What is a Bridge Round?
If you run a startup, it’s likely that at some point, you’ll have raised capital. But what if you need more time to develop your product or service? In that case, raising an interim round of financing, called a bridge round, can give your company the boost it needs to keep moving forward without sacrificing its future growth potential by taking on too much debt or diluting ownership too soon.
What Is A Bridge Round?
A bridge round is a type of equity financing that startups use when they need additional funding. Unlike seed rounds, which typically occur before the company has raised outside capital, bridge rounds happen after a startup has already raised some funding from venture capital firms or other investors.
A bridge round can be a direct investment by investors in exchange for equity in the company or a convertible note. A convertible note is a way for investors to loan the company money instead of buying stock. It’s a form of short-term debt financing and at another funding round, it will be converted to shares in the company.
Why Do Some Startups Raise Bridge Rounds?
Bridge rounds provide enough capital to help startups to expand and get ready for their next steps in growing their business. If you have been in the market for a while but haven’t hit your goals, a bridge round could be just what you need to keep going strong.
A bridge round is a short-term infusion of funding to keep a company afloat until the next round of investment comes in. It’s not uncommon for companies to raise a bridge round if they’re between two rounds of funding or anticipating another round but want to continue growing until it arrives.
A bridge round will help startups so they have enough cash to last through multiple quarters without having to shut down or lay off employees.
Bridge rounds also allow startups time to get their business model proven before raising more significant amounts from investors down the line. This can be especially important for early-stage founders who don’t have years’ worth of revenue yet.
Related article: startup funding stages
How Much Can You Raise In A Bridge Round?
Bridge rounds are generally between $1M and $5M and are usually smaller than Series A and Series B rounds. For example, if a company has raised a seed round but needs more funding for growth metrics like user acquisition, customer success, etc., then a bridge round can be necessary.
How To Know If Your Company Needs A Bridge Round
The first way to know if your company is ready for bridge financing is if you are at a critical point in its lifecycle. A bridge round should be used when you need to scale significantly, either by hiring more people or expanding your product/service offerings.
An example is when your startup has reached an inflection point but hasn’t yet achieved product/market fit. In this scenario, it may be beneficial to raise money so that you can hire more employees who can help build out the product and get customer validation.
Another example would be if you’re planning on expanding into new markets and want to grow quickly by hiring salespeople or building out customer service teams before bringing products or services online in those markets. You might need a longer runway for this in terms of cash flow.
A bridge investment can also be a reason to help increase the valuation of your startup in the future before a new big funding round. This will help raise future investors.
So, Is A Bridge Round Right For Your Company?
In general, bridge rounds are most appropriate for companies that have strong growth potential but need additional capital to get them over a critical hurdle. This could be when you’re looking to hire key employees or expand into new markets. It can also make sense if you’re trying to raise money before achieving product/market fit in order to build out the business and better position it for long-term success.
Of course, it doesn’t come without its risks. If you’re not careful, bridge rounds can be a slippery slope that leads to further rounds of dilution. It’s important to find investors who want a long-term stake in your business rather than just capital for the sake of it and who understand what they’re getting into when they invest in your company.
If you’re a founder or early employee at a startup, it’s essential to know about bridge rounds. Bridge rounds are for startups that need more money and growth capital than their existing investors can provide. They help companies through difficult times, find product/market fit, or buy time when raising a new funding round.