing round. Series B investors usually pay a higher share price for investing in the company than the earlier investors through the Series A financing round.

Series A financing involves capital raising for startups with a solid business model. Series A funds are usually from private equity firms and are used to expand operations by buying equipment and inventory as well as hiring staff. Series A funding is considered seed capital since it's designed to help new companies grow.

Series B financing is the next stage of funding after the company has had time to generate revenue from sales. Investors have a chance to see how the management team has performed and whether the investment is worth it or not. As a result, Series B financing tends to have less risk associated with it versus Series A financing. However, Series A financiers get in at a lower share price to help compensate for that risk.

Publicly-traded companies can raise capital or money by increasing the number of equity shares issued on the open market. However, one of the drawbacks of raising funds via the issuance of new shares can be share dilution. Dilution occurs when the existing shareholders see their percentage of ownership decrease as a result of new shares being issued. Dilution can lead to a lower stock price and valuation, which can be disconcerting for early investors.

To help mitigate the risks of dilution, Series B equity investors typically prefer to receive convertible preferred stock versus common stock. The preference stems from the various anti-dilution features that are available for preferred stock investors. Also, preferred stockholders are paid dividends before common stockholders. Dividends are cash payments from the company to its shareholders.

In addition to the public markets, businesses have an increasing number of fundraising resources for which they can obtain capital. In Series B funding, companies often utilize their previously pursued fundraising channels due to familiarity and reporting convenience. In some cases, the early investors from the Series A financing may want to up their stake in the company by lending them more money.

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