Early-Growth Unpacked: Navigating the Path from Series A to B

Securing Series B funding is a pivotal milestone for founders. It marks a transition from early-stage validation to scaling for substantial growth. We at BuildGroup refer to this stage as “early growth.” Unlike Series A, in which investors focus on companies who are establishing product-market fit, Series B investors seek evidence of your ability to replicate initial success and expand your market presence. This stage demands a heightened focus on financial metrics. Companies need to demonstrate sustainable growth and a clear path to profitability. As Fred Destin of Accel Partners aptly puts it,

"Series B is hard for a simple reason: suspension of disbelief fades and is replaced by an increasingly cold, hard look at milestones and progress. Series B is the round where the rubber meets the road, where the promise has to be met with numbers and projections." 

BuildGroup believes that at this stage, the risk of failure shifts from product-market fit (more crucial in early stages) towards execution challenges. Early-growth companies have typically validated their product and identified a market, even if on a limited scale. However, they face heightened  risks from challenges such as leadership gaps, ineffective go-to-market strategies, or misaligned product roadmaps. Ultimately,the success of early-growth companies depends more on effective execution than on simply having the right product-market fit.

As you prepare for your Series B fundraising journey, it's crucial to have a deep understanding of the metrics that matter most to investors, including ARR growth, net revenue retention, gross margins, and efficiency indicators such as the net magic number and ARR per full-time employee (‘FTE’). By demonstrating strong performance in these areas, you can build confidence in your company’s ability to scale and attract the right investors. For instance, investors typically expect to see ARR growth of at least 100% year-over-year, net revenue retention exceeding 100%, and gross margins above 70%. At BuildGroup, we look for above 40% year-over-year ARR growth, in the case that there is a good product that simply requires a better strategy for stronger execution. 

Another key element in achieving early growth success is demonstrating a clear path to profitability. This involves optimizing your cost structure, improving your pricing strategy, and expanding your customer base efficiently. Key metrics here include customer acquisition cost (CAC) payback and the lifetime value (LTV) to CAC ratio, indicating that a customer’s lifetime value exceeds acquisition costs. While early-stage investors may be more tolerant of high burn rates and uncertain unit economics, early growth investors will expect to see a well-defined plan for achieving positive cash flow and sustainable growth.

As BuildGroup Co-Founder & CEO Jim Curry puts it, “You are just an experiment until you are profitable. Only then can you truly call yourself a business.”

Beyond financial metrics, Series B investors also look for evidence of a strong and scalable business model. This includes a clear understanding of your target market, a well-defined go-to-market strategy, and a proven ability to acquire and retain customers efficiently. Additionally, investors will assess your team's ability to execute on your growth plans, looking for a combination of experience, expertise, and a shared commitment to your company's vision.

At BuildGroup, we understand the distinct challenges and opportunities that accompany early growth fundraising. As a firm dedicated to supporting startups in this critical phase, we provide more than just capital. We offer strategic guidance and operational expertise to help founders navigate the complexities of scaling their businesses. Our experience working with high-growth companies allows us to identify key indicators of success and potential pitfalls, ensuring your startup is well-positioned for long-term growth.

For instance, Flowspace, with its asset-lite model in fulfillment, recognized the need for  robust software to support its operations, and partnered with BuildGroup to leverage our expertise in scaling software solutions for continued growth and success. Cybrary, a cybersecurity workforce development platform with a large and engaged user base, was striving to develop a go-to-market strategy to upsell to the companies employing its users as it also intensified its focus on product development. (Flowspace and Cybrary are both current BuildGroup portfolio companies, and their inclusion in this piece is solely for illustrative purposes regarding our investment strategy.)

Our investment strategy is designed to enhance our hands-on approach with portfolio companies.

We  selectively partner with founders who demonstrate a strong vision and proven execution capabilities and work closely with management teams to co-develop and implement growth strategies tailored to long-term objectives. This collaborative focus is further supported by the flexibility of having no mandatory minimum check requirements per year, allowing our team to prioritize meaningful engagement and offer the resources and guidance founders need to achieve their full potential.

Remember, early-growth fundraising is not just about securing capital; it's about finding the right partner to support your growth ambitions. At BuildGroup, we are committed to helping founders build enduring businesses that make a lasting impact. If you're ready to take your startup to the next level, we invite you to connect with us and learn more about how we can help you achieve your goals.

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The information in this blog post is provided in good faith without any warranty. It does not constitute investment advice, recommendation, or an offer of any services or products of BuildGroup Management and it is not intended to provide a sufficient basis on which to make an investment decision. This document is provided for educational purposes only. Discussions of current or former BuildGroup portfolio companies are intended for educational and discussion purposes only. Any portfolio company so discussed has been selected based on objective, non-performance based criteria.

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This content does not constitute or form part of an offer of any investment advisory services of BuildGroup Management, LLC, nor does it constitute or form part of an offer to issue or sell, or of a solicitation of an offer to subscribe or buy, any securities or other financial instruments, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.

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