Why or when does battery capacity matter in a series circuit?
Lithium cells like 18650s are damaged if discharged too deeply.

When you have several cells in series to make a battery, then you need to make sure that you monitor the voltage of every cell, and stop before the lowest goes below the minimum voltage, rather than the voltage of the whole battery.

For instance, if you set an endpoint of 3v per cell, you might then look for 9v on your 3S battery. However if there is a low capacity cell, the voltages might be 3.5v, 3.5v and 2v at a 9v total, and that cell is now permanently damaged.

On charging, the situation is similar, no cell must go above 4.2v. While a balance charger will try to maintain this, some balance chargers would only cope with or tolerate a nominal variation in capacities, and give up on a large variation in capacities, deeming it to indicate a damaged battery pack.