What Is a Bridge Round?
Last Updated: By Michaela Dale
When startups are in a financial bind, additional capital can provide the financial lifeline they need to keep the company afloat. Referred to as a bridge round, this infusion of cash essentially is extra startup funding to help a company survive until the next funding round or to prepare for an exit.
While bridge rounds may not always be ideal, they can be an important tool for startup founders. This guide explains what startup founders need to know about bridge financing and how it works.
What Is Bridge Financing?
A bridge round or bridge financing is a type of startup funding raised by companies when they need additional capital between major funding rounds. This is often either through equity financing or, more commonly, a convertible note.
Why Raise a Bridge Financing Round?
The goal of a bridge round is to keep a startup financially stable until the next funding round, such as getting from a Series A funding round to a Series B funding round.
Startups may end up raising a bridge round for several reasons, including improving a product, buying inventory, strengthening their balance sheet, or extending the cash flow runway to avoid shutdowns or layoffs.
Bridge rounds happen for many reasons and can carry some negative connotations. Venture capital firms and other investors may see bridge rounds as a sign of failure to effectively manage the company's financial planning. However, bridge rounds don't always mean a company is in trouble.
While startups can use bridge round financing as a financial lifeline, they also may use this type of funding as a tool. For example, a startup might use a bridge round to enhance its balance sheet — the summary of the company's assets, liabilities, and equities — before an initial public offering (IPO) or to stimulate rapid growth.
Pros and Cons of Bridge Rounds
Bridge round financing can be a saving grace for startups in financial turmoil, however, it also may come with some disadvantages. Below are the pros and cons of bridge rounds that every startup founder should know.
Pros
- It can help to avoid shutdowns or layoffs. For startups in financial turmoil, a bridge round can help them avoid the need to cut staff and, in serious cases, go out of business.
- It may help accelerate growth. In some cases, startups can use a bridge round as a cash infusion to expedite growth to the benefit of both the startup and the investor.
- It can help startups prepare for an IPO. Bridge rounds can, in some cases, help strengthen a startup’s balance sheet, priming the company and its investors for an IPO.
Cons
- It may deter future investors. If your bridge round includes offering lower valuations to investors participating in the financing, that means less advantageous terms for potential investors in the future.
- It often includes interest. Convertible debt requires the inclusion of interest rates, meaning your startup will have to pay an additional amount when repaying the bridge round financing to investors.
- It may incite negative connotations. In some cases, a bridge round may indicate your startup is in financial distress to outside parties.
How Do Bridge Rounds Work?
Startups typically raise a bridge round in one of two ways: by issuing preferred equity or with convertible notes. In most cases, startups will approach existing investors before attempting to raise a bridge round from other venture capital firms.
A convertible note is a form of debt financing that represents the most common structure for bridge financing. This is a short-term loan that is repaid with interest and allows investors to place a valuation cap or "ceiling value" on the next equity round. This rewards the investors for taking on the risk of financing the bridge round.
If the investor(s) and startup choose to move forward by issuing preferred equity rather than convertible notes, the bridge round will most likely follow the terms of the previous funding round.
Frequently Asked Questions
Is a bridge round good?
Bridge rounds can be seen as negative by founders as well as existing or future investors because they can imply the startup is struggling financially. However, this isn't always the case. Startups can raise a bridge round for other reasons that may not hold negative connotations, such as supporting rapid growth or strengthening balance sheets before an IPO.
What is a bridge fundraise?
A bridge round or bridge fundraise is a type of startup funding that occurs between funding rounds. Startups choose to raise capital between funding rounds for many reasons, such as to extend their cash flow runway, avoid layoffs, improve a product, or prepare for an IPO.
How is a bridge round structured?
Bridge rounds are most often structured as either convertible note or equity financing. However, convertible notes are more common with this type of funding.
