Aug 8, 2022
When fundraising gets tougher for startups, the existing investors (insiders) will often provide a bridge loan to the company to extend the runway for getting another round done. There is more of this sort of thing happening in today’s fundraising market and I thought I’d share some of the things I have learned about setting up bridge loans.
First, bridge loans are a bridge to something else. Most commonly they are a bridge to a round of financing with new investors (outsiders). They can also be a bridge to the sale of the company. Occasionally, but not often, they can be a bridge to getting cash flow positive. If none of those things is going to happen in a relatively short period of time, then it is a bridge to nowhere and you really want to avoid that. A bridge to another bridge is never a good thing and should be avoided at all costs.
An alternative to a bridge is an “insider round” where the existing investors provide sufficient capital to fund the business for eighteen to twenty-four months. That is a real round of financing and it is not a bridge. While that can sometimes be the right answer for a startup, I strongly prefer bringing new investors/new capital into a company in every financing round. New investors strengthen the investor syndicate which makes the company more resilient. New investors bring new ideas, new experiences, and new sources of funding to the business. New investors in every round are a very good thing and I like to try for that whenever possible.
So let’s say your company really wants to bring new investors into the business with another round, but it is taking longer. But you and your investors are confident that the new round will happen. Then a bridge is a good idea.
Here is how I like to structure a bridge:
When it is time for a bridge, the lead investor, which is typically the investor with the largest capital invested and largest ownership, should “step up”, suggest terms, and work with the investor syndicate to come together and provide a bridge loan. That kind of leadership is very important when fundraising gets harder. The startups that have strong leads will do a lot better in tough times and this is a really good example of why that is.