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Series B – The Time and Turn For Playoffs

We all know that a ball hitting the post doesn't change the score. And inevitable is the emotion of a player when participating in a playoff phase, the famous name given to the final games of a sporting competition. A mixture of achievement for having gone through the previous selection and challenge stages, as the competition is increasingly fiercer and what is needed to pass the stage becomes more complex.

The challenge for a player at this moment is to know that the positive points of his team need to be further reinforced given the high level of competitiveness at this stage and that the negative points need to be worked on very well, as they have already been somewhat exposed in the rounds. previous ones.

Holding a Series B, as well as a knockout phase, involves much more than a dispute between players within a competition, it is the challenge of a team facing the complex ecosystem of VCs in which only “winners take it all”.

1. Player < team – the organizational structure

The player who has passed the initial selection (or fundraising) phases can no longer be a solo player. Much more than a player, the essential thing at this stage is to be the technician in assembling a team with high performance, technical capacity and a high degree of responsibility in the face of the challenges of consolidating the company's growth, minimum factors for success in a Series B.

From this stage onwards, part of the investor selection process involves getting to know the team behind the business in depth. If in previous stages average teams with some good players could win, from series B onwards the investment case selection screen requires good teams with good players.

The team's diligence at this stage is more complex and everyone gains a greater role in the process, which makes Series B practically a game of chess where each piece is a cog in a system. A bad move or a weakened organizational area can compromise the whole.

As a greater number of people will be involved in this phase, it is important to keep the fundraising project restricted to the company's most strategic people and organize the flow of information and processes. Organization is key to showing investors the high level of maturity achieved by the business. Which brings us to the next topic.

2. Team organization – governance

A good but disorganized team is the first to lose a playoff game. With greater growth maturity and scalability already proven by historical numbers, a relevant part of the Series B selection process is to show that the product has managed to scale without compromising process security and that it is well equipped to continue growing in an organized manner.

We all know that innovative companies need wings to take off. The role of governance is to create flight manuals for the business to remain disruptive and continue flying.

These are practices, policies and discussion forums that investors view favorably and that show how strong the pillars that support the company's growth are. I list three very common pillars in series B due diligence processes:

(i) Board of Directors: For a company with organized processes, including fundraising, it is important to establish a board of directors to determine the main strategic guidelines and continuous evaluation of the operation.

Building an independent, active, diverse board with names recognized by the market is essential to show investors that the operation seeks the best management practices to remain economically sustainable.

(ii) Executive committees: While the board of directors prioritizes macro definitions, internal committees go one layer further into the operation and analyze the performance of each area. Technology, finance, people, compliance, sales... there are several topics that can be analyzed in greater detail in specific forums and outside the board's agenda.

(iii) Internal policies: There is much discussion about the trade-off between proceduralization and innovation. Many startups are averse to creating processes and policies because they see them as tied to the disruptive essence of the business. The entrepreneur's mission is to create a business that is innovative, high-growth, but sustainable. Processes help create the foundations for achieving such sustainability.

There is a fine line between creating processes and creating bureaucracy. To achieve this, the C-Level needs to be diligent about the company's main guidelines and create policies in accordance with the priorities defined by the executive committees.

Codes of conduct, internal policies for employees, privacy, information security, risk management, among others. Validating points that help increase investors' security to invest in a business prepared for any potential scenarios.

3. Game statistics – replicability of the thesis

Experts put together various analyzes and probabilities of a team winning or losing a game based on comparisons with old games, athletes' performances, weather, pitch analysis and so on. And when the whistle signals the start of the game, the statistic seems to become less important. However, investors are increasingly making investment decisions based on theses that are easily replicable and comparable to past successes.

The funds gradually began to specialize in some segments. The theory is that the more you know about a given subject, the more likely you are to have the right tools in your hands to make it grow. Many investors use this concept to look for past success stories to validate new investments. Some points are added if this success was the result of a transaction by the fund itself.

No matter how disruptive an investment case may be, if it does not have any successful global comparable that gives greater assurance to investors that there is a path to growth, the more difficult it is for the fund to justify that the return on investment to be made is “ safe".

However, in the tech ecosystem, the creation of truly innovative businesses with few replicables in the global market is a constant. In these cases, the entrepreneur must be more concerned about showing that his thesis of low replicability is well supported by a high potential for penetration in his addressable market. In addition to having products already consolidated in its segment of activity and with many avenues still to be explored.

4. The result of the game matters – valuation

Many say that the important thing in a match is to win and pass the stage. Winning with a slim or robust result doesn't matter. Despite this, we all know that a team that wins with a greater number of points has a certain protagonism compared to the others. Greater is the confidence that you have built the necessary elements to achieve success. However, the pressure from fans (or stakeholders) is also greater regarding what the next steps will be.

The analogy here applies perfectly to the valuations offered from this round onwards. Over the past few years, several Series Bs have resulted in unicorns. VC funds offer a valuation of US$1 billion as a lure for the company to take advantage of. Marketing based on this status, greater attractiveness for recruitment and team selection, recognition and greater relevance among stakeholders, are several benefits extracted from a billion-dollar valuation. This leverage factor offered by investors grew in the same proportion as the number of deals with these valuations.

However, the pomp of “high valuations” must be negotiated in conjunction with the dilution percentage. We saw that the average post-money valuation of Series B deals in recent months was around US$ 100-300 M. While the average dilution was around 10-25%.

These references can be changed based on how strategic the fund is to unlock the growth of the enterprise and how willing the entrepreneur is to execute the deal.

In 2021, we saw an average ARR (annual recurring revenue) of Series B investments of around US$ 20-30 M. Unicorns being created with ARR of US$ 30 M and transacted multiples above 30x ARR. Some cases of series B receiving pompous checks - more common at this stage of fundraising -, but with performances still incipient, analogous to series A.

The greater the risk x return components, the greater the investment checks, the valuations offered and the relevance of post-Series B players. However, what not everyone indicates is: the greater the importance achieved after this fundraising stage, the greater the pressure about the company's performance in the future.

Expectations regarding the performance of players that successfully completed their investment rounds made the footsteps of unicorns increasingly followed. And the combination of pressure from shareholders and a scenario of greater economic uncertainty - especially in recent months - resulted in a process of greater due diligence on the unit economics of investees. This return to fundamentals is what leads us to the next topic.

5.  Nothing happens without performance – back to the numbers

efforts to generate cash as protagonists, we see that both in sport and in the VC ecosystem “we’re all about the fundamentals”.

The constant focus on delivering results has always been and continues to be the main vector for validating a thesis in front of Series B investors. Growth of economics, financial performance, growth + profitability, gain in market share. In recent years, there have been many new performance analysis models used by funds when putting together their investment theses. Cohort analysis, runway model, evolution of KPIs, retention matrices. All with the same objective: to validate the growth rate of business indicators.

Focusing on improving performance does not guarantee victory in a game or that the team will pass the stage - the best thing to do is to continue playing and aim for the goal (or victory) without depending on luck


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