Discussing a bridge round or extension is one of the most challenging and important conversations between founders and investors. In the current environment, these conversations are happening daily. I wanted to share my experiences navigating these conversations and provide founders with some insights into how many investors think about when to provide additional bridge or extension funding to an existing portfolio company.
For many investors, the decision to participate in a bridge or extension comes down to whether or not they think they think they see a good outcome for the company. A good outcome could be a bridge that sets the company up for a future round of financing on the way to becoming a valuable company that could someday go public. A good outcome could also be a near-to-medium-term M&A transaction where investors think they will generate a good return. In some cases, a good outcome could be getting the company to profitability with a path to continued growth without additional invested capital. This decision is also often influenced by the investor’s relationship with and feelings toward the company, whether or not the investor led the last round or has a seat on the Board, and the investor’s capacity to tap into reserves to provide more financing. To get to that answer of a yes or no on a given bridge, many investors ask themselves (and often the companies) a subset of the following questions.
Is the company still going after a venture-scale outcome?
When companies ask for bridges or extensions, one of the first reflexive questions to ask is whether or not the company is still going after a venture-scale outcome. For me, a venture-scale outcome is a company with a path to reaching $100 million in revenue with good margins in the next decade. When the initial investment is made, most investors believe the companies they invest in can hit that target.
Over time, investors and founders learn a lot about the probability of achieving that outcome. A bridge or extension conversation forces investors and founders to revisit the adjusted probability of achieving that goal based on what they’ve collectively learned about the team, the market opportunity, and the company’s product. Sometimes, with the benefit of learning and experience, it becomes clear that the company is no longer on track to build a venture-scale business. In cases where investors learn things about the business that causes them to doubt whether the company can still achieve a venture-scale outcome, the case for a bridge or extension becomes much harder to justify.
Deciding not to pursue the venture-scale outcome shouldn’t be seen as a mark of failure. Sometimes the market timing is such that it will be very difficult, if not impossible, to create a company of that scale in your category. This does not mean that you should quit or give up on the company; there might be a sustainable, profitable business to be built or a smaller outcome available to the founders and management team. Opting for this path means it is also less likely that your investors will provide you with the bridge financing to get there.
What’s the rationale for the extension?
The most important question where I think founders and investors need to be on the same page is the rationale for the extension. What will the extension allow the company to accomplish or unlock that they have not gotten done to date? And, importantly, why will achieving that milestone matter?
The biggest mistake I see founders make is asking for a bridge or extension simply to extend runway and keep going. For most investors, that is not a compelling reason in and of itself.
I have found that extension requests where the rationale boils down to the company wanting to keep going, largely on the same trajectory, with the same strategy, same team size, and the same burn rate generally fail to generate investor interest. Simply put, if doing things one way put the company in a position to need a bridge or extension, why is continuing on the same path likely to produce a different result?
A strong bridge financing ask paints a clear picture of what the company will do with the money that will change the company’s trajectory and answer some of the big outstanding questions about the business. In many cases, a strong bridge financing ask explicitly calls for changing something about how the company operates – reducing burn rate, focusing more energy on generating revenue, improving unit economics, or shipping key features or products that will unlock new customer segments.
How much progress did the company make with the capital invested to date?
This can be a hard thing for you to assess as a founder, but I think this is one of the single most important things investors consider when you approach them for a bridge. As I mentioned before, the initial investment is always a moment of peak optimism, and investors and founders alike are optimistic about what the capital can do for the company. Over time, a picture emerges of how efficient given company is at turning investor dollars into progress.
Companies often ask for bridges and extensions because they couldn’t clear all the milestones to unlock the next round. The “why” is an important part of this story. Did the company fail to achieve the milestones and goals it set out when the last round was raised? Or did they mostly achieve what they set out to do but find themselves in an unfriendly fundraising environment where investors have higher expectations for performance? From the investor’s point of view, it can often be difficult to believe that a company that was not efficient with the previously invested capital will become more efficient and effective with the next tranche of investment.
Is this bridge coming on the back of a failed fundraise?
In my experience, the calculus on whether to participate in a bridge or extension is really different when it comes on the back of a failed fundraise. Bridges or extensions that come on the back of a failed fundraise are difficult decisions; it can be hard to say yes to an extension or bridge round when a company has just gone to market and failed to raise. The challenge for investors is figuring out whether the reasons why the company failed can be rectified with more time and resources or whether investors have identified a fatal flaw in the business that will continue to make it difficult to finance. In many cases, founders believe that more traction or progress is what’s needed to unlock the next round – this is natural as this is what’s under their control. But in many cases, investors can deduce other reasons why the fundraise failed and conclude that there are bigger issues at work and that more traction or progress is unlikely to change the decision the next time the company goes out to fundraise.
What is the minimum amount of capital needed to reach a meaningful milestone?
The most practical thing to determine is the amount of money required to get to a meaningful milestone that will allow the company to unlock the next fundraise or get on a path where the company can grow without requiring more outside capital. One difference I have noticed is that investors and founders don’t always see eye to eye on this amount. In my experience, investors often have a number in mind that will get the company to the milestone, with some cushion. On the other hand, many founders have in mind a minimum amount of money they need to raise to continue operating and making progress. For a bridge to come together, particularly when capital markets are tough, founders and investors need to get on the same page about the amount to be raised to get to that milestone.
I have a few other quick things I think are helpful for founders to understand when approaching investors about bridges and extensions. These things are not necessarily under your control, but they are worth understanding if you can get insight into them.
What’s happening across that investor’s portfolio?
Are you asking an investor for a bridge or extension at a moment when a large chunk of his or her portfolio is in the same position? Is he or she in fight-or-flight firefighting mode? Having context on these questions can help you understand their mindset when you make the ask.
What is your investor’s willingness and ability to put in more money?
Only some investors can make follow-on investments in bridges or extensions. Some firms have strict policies about when they will and will not participate in bridges or extensions. Other firms will require a new outside investor to set terms or contribute capital before they participate. And, sometimes, you will find that a supportive investor is at a point in his or her fund cycle where he or she lacks the capital to make an additional investment.
I hope these tips are useful to you as you navigate your fundraising journey.