Trying to close a Series B in 2023? Read this first

Originally published on TechCrunch and written by @itsmarkchaffey on 03/07/2023.

Despite ongoing economic uncertainty, there will always be a path forward for determined founders with strong ideas and smart investors with an eye for opportunity. But make no mistake, the challenges are real and sizable. Global funding in Q1 2023 was down 53% compared to Q1 2022, a precipitous drop hastened by broader market turbulence and fears of a prolonged downturn.

And the stagnation wasn’t limited to just late-stage funding either. Crunchbase analysis revealed that Series B investment in the second half of 2022 was down over 60% from the same period the year before—putting Series B investments on track to come in at the lowest quarterly level in more than three years.

With this backdrop, our company began our Series B round of fundraising in early 2023. We went into the process aware that our sector has historically suffered in a down economy, but we chose to focus on the positives—namely that our ability to close in this environment would showcase the quality of our business, and that any investors willing to make an investment despite the challenges would result in a stronger long-term partnership.

How we closed our $25M Series B in April 2023: 5 key factors

For us, we knew we were ready for a Series B when:

We were cash efficient with a burn multiple under 1.
We had proven product-market-fit and go-to-market fit with excellent unit economics.
We had strong retention, in our case a net revenue retention rate (NRR) of 149%.

From there, it was all about execution. Here are five other strategies that helped us close our Series B.

Set the foundations to scale: Team, process and expertise

Series B rounds are all about scaling the business. The scrambling and existential doubt you had as an entrepreneur won’t go away, but by this point, you should have built a strong executive team around you that is, frankly, more skilled at scaling their individual functions than you are. As soon as you land the Series A, start to lay a real business foundation — pivoting from a survival mindset to a sustainable one.

We embraced this, and after closing our Series A, we built the groundwork throughout 2019 that enabled us to take advantage of the unique opportunity that the COVID-19 pandemic created. Ultimately, this strong foundation led us to close our Series B round in an extremely challenging market.

There will always be a path forward for determined founders with strong ideas and smart investors with an eye for opportunity

Your org chart doesn’t have to be fully built at this stage, but you should have a plan to scale. When building out our exec team, we balanced homegrown talent that had progressed internally with individuals who had achieved success at the next level of scale than we operated currently.

When raising a Series B, it is important to hire execs with experience for this stage of the company. A CRO who is used to scaling from $50 million ARR to $100 million ARR has a very different skill set than what you need to scale from $10 million to $30 million ARR. For example, when looking for a VP of finance, we wanted someone with a track record of closing Series B and C investment rounds, as that was the next step for us.

Understand potential investor reservations, then create a plan to counter them

When fundraising, a common piece of advice for founders is to start with your tier 3 funds first and work your way up to pitching tier 1. The logic behind this is it gives you the opportunity to learn what questions investors will ask and which objections you might receive before you sit down with the big guns.

This didn’t work for us. The challenge with starting with “tier 3” funds is that the “tier 1” funds often have more context about your space (at least they should if you’ve tiered correctly) and therefore the quality of the questions they ask are far superior to the ones you’ve been prepping on from “tier 3” fund conversations.

Instead, we sought to understand the common objections investors would have about investing in our business through informal catch-up calls when we weren’t in fundraising mode. This enabled us to understand potential investors’ objections upfront without going through the “tier 3” to “tier 1” process while still addressing those objections directly. In these introductory conversations, we were frequently asked the following:

“What sets you apart from others doing the same thing?” To help guide our answer to this, I reached out to a longstanding friend, John White to help. John wears many hats in the venture space – part angel, part syndicate lead and founder of growth advisory arketyp. John helped us stay focused on first principles and the long-term tangible value we’re delivering that enabled us to transform our story from “what” problem we solve and “how” we solve it to “why” we matter right now. John was perfect for the task, as whilst he isn’t a deep expert in the talent market, he has probably seen more investor decks than anyone I know, and his experience in enterprise tech and willingness to continuously review the deck and refine and iterate the narrative was invaluable.

“How will the macro environment impact your business?” Every time an investor turned on the news during the time we were fundraising there was another story about a tech company laying off 20% of its staff, creating a formidable narrative for a tech hiring platform! To counter, we proactively created a memo explaining why we’d be resilient in a macroeconomic downturn. It focused on our ideal customer profile—typically enterprise organizations going through massive digital transformation—and why they are protected against dips in the economy. While we still received many no’s based on the macro environment, it positioned us to handle these objections upfront and find investors that had conviction.

It’s a numbers game!

UpFront Ventures managing partner, Mark Suster coined a very famous line: “invest in lines, not dots,” a strategy that I believe is key to a fruitful fundraise. Long before we kicked off our Series B effort in earnest, we nurtured a long list of potential investors with quarterly check-in calls. I’d dedicate one week per quarter to 30-minute conversations with potential investors where we discuss our business strategy and exciting product changes.

In turn, they shared potential objections and feedback on our growth to date. By the time we kicked off the raise, our shortlist of investors already had several quarters of data on our performance.

From there, it’s a numbers game. Targeted research will help narrow down potential investor teams, but finding the right fit that aligns with your sector requires talking to as many people as you can. When we sat down and looked at the numbers from our Series B round, here’s how they turned out: 78 first-stage meetings, 5 term sheets, and 1 winner.

How did we get from 78 to 1? It’s about approaching the process the same way you’d approach sales—create a funnel of touch points along an investor’s decision journey. This approach will not only ensure that you run a tight fundraising ship but will also ensure you’re selecting the right investor to support you throughout the next phase of growth.

Build a killer data room with the right data available on demand

Most companies that have gone through Series A funding have developed solid user bases and proven they are ready for success on a larger scale. Series B, on the other hand, is focused on how to scale the company to meet those levels of demand, and you’re only as strong as the numbers you can provide to investors. Fortunately, we had an experienced VP of Finance with a track record of running successful growth-stage fundraises and came armed with a very powerful data room template. Here’s what we deemed essential:

A Loom video for a deck overview and product demo. This is critical in catching potential investors’ attention.
A Go-to-Market data book that highlights: unit economics (LTV/CAC, payback period), your MRR Waterfall, GRR/NRR, sales team efficiency, quota attainment, etc.
A financial data book with a detailed financial model, P&L, balance sheet, cash flow statement, etc. The assumptions that power the model are critical and the goal is to demonstrate a thoughtful, idyllic approach to investors based on historic performance. Given we were fundraising in a tough environment we presented three models: our board case (with a slight degradation on current performance for assumptions), our upside plan (with existing performance data used for assumptions) and a downside plan (with significant degradation on our current performance).
Finally, a marketplace data book that dives into the liquidity of the business, highlighting network effects, user acquisition strategies, CAC per channel, etc. This won’t be essential for pure-play SaaS businesses but given we’re a
marketplace, it was important for us.

Sprint to the first term sheet, but don’t overplay your hand

We have to acknowledge that we’re no longer in the fundraising heyday of 2021 and investor FOMO is nowhere near where it was then. Therefore, it’s critical to manage a fine balance between creating competition in the round to secure the best terms and not overplaying your hand to ensure investors don’t drop out.

We balanced this by setting realistic timelines for the investors we spoke with and kept them updated on how things are progressing, while also sprinting like crazy to our first term sheet. Once you’ve secured your first term sheet, you have a
lot more leverage in the process.

At this point, make it clear to other investors you have multiple offers but do not feel the need to disclose specific terms. This is how you can then negotiate the things that matter most to you.

Final thoughts: Finding the right partner for the long term

Deals are taking longer to close post-COVID and you’ll likely spend months getting to know different investors. Look for firms that get involved with their companies and have ample resources to help you succeed.

Remember, it’s not impossible to raise funds in this environment, so don’t be too hasty. Your Series B investor is your partner in growth, and the deal closing is just the beginning. We met with 78 potential investors in our process and closed a deal with what we genuinely believed was the best fund and partner we met along the way, Sean Cantwell at Volition Capital. Sean has deep domain expertise which enabled him to see past the risks of the macro environment and understand our strong differentiation.