Startup Funding Explained: How to Raise a Bridge Round
When you’re raising a bridge round and pitching investors, their first reaction may be that you’re in trouble. To overcome this, you’ll need to properly address your reason for raising bridge funding. In this #DreamitDose, Managing Partner Steve Barsh gives founders tips on how to frame their bridge round ask, overcome assumptions investors often make, and provides a general way to structure startup bridge round pitches. In just 5-minutes, you’ll learn and be able to avoid common obstacles founders confront while raising a bridge round.
Follow this simple framework to help guide your bridge funding strategy:
Clearly articulate why you’re raising bridge funding
Understand investor assumptions and avoid negative signaling when pitching
Frame your bridge funding ask to reach future fundable milestones investors care about
Structure the terms of your bridge correctly with the right discount and cap to justify risk
Address whether existing investors are joining the bridge round
Momentum is everything, show you’re moving in the right direction
Let’s dive in.
Why raise bridge funding?
There are typically three core reasons why founders may be raising a bridge. It is crucial to know which one you fit into.
You didn’t achieve necessary traction to raise your next round, and you’re running out of cash
You want more cash so you can hit key goals, raise your valuation, and make your next round less dilutive
Market conditions have changed
Let’s dive into each reason below.
Reason #1: Low traction, low cash
You must be very careful to avoid negative signaling if you’re raising bridge funding for this reason.
When investors hear this, they’ll assume that you weren’t able to hit your goals and now you’re failing. To frame this scenario in the right light, acknowledge that you are starting from a disadvantage and use this opportunity to prove that your plan will work this time. Take what you learned following your most recent round and use that information to make the plans following your bridge even more successful.
Reason #2: Make next round less dilutive
You need more cash to reach the necessary proof points for a higher valuation in your next round. Be careful. Investors will try to pick this apart to ensure you’re not in reason #1 (low traction, low cash). You’ll need to explain how hitting these inflection points will increase your valuation significantly. This should not sound like you’re avoiding saying that you’re low on cash. Instead, there are new necessary points you need to hit so your company can reach its highest potential before the next valuation.
Reason #3: Changing market conditions
This justification could mean a number of things. Perhaps a new competitor may have emerged or the market may be growing and ramping faster. Here, you may come across the same issue raised in reason #2: Investors will try to make sure this is not just a case of low traction, low cash, or an attempt to put the reasoning for the round in a more favorable light. This is why you must be incredibly honest with yourself, your team, and potential investors concerning the legitimate reasons for why you’re raising a bridge. You don’t want to risk your investors calling BS.
Once you know why you’re raising a bridge round, make it clear to investors that you’re building a bridge, not a pier.
Build a bridge, not a pier
The term ‘bridge round’ is intentionally worded; a bridge gets you to a destination while a pier leads nowhere. How can you demonstrate you’re actually building a bridge to investors? Cover these key points in your pitch:
Goals you’ll hit with this bridge round
Show that these goals are fundable milestones that will translate to value inflection points for a larger round
Evidence that you’ve picked the right fundable milestones
Make sure the round gives you enough cash and time to run for at least 3 additional months after you’ve closed your next round
Once you’ve figured out why you’re raising a bridge round and how to demonstrate that this bridge will take your company to the next necessary milestones leading up to your next round, the last key question to answer is: How do you structure the bridge round?
How to structure bridge round terms
Bridge rounds are typically structured as convertible notes. Investors won’t know what the company’s valuation is until the next priced round.
Don’t forget, this means that you’re asking investors to put money in, not knowing what it’s worth. How do you overcome the understandable skepticism that will result from these terms? Typically, founders offer a discount for the next round around 20% or they put a valuation cap on the bridge. Also, understand that investing in a bridge round is a very high risk. You will have to provide all the evidence you can to put your prospective investors at ease.
Be ready to answer whether or not your previous investors will be putting money into the bridge. This provides proof that previous investors still believe in you and your company.
If existing investors are not participating in your bridge round, overcome negative signaling with transparent answers. For example:
Two angels were in my last round, and they now are tapped out.
My seed round was just one fund, but they’re out of dry powder and can’t continue to invest.
Finally, one of the most critical things your investors will be looking at are metrics that show your momentum. This assures investors that you are moving in the right direction and have enough velocity to hit your goals. Here are some useful metrics Steve recommends including:
Sales Velocity
Revenue
LTV to CAC Ratio
Trials completed and the rate at which they’re being completed
Close-ratio
Investors put money in lines, not points. With your bridge, you will move along that line in the right direction. Following our tips will help you prove to investors that you’re not raising a bridge simply because you’re in trouble, but because there are vital goals you must meet that will put your company on track to reach its full potential by the next round.
By Alana Hill, Securetech Associate at Dreamit Ventures
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