NB. This post has ended up being much bigger then I originally planned and is still very much a Work In Progress.

I've encountered multiple startups over the last few years in one capacity or another that have got themselves stuck in what I've taken to calling the Series B Trap so I thought I'd write up my observations and share them here.

By documenting this phenomena thoroughly I hope that future ventures of my own can better avoid this trap and by sharing it I can maybe help others to avoid it at well.

What is the Series B Trap?

The Series B Trap snares companies between their Series A and B fund raising.

It occurs when, through a combination of factors, a startup finds themselves in a challenging position when it comes to raising that B round at an increased valuation.

The Series B Trap most commonly occurs in companies that have great initial success but lack a clear understanding of where they are going and how they plan to get there.

Potential Narrative

Not sure if you've experienced being part of an SBT company? I've provided a narrative that follows an imaginary company from inception through to the point at which the Trap snaps shut.

NB. This narrative is intended to be illustrative. Not all companies will have experienced such a journey. That said the beats in this story are modelled on a combination of 12 years of personal observations and multiple discussions with team members from many other startups.

  1. A visionary founder identifies a very valuable problem to solve
  2. The parties suffering from this problem are highly diversified along at least one, if not multiple, axes (industry, geography, scale, affluence, maturity etc.)
  3. Based on initial conversations - maybe even a partnership - the startup builds something (MVP, PoC whatever you choose to call it)
  4. This thing solves PART of the global problem in a fairly unspecific way
  5. The partial solution is valuable enough to deliver early commercial success however, and the company recruits a broad range of initial customers off the back of it
  6. The visionary founder actively participates in sales conversations and partnership/promotional activity and is constantly identifying new opportunities
  7. The startup raises a Series A round on a narrative of strong initial growth and excellent projected growth in an exciting global market
  8. The company decides to spend some its new capital professionalising
  9. Many of the functions are scaled - normally starting with leadership then process and people.
  10. As part of this the business defines: an Ideal Customer Profile for new business opportunities; target audiences for marketing lead generation; and Personas as model users. No one sits down and checks that they all properly line up.
  11. Almost immediately (after push back) the sales function extends the criteria of it's ICP to be an Acceptable Customer Profile
  12. under pressure to fill their funnel and deliver on numbers the company ignores the ACP and continues to sell to all and sundry
  13. Without a unified understanding of who they are building for the R&D function spends their time delivering functionality designed to retain existing customers and new functionality that never quite seems to be the unilateral success story everyone is hoping for
  14. Competitors emerge with cleaner tech (meanwhile the startup has never re-engineered and continues to stack new features and functionality on top of it's original MVP) and a more tightly focused product second mover advantage (complicating the sales process which starts to become more formal and drawn out)
  15. Revenue growth slips, investor pressure mounts
  16. The commercial team responded by casting the net wider, leaving no stone unturned, and pushing for whatever unique feature or integration needs to be built in order to secure revenue growth
  17. Despite their best efforts revenue growth remains low
  18. Pressure increases on the R&D function to build their way out of the situation with new functionality. At the same time however retention of existing customers/users becomes paramount as reducing churn is identified as a key strategy to propping up the faltering growth numbers
  19. The requests of the existing customer/user based now cover an incredibly wide range of features and functions, some mutually exclusive, many contradictory to the companies stated Vision and Mission
  20. The teams are increasingly frustrated
  21. So are the company's attempts are raising a Series B round

Setting the Trap

So how do we avoid getting caught?

Before we can answer that we need to understand how the trap works.