Meaning
Structural inefficiencies increase the time and capital required to secure successive rounds of external investment. Non productive costs associated with legal fees and due diligence are identified as series financing friction. Calculation of the gap helps determine the amount of capital an investor commits versus the actual cash that reaches company operations.
Friction remains higher in industries with heavy physical assets or regulatory burdens.
Capital Deployment
Reducing the time spent on closing a round allows the management team to return to scaling production. When series financing friction is high, a company may run out of cash before the new funds are available. Risk management forces the organization to hold larger cash reserves than would otherwise be necessary.
High friction also complicates the valuation of the firm by introducing transaction costs that are not reflected in the face value of the deal.
Record Keeping
Documentation requirements for a later stage round are often an order of magnitude larger than for the initial seed phase. Navigating the demands of multiple venture capital firms creates series financing friction that diverts engineering talent away from product development. Each investor may require different audit reports or specific board seats.
Standardizing the term sheet is one way to lower these costs.
Growth Velocity
Scaling from a pilot plant to a production facility requires predictable capital inflows. Accumulated series financing friction acts as a drag on the growth rate of the business.
