11 Jan 2018  |  Thoughts

Learnings from our $12.5m Series B

6 minute read

How a B round differs from an A round and how to smash it.

Below is a slightly longer version of an article that I wrote for UK Tech News, published on 2nd January 2018.

Paddle has just announced a $12.5 million Series B just over a year after raising a $3.2m Series A 🎉. Notion joins the Paddle family and BGF Ventures and Kindred Capital have both increased their holdings. This is cause for celebration, and is a big endorsement of our mission to become the operating system for software companies.

However, in spite of the plaudits and the PR this feels more like the end of the beginning than the beginning of the end. Paddle may already be growing at an incredible rate - over 3,000% over the last four years - but we are all aware that the hard work doesn’t stop here…

As CFO of Paddle for the last 3½ years, and having spent a decade in financial services before that, I have spent most of my career either fundraising or running similar processes. At Paddle I have helped manage 2 seed rounds, a convertible bridge round, our Series A and now our Series B. So here are some pointers on the difference between A & B rounds and also how to best prepare yourself for a successful fundraising round.

How do Series A and Series B differ?

TL;DR Be prepared for an extra degree of rigour from investors at Series B, however it may take less time than you think.

The key differences, in my experience, are:

  1. There are fewer funds in London / Europe who can write a $10m+ cheque vs. a $2-5m cheque, and only a handful of world-class funds who can really add value. In Notion, we have found investors who do bring clear added value to the table: they are in my opinion the foremost European B2B and SaaS specialists.

  2. After you get the A round away, you’ll suddenly get loads of inbound interest from VC funds. FOMO is strong in the venture community (no-one wants to miss the next unicorn).

  3. At Series A you will have product market fit but you probably haven’t built a repeatable go to market strategy. By B, it is easier to demonstrate real traction and conversely harder to hide behind vanity metrics. Tom Tunguz eloquently sums it up as an in-between round.

  4. Linked to the 3 above 👆: fewer funds, better visibility in the market and more traction means less time wasted and can lead to an accelerated process. As context, Paddle’s A round took almost 5 months from initial meetings to Term Sheet; our B round took around 2 months.

  5. At Series A, the focus of the VCs is all on the founders. By Series B the team that the founders have built around them become more and more important. Scaling a company from 1 to 10 people can be done force of will alone. Building a team of 50 to 100 people and beyond requires real leadership & a strong supporting team.

  6. Due diligence gets more intense as the cheques get bigger. Be prepared to share detailed customer information, offer up customer calls, have the VC meet all key people at the company before Term Sheet stage. After Term Sheet the diligence tends to be more legal and financial oriented (albeit very detailed) and may also include personal references on the management team.

So how do you position yourself to smash it?

No two processes are the same, however for Paddle there was definitely less imperative to raise cash at Series B. Much of that was down to preparation: from about 6 months after Series A we wanted to be in a position to raise money whenever the timing was right.

This was achieved in 4 ways:

  1. Constant dialogue. Maintain a dialogue with a small number of investors that you think can really add value to your company (not just provide the capital). This may be as a great advisor or mentor, or through domain expertise, their rolodex or because you’re expanding into a new geography. Even if you’re months off fundraising it’s worth making the time. Investors like to be kept in the loop and given regular updates on progress. Also, if they think they can pre-empt a process, it gets their competitive juices flowing.

  2. Be open & transparent. Be honest and straightforward with potential investors, anything else is just poor practice and you’ll get found out sooner or later. Be up front about timing and whether they’re getting privileged access. Also, don’t be afraid to share some metrics with them. We put together an investor dashboard which contained some basic figures which we updated monthly and sent to investors with some commentary (MRR, no. of customers, ACV, Churn etc.). Not sufficient for their diligence or containing anything commercially sensitive, but enough to keep them in the loop and Paddle front of mind.

  3. Full commitment. Once you decide to launch a process move heaven and earth to get it done. Get on that plane. Take those meetings. Push to hard deadlines. This may seem an impossible task, given that you’ve got a business to run and are already doing 100 hour weeks. But you’ve got to find a way. Momentum is everything.

  4. Do the heavy lifting up front. When we decided that we were going to go for it, we front loaded our preparation. This means that you’ll be as ready as you can be for any curve ball information requests during the process (as you’ll have nailed the essentials). To get to Term Sheet stage you’ll need (as a minimum) an Investor Deck, a valuation underpinning the amount you’re looking to raise and a three year financial model. Beyond Term Sheet you will need a data room containing a bunch of dull but important information covering statutory information, IP, financials, employees, contracts etc.

That sounds daunting - are there any shortcuts?

If you’re not naturally organised or process driven, you can hire someone in to help. There are plenty of bright, young McKinsey, Bain or Goldman alumni around who can run one of these processes in their sleep. You won’t be able to completely let go as you and your senior team will still be the repositories of information - not to mention the vision. However, you may be able to divest responsibility for some of the more tedious aspects (i.e. populating the data room) and get someone to share the burden on the investor deck and model which will take a few weeks to nail.

Conclusion

Getting Series A funding is awesome, but in reality all it means is that you get 12-18 months to prove your model before raising a Series B. Per Crunchbase data, around 45% of Series A funded companies in the US fail to raise a Series B. The best way to avoid the graveyard is to build an awesome product that delights customers and to have persuasive founders who can convey a compelling narrative about how their success is inevitable. Obsessive preparation won’t be the main reason for a successful raise, but it can help you to avoid screwing it all up.