In the world of startup funding, it’s not uncommon to see companies seek out “bridge rounds” to secure the capital they need to move forward. I wrote about this recently in a blog $5M in with $1M in ARR. Typically, these rounds are used to bridge the gap between larger funding rounds and help companies maintain their momentum without having to give up a significant amount of equity. But recently, we’ve seen a rise in the number of technology companies seeking bridge rounds when they’re really not ready for them. These companies may have millions of dollars in funding already, but they’re struggling to justify their valuations and are essentially trying to bridge the gap between a shitty investment decision and a better one.
When it comes to bridge rounds, there are generally two types of companies that seek them out. The first are companies that are genuinely in need of capital to keep their operations going. They may have hit a snag in their growth plans or run into unexpected expenses, and a bridge round can help keep them afloat while they figure out their next move. The second type of company is one that we’re more concerned with here – the company that has already raised a significant amount of money, but is struggling to justify its valuation and is essentially trying to use a bridge round to cover up mistakes made in earlier funding rounds. I call this the bridge to nowhere.
The problem with these companies is that they’re often running on legacy biases and stories that haven’t been proven. I call this the 2021 seed cohort. They may have been able to secure a large amount of funding based on a great idea, a charismatic founder, or simply being in the right place at the right time. But if they can’t demonstrate that they’ve made progress toward their goals and that they’re worth the valuation they’ve been given, then their bridge round is simply a band-aid solution to a bigger problem.
Unfortunately, these companies are not always easy to identify. They may have a flashy website, impressive-sounding advisors, and a lot of buzz around them, making them appear to be a can’t-miss opportunity. But savvy investors and founders should be asking tough questions about the company’s metrics, milestones, and overall strategy. They should be looking for evidence that the company is executing its plans, rather than just talking about them. I can spot them pretty easily- the founders usually have their eyes open super wide and are sweating over the Zoom call. Their voice sometimes cracks when they ask for $2-$3M SAFE note.
It’s worth noting that bridge rounds can be a legitimate way for companies to secure the capital they need to keep moving forward. But when companies seek out these rounds for the wrong reasons, it can lead to several problems down the road. Investors may find themselves stuck with a company that never delivers on its promises, while founders may find that they’re simply treading water rather than making real progress. In the end, it’s up to everyone involved to carefully evaluate whether a bridge round is really the best path forward, or if it’s simply a way to kick the can down the road.
As the technology startup landscape becomes more crowded and competitive, it’s no surprise that some companies are looking for any way to stay afloat. But seeking a bridge round simply to cover up past mistakes is not a wise strategy. Founders and investors alike need to be diligent in evaluating the companies they’re considering investing in and should be looking for evidence of real progress toward stated goals. If a company can’t demonstrate a clear path forward, a bridge round will likely do little more than delay the inevitable. So, it’s time to be more cautious while bridging gaps in funding rounds.
