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The Risky Business of Raising Series B
June 13, 2019

The Risky Business of Raising Series B

As early stage investors, we’re typically the first institutional investors to invest in our portfolio companies, either at the Seed or Series A stage. With both Stratio & 4iQ closing Series B rounds in the last few quarters we thought it was a good time to reflect on what makes a successful Series B fundraise and share some of our key learnings.

The importance of product revenue

Stratio is a transformational big data and artificial intelligence company that facilitates large enterprises and incumbents transition to a data centric architecture empowering the digital transformation of the company. These are large, complex, turnkey solutions for big organisations that require a mix of services to accompany the enterprise software. Sales cycles are long with high value and lots of stickiness.

Although it is the proprietary software that is the core of the Stratio solution, the service element is fundamental in closing the deal, to ensure peace of mind for the customer, a smooth transition from one system to another, and ongoing maintenance for mission critical applications. Stratio’s journey from their €4m Series A round to their €13m Series B round has been focussed on productising their offering and reducing the service element of the revenue mix. Despite the high margin and low operating expense of the service revenue, the focus on the product revenue is fundamental to enable Stratio to scale faster.

Facilitating the transition from majority service revenue to majority product revenue has required laser focus and discipline from management to leave additional service revenue on the table while doubling down on engineering. A bet we are now seeing starting to pay off.

Creating a new category

4iQ is also a big data company operating in the security space selling Identity Threat Intelligence and Attribution Investigation solutions to some of the largest identity theft players and Intelligence Agencies. 4iQ operates in a blue ocean opportunity offering new products and services into an industry that up until recently didn’t exist. This has created a major market opportunity albeit with some operational risk as the company is defining a new category in the intelligence space.

This requires product evangelisation with unpredictable sales cycles. 4iQs evolution from their $15m Series A to their $18m Series B raise required much experimentation in defining the product offering and sales process. The Series A fundraise was put to good use building a world class product and validating the market, on-boarding first clients, a solid pipeline and building a full executive team. The Series B raise is now focussed on converting that pipeline and consolidating market leadership - a critical factor in the future success of the business.

Refining the go to market

When selling a visionary product like the 4iQ Identity Threat Intelligence suite or the Stratio Data-Centric Architecture the founding team including the CEO typically need to lead the sales effort. No one sells a new disruptive product better than its creator especially early on in the life of the company. In fact, the founding team need to know how to sell the product to then train up the sales team on how to sell it.

This direct sales approach is important in the initial stages of the company as it seeks product/market fit, however, when evolving towards a Series B round the company must be able to demonstrate a scalable sales model that enables huge market reach.

In the case of 4iQ and Stratio, identifying the early adopters and domain experts who can accelerate the sales process has been critical in defining their sales model.

Selling into a new market has made it difficult to measure the market size and accurately forecast sales cycles, as a result partnering with early adopters and thought leaders, who immediately validate use cases and improve credibility, has enabled them to move from evangelisation of their product into actually selling to a prepared customer faster.

Moreover, client diversification has been an important goal prior to raising future rounds. With large contracts making up much of their core business, client concentration was a risk factor early on that over time has been mitigated, through a a more diversified client base.

Bootstrapping to Series B

Participating at SaaStr Europa last summer, Adara Ventures had the pleasure of interviewing Alfonso de la Nuez, Founder & CEO of Userzoom, a SaaS business for UX research of Spanish origin based in Silicon Valley who bootstrapped to $12m ARR before raising a $34m Series B in 2015.

Having bootstrapped the business by originally starting out as a consultancy service in 2007, the company managed to move to Silicon Valley and productise the company on a small family, fools, and friends round. Founders didn’t go down the road of VC funding as they didn’t believe the market for user testing was as big as it turned out to be. By keeping the head down and focussing on building the business Userzoom were able to attract unsolicited VC interest. Being profitable at the point of raising their Series B Userzoom were in a unique and privileged position to negotiate their round.