How Bridge Rounds Work in Venture Capital: Messy, Full of Drama, and Not Without High Risk

I’ve watched many bridge rounds over time from a far, and took $500k in bridge capital at EchoSign myself when our seed round didn’t end up being quite enough to get us to the Series A.

But I hadn’t really seen bridge rounds from the other side, as an investor, until recently.  That’s mainly because over the past 2 years I’ve invested in more early-ish seed companies (vs later seed companies), that often end up needing a second seed, or bridge.  And once you start seeing them in action, you see all the many, many mistakes founders make here.

What is a “bridge financing”?  Simply put, it’s another round of venture financing from the same investors as the last round.  VCs do not like to do this.  VCs like to see each round priced 2x-3x the last round, or higher.  And generally, they prefer a new lead investor for the next round, and often, the most prestigious one possible.  These days, many larger VCs are pre-empting the next round in their top companies without a new, outside lead.  But that’s not a bridge.  Those rounds are usually priced much higher, and correlate to very high performance.

A bridge round is when you are doing OK, maybe even good, but not quite well enough to attract a next round investor yet.

Here are a few key dynamics to understand.  Because VCs do plan for bridge rounds, but don’t like them, the dynamics can be drama-full:

  • Most VC funds carry “reserves”, or extra money for 1 bridge round and 1-2 later rounds.  But not all.  And usually only for their core investments.  Yes, if a large VC fund invests say $3m into you, they’ll often quietly set aside another $500k-$1m if you need a bridge — if they are the lead investor.  But if they’ve invested say $500k of a $3m round?  They rarely set aside any money for a bridge.
  • So if you split up a round among many VCs and investors (vs 1 or 2) — do not expect any to bridge you.  This is really restating the second half of the prior point, but it is so important, it bears specifically calling out.  Yes, VCs carry “reserves” to bridge their core investments.  But if you decide to split a seed round among say 3-4 VCs firms, or just go with angels, there are some advantages there.  But if you do this — no one will carry any reserves for a bridge round.  No one.
  • Generally, no one carries reserves for SAFE or Debt rounds.  Again, related to the prior 2 points, but super important.  VCs do not consider SAFEs and convertible debt rounds core investments, generally speaking.  So they don’t carry any reserves after SAFEs/convertible debt, or plan to bridge you.  Almost never.  If you want a VC to be more on the hook, do an equity round instead of debt or SAFEs.
  • If your lead won’t bridge you, a bridge gets really hard.  If you have a syndicate of investors and need a bridge, everyone will be looking to the “lead”.  The largest investor, and if there is a board, the one on the board.  If she/he isn’t supportive of the bridge, generally the rest of the investor syndicate won’t be either.
  • “Orphaned” investments have a really hard time getting bridged.  If the partner that led your VC round has left to do something else — which is more and more common these days — getting a bridge will be that much harder.  Each bridge round requires a VC burning some internal political capital.  If she/he has gone to another firm, there’s no political capital to burn.
  • Terms can get brutal if you run out the clock.  So raise the bridge earlier, not later.  No one loves to have their hand forced.  If the company has days of money left, the investors may be forced into a bridge.  But everyone gets really grumpy at that point.  And starts talking about who should be CEO, etc.  When I took a bridge round, as part of it, I took no salary for a year.  That’s an example.
  • VCs that don’t get very regular — ideally monthly — investor updates don’t bridge.  You can’t just drop off 12 months of missing information one week before you are out of money.  Investors that aren’t updated don’t make any plans to invest more.  Especially if things aren’t perfect.
  • The bridge has to last.  No VC wants to give you just 3 more months of runway, not usually.  That’s not enough.  The bridge usually needs to last a year, or close to it.  That may mean you have to make tough cuts and choices.
  • If your largest investor is “tapped” out, a bridge gets much harder.  This is nonobvious, but important.  If your largest investor is a small seed fund, for example, they often won’t have enough money to really contribute to a bridge.  The rest of the syndicate won’t want to bail them out.  This often can lead to a rights offering (a punishing round that dilutes folks that can’t participate) and other suboptimal, high-drama issues.
  • Another second bridge after the first one is really, really, really, hard.  And really, really painful.  If you do get a bridge, assume there will never be another one.
  • The price probably won’t be great.  Bridge rounds are often priced at the last round price.  If you are close to another round, doing well but just literally need a smidge more time, sometimes bridge rounds are priced via notes at a discount to the next round.  And conversely, if you are really struggling, assume the price may be lower than the last round.  The base case is an extension at the last round price.  You need a new lead to drive the price up.

So, bridge financings aren’t fun.

What’s actionable here?

  • First, ask each VC investor how you are doing, on a scale of 1-10, each time you meet with them.  If you don’t get a 9 or 10, ask what you need to do to get a 9-10.  And then ask if they would invest more capital, on what terms.  Ask.  Don’t be shy.  Ask.
  • Second, send out monthly investor updates.  You have to do this.  This keeps everyone bonded to you.  Do this.  Make the time.  It doesn’t take that long.  And don’t not send them on the tough months.  VCs can take bad news.  It’s part of their job.  They are used to it.  A lack of news is much worse.
  • Third, get a controller, even a part-time one, that knows SaaS.  The #1 reason I see founders need a bridge is simply having bad financial controls and financial planning.  They don’t realize how much they are spending until it is too late.  They are closing deals, but not collecting enough cash.  Bad spending and collections compound … negatively.  Before you know it, your burn rate has crept up on you.  Even when you think you are running lean, and still making everyone buy their own desk and Kind bars.  Spend not just carefully, but accurately.  This is almost the #1 best thing you can do to stay out of trouble.  You need experience helping you, even if only 1-2 days a week for now.
  • Fourth, make absolutely sure you and your investors know your Zero Cash Date.  And forecast it every month.  No surprises = less drama.  More here.
  • Fifth, pick your board members and lead investors carefully.  If they can’t lead a bridge, you probably won’t get one. No matter how much you like them.  Be especially careful here if your largest investors do not have the board seat(s).  This almost always creates a really awkward dynamic in a bridge.  As a rule, if you don’t offer a larger investor a board seat, don’t expect them to write another check.

No founder thinks they need a bridge.  But then they make just a few bad hires, have one tough quarter, get behind on collections, etc. and … they do need one.

Make sure you know who will be in and out.

Knowing — and Sharing — Your Zero Cash Date

Published on June 20, 2019

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