The latest data paints a concerning picture for startups looking to raise Series B rounds. According to Crunchbase, U.S. startups are facing the longest Series B closure times since 2012, with a median of 28 months between Series A and B funding[1]. Out of 4,400 startups that raised a Series A in 2020-2021, only 1,600 (36%) have gone on to secure a Series B[1].

 The Series B Crunch

Raising a Series B has always been a critical and challenging milestone for startups. At the Series B stage, investors expect to see strong business fundamentals, scalable unit economics, and a clear path to profitability[1]. Many startups that looked promising at the Series A stage stumble when it comes time to prove out their business model and show sustainable growth.

In the current environment, with tighter VC budgets and a flight to quality, Series B investors are being even more selective. They are focusing their dollars on startups with exceptional metrics and category-leading potential. Even well-funded Series A startups with strong teams and products are getting caught in the Series B crunch.

 Sector Bright Spots

It’s not all doom and gloom though. Some sectors, particularly artificial intelligence, are still attracting large Series B rounds from investors eager to back the next breakout company.

Elon Musk’s xAI, for example, raised a massive $6 billion Series B just 6 months after its prior round[1]. Other hot AI startups like Anthropic and Adept have also raised supersized growth rounds in short order.

So while the bar for Series B is higher than ever for most startups, there are certainly exceptions for buzzworthy companies in the right sectors catching investors’ attention.

 Advice for Founders

For the majority of startups, the key to navigating the perilous Series B landscape is to plan ahead, be realistic, and explore all options:

– Start early: Given the long Series B closure times, it’s never too early to start building relationships with potential Series B leads. Plant seeds 6-12 months ahead of when you’ll need the capital.

– Shore up insider support: The path of least resistance is often an insider round led by existing investors. Make sure you’re communicating proactively with your Series A investors and getting their buy-in to preempt or at least backstop your Series B.

– Consider alternatives: If traditional Series B funding is proving elusive, look into alternative financing options like debt, revenue-based financing, or even an early exit to a strategic acquirer. The name of the game is extending runway however you can.

– Be scrappy: With funding hard to come by, it’s time to shift into scrappy startup mode. Cut burn, extend cash, and do more with less. Demonstrate to investors that you can execute in a capital-efficient manner.

Raising a Series B in this environment is undoubtedly challenging for most startups. But with foresight, creativity, and grit, savvy founders can still find a way to get it done. After all, constraints breed innovation.

 AI tools were used as a research assistant for this content. Written by Brent Huston with aid from Perplexity.

Citations:

[1] https://www.bizjournals.com/sanfrancisco/inno/stories/inno-insights/2024/07/18/series-b-gap-startups-higher-interest-rates.html
[2] https://houston.innovationmap.com/q4-2023-startup-funding-2666870949.html
[3] https://houston.innovationmap.com/2024-q1-funding-houston-startups-2667750361.html