Bridge Rounds of funding are the rounds that occur after the seed round of funding and before the next big round of funding like Series A funding. They bridge the gap between the rounds to keep the company functional.
What are Bridge Rounds?
Bridge Rounds are undertaken by a startup when it has already taken the seen round of financing and is not where they want to be or investors want them to be for the next major round of funding. For instance, if a company decides to pivot from B2C to B2B, they may decide to raise a small round to prove out the value of the new strategy before taking on significant capital.
Bride rounds are considered to be easier, more efficient and a less time-consuming options when the company is in need of short-term funds. Series A round of funding often involves new lead investors and a long due diligence process to be completed. At times when the startup may not have new investors committing to it or it may not have the financial ability to survive without funds for a long duration, bridge rounds of funding serve an important role in supporting the long-term viability of the business!
Why complete a Bridge Round of funding?
There are, essentially, two reasons for a company to receive bridge rounds of funding.
The first situation is when the company is doing well, and it needs more time to prepare for the next round of funding. The startup is growing exponentially and/or generating revenues and is waiting for its product to become more mature and sophisticated before it launches the next round of funding. This is when bridge rounds come into the picture. At the same time, the bridge rounds also help to increase the future valuation of the company before the next big round of funding.
The second situation is when the company is not doing well and does not have the funds or resources to survive and remain functional in the long term. This is also where bridge rounds of funding play a critical role. They help the company obtain enough funds for its day-to-day expenses and remain afloat until the next round of funds come in.
How are they Different from the Seed Rounds and the following Series A+ Rounds?
It is important to note that the Bridge Rounds of funding differ from the seed rounds and the Series A rounds in their purpose, investors, and amount raised.
While the purpose of the seed rounds is to take the company off the ground, the bridge rounds help to keep the company afloat. Regarding investors, the ones who participate in the Series A funding are usually new investors, while those investing in the bridge rounds are, in most cases, the existing investors of the company who already have financial interests in the company.
Bridge rounds also tend to be smaller in size. For instance, with a seed round of funding of $2 million, the Series A round may typically fall in the $4 to $10 million range, while the bridge round will fall into the, $0.5 to $1 million range.
The new relationship between Bridge Rounds and Equity Crowdfunding
The face of the funding of startups is changing at a rapid pace. Startup financing looks very different from what it used to look a couple of decades ago. With the implementation of the JOBS Act, the relationship between equity crowdfunding and bridge round has changed to a very large extent and has become more common.
Several startups that have raised funds through equity crowdfunding have conducted bridge rounds of funding from the crowd to support the business in the short term to meet the growth metrics needed to obtain the next round of funding.
What are the Advantages of Bridge Rounds?
The bridge rounds of funding have several benefits for entrepreneurs.
· Financial runway: The most significant advantage of the bridge rounds is that they offer the startups a cushion in the times of need. When the company is running out of funds to stay afloat and is slightly far away from the next round of funding, bridge round gives the required runway between the seed round and the full-fledged Series A round.
· Shorter time to close: The bridge rounds take less time to close as compared to the Series A rounds. So, they become advantageous to the startups when they do not have much time in hand to wait for the bigger rounds of funding.
· Increased valuation of the company: A more strategic advantage of the bridge rounds is that they increase the valuation of the startup. This helps the entrepreneurs in negotiating a better deal with the future investors for the next rounds of funding.
· More time to develop the product: Bridge rounds help to sustain fast growth of the company and help it in making its products and services more mature. Due to the bridge round of funding being secured, the company gets more time to prepare and test its products and reach important milestones that can help the team raise at a much larger valuation with less dilution.
What are the Drawbacks of the Bridge Rounds?
There are risks to bridge rounds as well. They offer a cushion to the entrepreneurs. However, they can be risky to investors depending on the circumstances.
· Next round of funding may not materialize: Bridge rounds are similar to loans that get converted into the shares of the company at the next round of funding. However, there is a strong possibility that the next round of funding may not happen, after all. In such a situation, investors lose their bridge investment.
· The startup may fail: If you invested in the first round of a startup that was struggling to remain afloat after the seed funding the probability of failure might be even higher than most startups. Additionally, if you re-invest in the bridge round, you can stand to lose both your original investment and incremental investment as well.
The Bottom Line
Understanding the reasons for why a startup is raising a bridge round can be very helpful in deciding whether or not it is a good investment. Trying to grow into a higher valuation can be great. But trying to stay afloat amidst a failing strategy can be a sign of too much risk.
It is critical for the
investors to place their investments after careful consideration and analysis
of the bride round. When done well these can be tremendous upside and in other cases
real downside to partaking in a bridge round.
About: Chris Lustrino
A Boston College Eagle for life, on a mission to democratize startup investing for all people at KingsCrowd, with a passion for Fintech, investing, social impact, doing well and doing good, and an avid runner, cyclist and writer.