We have noticed recently a significant increase in the number of “Bridge” rounds among stage 1-2 startups. I am writing this investor’s brief on the side of caution. Although when a company is preparing a bridge round, it at times seems for early stage investors that they can still get in on a very reasonable valuation and deal terms. That is where the sign of caution comes into play. Let me explain my view.
Startup founders most often will say; “ we want to delay the series A (when VC gets in) a bit longer to increase the valuation” or; “we do not think we need to give up much equity, the bridge round will take us to the next level”. In some cases it might be true and even smart, yet investors need to pay attention to the recent data indicating that over 60% of the companies that are raising “Bridge” round do so because they are underperforming, and that is the real reason.
In some cases it is the last attempt to raise capital before taking the “Down Round” path. Which strong market indicators say we will see a significant increase in the numbers of down rounds within the next 12-24 months. If they go to the VC they will be exposed for their lack of performance and the VC will get cold feet.
So before you, as an investor, are coming to a “Bridge” round use the following checklist to evaluate the opportunity:
- Look at their last 6-18 months performance against the original milestones
- Look at the monthly burn rate against the plan
- Is there any unexpected technology issue, challenges, or obstacles that need to be addressed and what will be the cost against the budget
- Look at the balance sheet, especially the debt, to see that the money that is being raised for future development and not to pay for the mistakes from the past.
- Last but not least, Make sure all updates in the original plan and milestones are being adjusted
Most investors keep dry powder for follow on investment. I, for one, would like to use my follow-on fund to invest in highly performing companies. The term “Bridge” round has a nice ring to it, yet you want to make sure you are not dumping good money after bad.
The question is, is it a 1 mile bridge or a 100 mile bridge, big difference.
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