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

This post is by Jason Lemkin from SaaStr

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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 haven’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 new lead investor for the next round, and often, the most prestigious one possible.  These days, more 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 plan for bridge round, 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.
  • If your lead won’t bridge you, you are in trouble.  If your lead is “tapped out”, it’s even tougher.  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 either.
  • “Orphaned” investments have a really hard time getting bridged.  If the partner that led your VC round has left to do something else, getting a bridge will be that much harder.  Each bridge round requires a VC burning some political capital.  If she/he has gone to another firm, there’s no political capital to spend.
  • Terms can get brutal if you run out the clock.  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.  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 information a week before you are out of money.
  • 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.
  • A second bridge 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, sometimes they are priced via notes at a discount to the next round.  And if you are really struggling, assume the price may be lower than the last round.  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.
  • Second, send out monthly investor updates.  You have to do this.  This keeps everyone bonded to you.  Do.  This.
  • Third, get a controller, even a part-time one, that knows SaaS.  The #1 reason I see founders need a bridge is bad controls.  They don’t realize how much they are spending until it is too late.  Bad spending compounds, negatively.  Before you know it, your burn has creeped up on you.  Even when you still make 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.
  • 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 can create a really awkward dynamic in a bridge.
No founder thinks they need a bridge.  Then they make a few bad hires, have a tough quarter, etc. and … they do. Make sure you know who will be in and out.
Knowing — and Sharing — Your Zero Cash Date

The post How Bridge Rounds Work in Venture Capital: Messy, Full of Drama, and Not Without High Risk appeared first on SaaStr.

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