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How to Get Funded After Failing to Raise a Series B

I've recently seen the movie Miss Sloan, in which Jessica Chastain, my favorite actress, yells:

Know your subject, people!

She used a biblical verse to argue that failure to know a subject may result in losing a golden opportunity.


It is accurate in the startup industry, especially in these uncertain times.


Credits to Miss Sloan


If you have taken the VC path, a Series B may seem like the most obvious funding option after a Series A.


However, other options exist and shall not be forgotten, mainly because Series B is the most challenging financing round. In this stage, vision and promise must be associated with data, facts, and hard numbers showing a clear path to success.


Imagine after building a product, raising a $2m Seed, getting product-market fit, then raising a $10m Series A; your business isn't scaling anymore.

You are in what we call the Series B trap.

The Series B Trap happens when companies raising a Series A ramp up spending but don't achieve the growth targets they promised at financing.


A Series B Trap is a challenging place to be. It's the place of lay-offs, restructuring, 2x preference bridge round, down round, and above all, little-to-no capital available to fuel growth.


However, you have options. Today, I am giving you a play to access alternatives source of capital by using the feature/benefit/value framework.


The feature/benefit/value framework is something learned in Sales 101:

  • A feature is a fact about your company.

  • A benefit is how that feature helps your buyer, expressed in terms of loss or gain.

  • The value aligns the benefits provided with the buyer's larger goals and objectives.

This framework is well-known by e-commerce entrepreneurs, and it can be leveraged in fundraising and M&A, which are basically high-value buying processes.


As a Series A VC-backed company looking for alternatives, let's dive into these alternative players' buying processes.



It starts by knowing who these potential buyers are, grasping what they are looking for, and then giving them what they want.


First, who are the potential buyers beyond Series B VC?


I have identified two types of players that are a good fit for Series A VC-backed companies: VC-backed scale-ups and Strategic serial buyers.


Thanks, Thomas, but who are they, and what are they looking for?


A VC-backed scale-up is using M&A as a growth engine


A scale-up is a company that has validated its product-market fit and has proven sustainable unit economics.


It's basically a Series A VC-backed start-up that has managed to raise a Series B, a Series C, and beyond.

These companies operate in a context where the growth rate determines whether a company thrives, survives, or dies.

To understand this Grow Fast or Die Slow framework coined by McKinsey, it is essential to approach growth as an episodic event. There are three critical phases: the intro, act one and act two.


The intro is about finding an offer appealing to a broad customer set. It's the Seed stage.


In act one, companies have found an offer that scales in serving customers and delivering revenues. The Series A and B stages help companies sustain growth by expanding the initial offer to new customer segments or geographies.


However, in most cases, the adoption curve will reach its natural limitation, and the initial offer will no longer fuel the growth engine. For these scale-ups to sustain growth, they must find their second act to become Tech companies.


Some scale-ups use M&A as their act two. M&A can act as a massive growth engine, but deals must be carried out strategically to avoid a high failure rate.


A strategic serial buyer performing Programmatic M&A in Tech


Programmatic M&A is the play of performing at least two small or mid-size deals a year around a specific business case.

This play is a good fit for Series A VC-backed companies as they need the EBITDA scale to interest most strategic buyers.

Strategic buyers seek to maximize shareholders' value, commonly represented as an EBITDA multiple. A Series A VC-backed companies usually have a negative, maybe a breakeven EBITDA.


For most strategic buyers, buying a Series A VC-backed company won't have a direct accretive impact on the shareholders' value. They, therefore, prefer to focus on large EBITDA-scale companies.


These large, less frequent deals are contrasted with a programmatic M&A approach performed by some buyers in which EBITDA scale is not a prerequisite.


Programmatic M&A has proven successful in all sectors and enjoys a higher shareholder return than large M&A deals.


M&A deals can deliver benefits to help VC-backed scale-ups and strategic serial buyers to get value: growth opportunity and higher shareholders value creation, respectively.


To complete the Series A-oriented feature/benefit/value framework, we must understand what kind of benefits M&A deals can provide.


To avoid the high failure rate of such M&A deals, successful buyers articulate an M&A deal rationale around these three archetypes:

  • Product Line Expansion with Products Ready to Go-to-Market

  • Business / Geographical Expansion with Immediately Accretive Revenue

  • Low-cost Talent Acquisition


Product Line Expansion with Products Ready to Go-to-Market


Tech Integration


Any gaps in a buyer's product offering can create churn and disturb the ability to acquire new customers.

Buying a Series A VC-backed company with a product completing or enhancing the buyer's product can solve this problem.

On the one hand, this type of M&A is complicated, requiring the highest technical and operational level of product integration.


On the other hand, it's a big win if it works. Indeed, integrating both products successfully can shorten timelines and quickly bring value to customers.


Business / Geographical Expansion with Immediately Accretive Revenue


Tech Acquisition


Beyond a certain point, companies run against their market size or market share from their core product or service.

If a Series A VC-backed company has an established product-market fit, purchasing this company can induce growth thanks to an applicable customer base.

In these types of transaction, the Series A VC-backed company usually continue to operate as a whole alongside the buyer teams.


To succeed, it's essential to ensure a cultural and technological fit. Most importantly, ensuring the synergies between both companies enable market share capture at low costs.


Low-cost Talent Acquisition


Acqui-Hire


Significant competitive advantage can be gained by having the right talent.

Acqui-Hire refers to acquiring a company with talents but not a viable business model.

For instance, if the skills and businesses are complementary, an inadequate business model with a strong tech team or an innovative sales and marketing team but limited tech can offer disproportionate value to the buyer.


Acqui-Hires can be a win for the buyer and a lucrative face-saving option for the seller, but many things can go wrong, from cultural clashes to misaligned incentives.


Here is the complete Series A-oriented feature/benefit/value framework:

  • your Series A VC-backed company is the feature

  • your company can deliver benefits expressed through the M&A deal rational

  • the M&A deal will ultimately deliver value.


This framework is powerful because combining a deal rationale with the buyer's needs will generate strong interest and establish trust.


However, the job of scale-ups and strategic serial buyers is not buying companies. Unlike PE and VC investors who love it when opportunities come in, these alternative players will have their guard up if you'll approach them.

Buying decision are made with the heart but justified with the head.

By establishing trust, you can win the heart. But the head is still saying no. In all buying-process, people always hesitate to proceed because they fear the consequences of the buying decision. It's called the perceived risk.

The higher the product is priced, the higher the perceived risk.

In our case, we talk about 8-figures deals. If you hesitate to buy a house worth hundreds of thousands of dollars, imagine purchasing an asset worth tens of millions.


That's when reassurance comes in. To calm fears and get a deal, here are three common questions you must be prepared to answer:

What is the value you provide to your client, and how can I leverage that value?Are you trying to pass me the buck?Am I overpaying?

Here are clues to answer these questions.


What is the value you provide to your client, and how can I leverage that value?


Answer this by performing a deep customer and product due diligence


Deep customer and product diligence helps buyers to understand the value available and how it can add that value to their business.

From my experience, focusing on quick wins through a deep examination of historic customer buying behavior is the most powerful dealmaking catalyst.

Indeed, insights from such analysis help buyers articulate at a granular level where the short-term synergies will come from and set aside funds to invest behind them.


Transformative revenue synergies, such as new customer value propositions, combined product offerings, and updated go-to-market approaches, can be more complex and take longer to realize.


That's why the importance of quick wins compensates for the fact that, as a sub-scale business, you won't directly impact the growth rate or the EBITDA.


Are you trying to pass me the buck?


Answer this by being a capital-efficient company


Through customer and product diligence, buyers define short, mid, and long-term synergies and invest behind them.

However, they won't risk their investment's value going to zero if they have to inject cash to pay wages or suppliers post-closing.

It's the case of many Series A VC-backed company that has scaled prematurely. Imagine Pre-Series A, your company has grown and scaled well with little invested capital.


You pitch a big growth story and raise a $10m Series A at a $50m pre-money valuation. Then you hire and spend like never before to meet growth and revenue targets, overbuilding the team and ramping up marketing spending.


You need to manage to raise additional funds to avoid being left with fixed costs that revenues can't cover. In other words, you have a business alive only on external cash perfusion.


You will only win their head if you consider converting your cash-burning company into a capital-efficient one.


Am I overpaying?


Make the difference between implied value and enterprise value.


If you have raised $10m at a $50m valuation, I won't be surprised if you believe your company is worth $60m.

However, the $60m is an implied valuation.

Selling 20% of your shares for $50m only means that 20% of the company is worth 50m. We don't know the value of 100% of your shares, the enterprise value, post-Series A.


Raising $10m at a $50m valuation means that you will use the $10m to try building a company with an enterprise value of $60m in various market scenarios.


Enterprise value is calculated with the Discount Cash Flow methodology or DCF's proxies like ARR multiple.

If your investors gave you a 30x ARR valuation multiple, it doesn't mean that buyers will also give you that same multiple.

Their equity story (deal rationale) is different from your VC.


In summary, if you are a Series A VC-backed company looking for alternatives beyond Series B:

Look for VC-backed scale-up using M&A as a growth engine or strategic buyers performing programmatic M&AApproach them using the feature/benefit/value framework to establish trust and win their heartPrepare all the reassurance elements in advance to win their head

I'm done! I hope you will land a deal!

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