Welcome to the Dreamit Dose.
When startups feel they don't have enough traction or proof points,
they will often revert to raising a bridge.
Hearing the term bridge round
usually has a negative connotation in investors minds.
Especially when startups don't position it correctly and hit
key points that investors really want to hear.
Raising a bridge is really not hard if you know what you're doing.
Let's dive in.
When you say "We're raising a bridge", as an investor,
the first thing I think is, oh shit, they're probably in trouble.
Here's how you change that perception.
First, let's talk about why you're raising a bridge.
Usually there's 3 core reasons
and it's important to know which one you fit into.
The first and most common scenario is,
you didn't achieve the traction needed to raise your next round
and you're running out of cash.
The next reason is, you might want to take on a bit more cash
to hit key goals that are going to increase your valuation
so your next round is less dilutive.
Lastly, perhaps market conditions have changed.
For example, new competitors have emerged
or the market's heating up more rapidly than expected.
Let's go deeper into reason 1, low traction and low cash.
The most common situation startups find themselves in
when raising a bridge round.
You need to be super careful about negative signaling in this situation.
Why is this negative? Because investors will assume
that most likely you weren't able to hit your goals
and you may be failing.
So you'll need to convince them that, this time, your plan is going to work.
Realize, you're starting from a disadvantage
and your story is going to need to be incredibly compelling.
If you're in reason 2, you've decided you need a bit more cash
to build out the company, product, traction, or other proof points.
By doing a bridge for this reason, you can raise your next round in a better,
less dilutive valuation before bringing in your next large round of capital.
But, be careful here.
Investors may try to pick this apart to really see if you're in reason 1,
low traction low cash.
So you'll need to explain how your valuation is going to step up in a big way,
and this couldn't be foreseen.
The last reason is changing market conditions.
Perhaps there's some new competitor that's emerged, the market is heating up,
or there's some other fast moving dynamic that's changed your funding needs.
That's fine as long as you can tell a credible story.
Once again, investors may call b.s. and just think you're
trying to reposition your bridge round into a more favorable light.
Whichever core reason you fit into, make sure from the start
you're clear on why you're choosing to do a bridge round.
Now, let's make sure you avoid building a bridge to nowhere.
Because when you say you're raising a bridge, I think a bridge to where?
As an investor, I want to make sure you're building a bridge
that's going to get you to where you need to go.
Not that you're building a pier that you're gonna walk off the end of.
So you need to have a great story on how this bridge is going to
get you to your goals, fundable milestones, or cash flow break even.
So in your pitch, you need to make sure to cover...
the goals you'll hit with this bridge,
why you feel these goals are fundable milestones
that create significant value inflection points for a larger round,
evidence that you've picked the right fundable milestones,
and make sure you bake in enough cash and time
to close your next round once you've hit your key milestones.
Typically, this is at least 3 additional months.
Next, we need to talk about structuring a bridge round.
Most of the time it's done as a convertible note.
So investors really don't know the valuation until the next priced round.
So you're asking investors to put money in,
not really knowing what it's worth.
To help them get over their concerns,
You will usually offer a discount to the next round.
Typically 20%.
Another way to get them over the hump is to put a valuation cap on the bridge.
That way the next round's valuation doesn't run away from them.
Realize, investing in a bridge is really high risk.
And the investor is thinking, is it really worth a 20% discount
where I might lose all of my money,
or should I just wait and invest in the next round and not get the discount?
And you better be sure to be ready to answer this one...
"Are previous investors going to be putting money into the bridge?"
For the most part,
insiders doubling down shows they still believe in you.
If they're not coming into the round, that's going to be
some serious negative signaling you're going to need to overcome.
Make sure you have clear and convincing answers if
any previous investors are not coming in.
For example, I have 2 angels that were in my last round
and they're both tapped out.
Or, my seed round was just one fund
and they're out of dry powder and can't continue to invest.
Lastly, one of the most critical things an investor is going to look for
is your momentum.
So what momentum do you have in your sales velocity,
revenue, LTV to CAC ratio, cost of customer acquisition,
rate of trials, and close ratio?
Things along these lines that show that you're moving
in the right direction.
Investors like to invest in lines, not points.
So they don't want to just hear about a point in time like your current revenue.
They wan't understand how things are changing
and what momentum is going on inside your model
and how your company is growing.
That's it. That's how you raise a bridge round.
Be clear on why you're raising the bridge.
Be careful about negative signaling.
Make sure you're building a bridge, not a pier.
Hit your fundable milestones.
Structure your bridge with the right discount and cap.
Make sure to stand in an investor's shoes,
and understand if the discount really worth the risk.
Do you have insider support? If not, why not?
And remember, momentum is everything.
That's your Dreamit Dose in way over 5 minutes.
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