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The purpose of a Series A and Series B

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Back in May Nicholas Lovell (pictured), author of the Gamesbrief blog, and former games entrepreneur and analyst published an e-book entitled How to Publish a Game which is an excellent manual for developers who are considering how best to get their games to market in the new, iPhone enabled, world of self-publishing.

Prior to publishing he asked me to take a look at the financing section and since then I have been keen to post the following excerpt on when and why entrepreneurs should raise a Series A and Series B round of venture capital.

Series A

The amount raised in a series A is falling, particularly for Internet and online companies. As so many services can be outsourced, bought in where necessary or hosted in the cloud and scaled according to demand, the need for upfront capital is correspondingly reduced. Series A can be anywhere from £500,000 to £3 million. Its purpose is to take an existing product, team and market niche and tweak them until they are firing on all cylinders. This may involve hiring new staff, adjusting the pricing structure or business model of the core product or adding new features.

The ideal outcome from Series A would be build to a successful, profitable business that could survive on its own. Many founders may, at this point, choose to continue to grow organically over time. But if they want to move faster – much faster – they might raise a Series B round.

Series B

Series B funding is rocket fuel for companies. It may be anything from £5 million upwards, and its purpose is to take the company into the stratosphere.

It’s time for Series B when all the stars are in alignment. The core team has executed well so far, the product is successful and the market is clamouring for more. Series B is not about taking risks, or experimentation. It’s about taking something that works and scaling it as fast as possible.

This can often be a tricky time for founders. It’s when entrepreneurialism gives way to execution, which often means that investors want experienced executives at the helm. It’s a time of transition for the company when many of the things that made the company successful in the first place – disruption, innovation, underdog status – may no longer be required.

(Many venture capitalists may disagree with me, and say that companies with £10 million or more of funding can still be innovative and disruptive. That may be true, but a company of that size is likely to have many departments, perhaps spread globally, and can no longer be run just by a single CEO who is on first-name terms with all the staff. Making this change requires professionalisation. If entrepreneurs understand that this is the process that they are going through, they can be better informed about how best to help the company grow, or decide to leave because their work is done.)

I like this for it’s simplicity and distinction between pre-product/market fit, and post-product market fit (to borrow a concept from Marc Andreessen – check out this post, 3/4 of the way down).  There are lots of different ways to think about financing a business, but thinking about the Series A as giving you time to tweak an existing product/service until it is humming and then a Series B to fund customer acquisition and growth is the right place to start.

If you are in the games business Nicholas’s book is well worth a read.

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  • Olli Pölönen

    Thanks for sharing this very informative piece. I find the definitions of Series A and B very creative and more useful than typically. Could replace the ones they give on school theory books to these ones.

  • http://www.theequitykicker.com brisbourne

    Thanks Olli

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  • http://twitter.com/rkteck1245 Fred T

    Thanks for setting the parameters. I hope that if it's a bigger market share, Series B Funding can still consider and accommodate companies that still have the ability to disrupt – even though its magnitude was lesser than the first target market.

  • http://www.theequitykicker.com brisbourne

    Thanks Fred. I'm not trying to say that innovation stops, more that the first product will usually be working, taking market share and have an effective sales model by the time you get to Series B. The vast majority of the market won't have been disrupted yet and there is always scope for new products.