Fundraising is one of the most important activities done by growth stage startups. The funds raised are utilised by startups to achieve their milestones. On achieving the current milestone, a startup can raise funds at higher valuation in the next round of financing. However, the market scenario might change. The startup might have a new milestone now, or is having a hard time achieving the current targets. Current funds might not provide enough runway to reach to the next stage. And without funds, the startup won’t be able to last long. How should a founder deal with this?

Bridge round of financing was introduced to address such situations. In general, startups go for a bridge round when they need an additional infusion of capital to reach the next milestone. This additional funding would enable the startup to achieve their milestone and move to the next stage. 

Scenarios when Bridge Round is Structured

Many investors have a skeptical view of bridge round, mainly because this round is generally raised to fill the capital requirements to reach the next milestone. Funds raised in each round should provide enough runway for the next milestone, when the startup can target the next round of funding. However, raising funds beforehand might mean that they couldn’t manage to reach their milestones with their current funds. Moreover, the bridge round of funding hasn’t always proved to be a beneficial step for investors. Many startups fail even after providing that additional ‘bridge’ funds, which means that the chances of benefitting from it are low. It might also seem like a sunk cost fallacy to investors, and prefer to avoid making any more investment.

However, bridge rounds aren’t always meant to have negative connotations. It can be a sign of exceptional performance too. In general, startup go for bridge rounds for the reasons mentioned below:

1. Targeting a better milestone: Sometimes, unexpected favorable market conditions leads to a better growth trajectory than the targeted numbers. For example, demonetization in India led to fast adoption of online payment channels, and it led to a huge spike in the customer base of payment applications. Improved metrics would mean higher valuations in the next round, but it might also mean higher cash burn than expected. Support in such a crucial stage from existing or new investors would give startups a necessary boost to reach their next milestone easily and target higher valuations than the previous estimate.
2. Addressing financial distress: The startup might have had a few setbacks, i.e. a new player in the market, costly hiring mistake, losing a valuable client, etc. which might reduce the runway. Injecting some funds would ensure that the startup is able to set back on track and reach its targeted milestones as required.  

There can be many other different reasons for raising a bridge round, i.e. the startup wants to expand to new markets before going for the next funding round, so that they can set higher valuations, or the company is targeting an early IPO, etc. However, most of the reasons revolve primarily around these two possibilities, i.e. better milestones, or financial issues. 

This is also one of the primary reasons for skepticism associated with bridge rounds. Startups can try to camouflage their financial distress into funding requirements for overseas expansion, or other bigger goals. Investors evaluate bridge rounds more critically due to these associated concerns. 

Getting Investors Onboard for a Bridge Round

Even though investors might be skeptical about bridge rounds, funding in this round can be beneficial to investors. Not investing would mean the startup is bound to fail, and the investors would lose their whole investment. But, if the additional ‘bridge’ fund helps the startup reach their milestones, it would be financially beneficial to the investors. 

Though there are no specific set of rules that can guarantee your fundraising efforts, following these tips from the beginning might be helpful for the startups. The details are shared below:

1. It’s best to state the truth: A startup trying to raise funds by stating other reasons may not sit well with investors. It’s much safer if the startup clearly states about their position of disadvantage, and explains which mistakes led to the current situation. Most importantly, if the startup can explain how they plan to get back on track with the additional capital, the investor would be more interested. The investor will work with the startup to ensure the startup can raise funds and secure their next milestone.   
2. Always have a lead investor: Generally, whenever a VC Firm makes a significant investment in a startup, they set aside some funds to address startup requirements in the later stages. Having a lead investor with a significant stake would mean setting such a contingency fund for the startup. However, if there are no lead investors, none of them would set aside anything for the bridge round.
3. Always keep your investors up-to-date: An investor would be more comfortable if the founders share at least monthly  updates and provide details of the financials, current runway, and other related information. Even if the startup is closing in on cash issues, the investor will be well aware of it and can try to assist the startup in the best way possible. However, if the startup doesn’t provide any update for the next 12 months and suddenly brings up the cash issues one month before they run out of funds, the investor would avoid supporting the startup. 
4. Get your lead investor for the bridge round: For raising funds in bridge round, it can be done either by involving new investors, or by involving existing investors, or a combination of both. In general, a bridge round of funding happens only when the lead investor agrees to be a part of it. It shows investor’s confidence in the startup. However, if the existing investors don’t agree to invest, the chances of getting investments from new investors is very low. 
5. Start as early as possible: As the startup gets closer to the end of the runway, their position of advantage diminishes rapidly. Managing a startup would mean spending money on operations, salaries, infrastructure, etc. and not paying even once would mean a cause of panic among stakeholders. In such cases, the startup would be considered lucky if they get funded at the previous valuation numbers. However, the startup might also have to consider accepting funds at lower valuation than the previous round. 

Note that these tips are applicable only when the startup is in actual financial distress, and might run out of business if additional funding isn’t provided. However, if the startup is faring well, and needs funds to reach a higher milestone, it won’t be a problem. Investors would do their best to ensure the startup secures enough funding and reach the next stage. 

In the Final Analysis

Investors have differing opinions on bridge rounds of funding. However, a bridge round can have either positive or negative sense, depending on the situation in context. In positive scenarios, investors would ensure the startup gets the additional funding to keep things moving. However, when things aren’t in favour, the startup has to ensure they provide all the necessary details to investors to gain their trust and raise funds to reach the next level.