Bridge Rounds

A lot of entrepreneurs want to raise bridge rounds.  These are rounds that are generally smallish in nature, and they “bridge” the company to the next larger round of capital.  In short, the company needs a bit of money to ingest or complete some sort of milestone that will allow the company to raise a big slug of capital and stabilize it for a longer period of time.

Bridge rounds can be called a lot of different things.  Pre-Seed is essentially a bridge round into a full-blown seed round.  Pre-seed rounds have impacted seed rounds.  Seed rounds have gotten bigger as pre-seed has grown.  Of course, since pre-seed and seed rounds don’t mean a company has product-market fit and is ready to step on the accelerator and go, post-seed rounds have made an appearance.  Those are the rounds between the seed and Series A round.  Series A rounds are huge now.  Much larger than they used to be.

It’s why looking at a cap table and parsing out the various classes of stock can be confusing when it comes to assessing where a company really is in its lifecycle.

There are some firms that will engage in a bridge round as initial funding into a company.  They see it as a “call option” on the next round.  They usually don’t advertise this, and any entrepreneur will have to feel out a partner to see if they do something like this.

The thing in VC is they like to take big ownership percentages in the companies they commit to.  They have to take a large enough ownership percentage to get the payback they need.  Venture capital is about risk and reward-taking a risk and getting outsize returns.  A small bridge round isn’t going to give most funds the ownership percentage they need to get the payback they need in order to pay their limited partners and make some money for themselves.

Contrast that with the entrepreneur perspective.  They are targeting a client or some sort of milestone.  Or, they have just roped in that client or achieved that milestone.  They would like a little fuel in the tank to help them ingest the progress, organize around it and show they can take it to the next level before raising a large round of capital.  Understandably the round would be at a higher price.

Sometimes depending on the company, you can find a bank or non-bank financing to do a bridge after getting a big customer or hitting a milestone.

On the surface, a new investor coming into the company in this sort of bridge round doesn’t have an economic incentive to write the check no matter how compelling the opportunity is.  They can afford to wait and then try and write a big check into the next round.  Existing investors in the company might, but they need the firepower inside their funds to do it.

This is why it is really important for entrepreneurs to do some good diligence on their investors.  It’s also incumbent on investors to be really truthful about how they operate, their intentions, and what causes them to write checks.  It’s also good for investors to clearly tell entrepreneurs when they are done writing checks, and why.  Those are healthy or should be healthy discussions.