August is upon us and as some Partners sit on a beach with a pina colada, Entrepreneurs are hard at work scaling their companies and in some cases working towards their next round of funding. Between the Series A crunchand the lack of deals getting done during the summer time at some firms, we’ve come across quite a few bridge rounds this summer. Although some firms may not participate in these types of rounds, we’ve actually found them to be quite advantageous to both the entrepreneur and the firm in some instances.
At Corigin, the type of bridge rounds that we get involved in are basically a “Seed II”. It’s when the startup is raising an amount of capital that’s either slightly less or greater than the first round they raised, but at a higher valuation. However, at this point in time, the Series A is in sight (3–6 months away), but the team needs a little more fuel put on the fire to get there. To me, these rounds usually have some advantages for the entrepreneur and here they are:
1. More Investors means More Resources/Value — A lot of times when we invest in bridge rounds, we work closely with the entrepreneurs to help them raise the A round. From helping them with their deck to setting up meetings with Series A firms that we’re friendly with, entrepreneurs may receive value from their bridge round investors that their seed investors may not have been able to provide.
2. More Time to Test — Many times we meet entrepreneurs that have achieved product market fit, but haven’t identified the 2nd or 3rd marketing or distribution channel to help them scale. With Series A investors looking to put fuel on the fire for those secondary channels, the startups come to us to give them the ability to test these channels prior to approaching the A round.
3. More Time to Close a Deal — Quite often the sales cycle for some big deals may be longer than people would like. As a result, the one or two big deals that the startup was hoping to close prior to raising an A are still in limbo, but the closing is in sight. Rather than raising an undervalued or lower amount round than they’d like now, the startup will raise a smaller amount with the goal of closing those 1 or 2 deals prior to raising the real A.
4. Better Valuation in the A = Less Dilution — Realistically it all boils down to this point. Most of the entrepreneurs that are raising bridge rounds know the metrics they need to achieve in order to raise an A. Additionally they’ve usually dipped their toes in the water with Series A investors and realized that in order to achieve the valuation and total raise amount that they want they need a few more months of growth to get there. As a result, they need a bridge because they’re not comfortable with the amount of runway they have.
When push comes to shove we’ve become fans of these types of rounds in some situations and think that it can be advantageous to everybody involved. Thus, if you’re out raising a bridge don’t be afraid to reach out to us. Meanwhile, if you’re raising a seed, make sure to read over Josh Kopelman’s article about the Series A crunch and be strategic in your raise.
What do you think about bridge rounds? Tweet your thoughts to me at @BoatShuman.