To Raise a Bridge Round of Startup Capital, Make Sure That’s What You’re Actually Doing
For the long-term viability of your startup, it’s important to be clear about your goals and understand whether you’re actually attempting to raise a pendulum round.
Raising a bridge round can be a smart strategic move for startups who need extra capital between their current and upcoming funding rounds. Many investors are happy to participate, and many founders find it gives them the flexibility to grow to the next stage or overcome an unexpected obstacle.
Before you do though, it’s important to ensure that you’re actually raising a bridge round, and not a pendulum round. The difference can make or break the sustainability of your business, and ensure that you’re mapping toward metrics that support rather than detract from your long-term growth objectives.
What’s a Pendulum Round?
I believe that I’m coining the term “pendulum round,” so don’t be intimidated if it’s not a term that you’re familiar with.
The difference between a bridge and a pendulum round is exactly what it sounds like.
A bridge is relatively stable. (I use the term “stable” loosely. We’re talking about early-stage startups. Nothing is completely predictable or stable, everything is relatively high risk, so there’s no problem with viewing this bridge as more of a makeshift rope above a moat of lava than a concrete one that could support a vehicle.)
Still, a bridge is relatively stable, with a clearly defined starting point and relatively predictable destination. You know the ground you’re standing on when you set foot on this bridge, even if some of the steps are missing and you’ll need to hold on for dear life while jumping between them. That’s fine. It’s still a bridge taking you somewhere you can clearly see in the distance.
But a pendulum is fundamentally different.
With a pendulum, you’ll stretch as far as you can from one side, hoping to swing past some of the steps that you’d really like to take, with the hope that amorphous momentum alone will suffice to propel you as far as you can to the other side. This requires sheer momentum to bring you to a tenuous destination, and it’s highly unlikely that you can predict where you’ll land or replicate the process to get there. Luck alone would land you back in an identical place again.
What’s more likely is that you slowly and repeatedly come crashing back into your starting point (and existing investors) with less momentum (capital) than you started with, and the identical ask: to push you again closer to the imagined destination, without a clear plan of how to stick the landing when you get close to the other side, or quantifiable promise of what the ask will bring.
When this happens, it’s often the first tangible sign that startups who raise pendulum rounds will gradually peter out without moving much from their starting point, and without enduring movement to show for all of their activity. It’s unlikely that you’d deliver even 100% return on their investment — a ridiculously low margin that’s the equivalent of losing money, because of the investors’ opportunity costs and time invested in your company. Plus, the incredibly narrow window between the bridge capital infusion and when gravity brings you crashing back to reality makes it almost impossible to methodically optimize how to spend the investment for long-term growth, or predict where you’ll land.
In a pendulum round, you may not have a clear vision for how you’ll know when you hit the peak or how high you can reasonably hope to get from the capital infusion. Usually, these short-term sprints are distractions from sustained growth, and are often tracking toward a goal that cannibalizes the optimal business strategy.
This shouldn’t be what the bridge round looks like. You should have a clear picture of where you want to land, the capital it will take to get there, and how you’ll deliberately make the journey between where you are and where you hope to be. The entire team needs to be aligned on their respective short-term objectives and how they map to the long-term business objectives. Each should complement, not compete, with each other. A misguided sense of accountability and “star performers” often leads to siloed departmental objectives, misplaced blame, and rushed firings.
Many founders say that they’re raising a bridge round, but are really aiming for a magical pendulum round.
They have no idea how far this bridge round will take them, or how to replicate and measure success along the way.
Establish Success Metrics Before, Not During, Your Bridge Round
Investors want to see returns on their investment, and in a short-term attempt to deliver, many founders shift their business objectives to better align with the quarterly objectives most investors measure.
You should start with a very clear objective of what will change for your business with a bridge round, and then put a plan in place to get there.
It’s entirely possible that the KPIs and success metrics proposed during a bridge round will take your company farther away from scalability.
How is that possible?
For example, if you raise a bridge round with the promise of increasing the number of new paid customers and industries served, it’s entirely possible to deliver on these goals and still be farther away from scalability than before.
Marketing is optimizing for Lead Volume and Cost per Acquisition, but Sales is working solely toward a Revenue Quota that includes cross-selling and up-selling current customers, you run the very real risk of missing the true underlying objective of Customer Retention that determines the overall health and viability of the business.
Or if Product and Engineering are driving hard toward launching and delivering a new product, but Marketing is still driving toward Net New and Marketing Qualified Leads, it’s possible that nurturing a new persona and market for the new product would cannibalize their efforts because it takes more time and money to refine — especially if these metrics don’t transfer neatly into a new market that may have a smaller total number of accounts but higher Average Contract and Lifetime Customer Value. (If I’m selling broadly into to enterprise clients and then launch a new product targeting banks, for example, there are fewer banks than there are software companies, so my lead volume could drop while the sales cycle lengthens.)
Not to mention, it’s possible that this new product launch is merely a distraction from improving upon the legacy product, whose differentiation will drive the all-important customer satisfaction, renewal, retention, and referrals that really determine viability.
It’s not as simple as driving hard toward accountability and KPIs. And it’s very, very easy to get further away from long-term scalability by optimizing for short-term growth metrics that you don’t realize are competitive with business viability.
A bridge round isn’t a supplement for future rounds or customer-generated revenue. When raising a bridge footing should be relatively predictable and stable the entire time, with clearly defined and aligned upon success metrics at every step.
A bridge has those.
A pendulum doesn’t.
How Do You Know If You’re Raising a Pendulum Round?
If you plan to close our bridge round in April, and then start your next round of fundraising in May, you’re probably raising a pendulum round. Your founding and executive teams will be so distracted by participating in such drastically different fundraising processes, that it’s almost impossible to optimally invest the new capital from a bridge round.
Don’t underestimate that. Raising each round is substantially different than raising the round prior, and a nearly full-time engagement for the months leading up to close. You can’t possibly be focused on building your business with the same fidelity that investors of prior rounds expected if you simultaneously have one foot in fundraising mode. You’ll become short-sighted and jeopardize strategic decision-making for starters.
Your prior investors of earlier rounds will likely be more forgiving and short-term risk tolerant than the VCs and PEs who tend to lead and join later rounds. Each round represents different priorities, focus, and goals.
At your seed, angels and VCs are investing in a promise. At Series A, VCs are investing in opportunity and optimization. At your Series B and C, and PEs are investing in growth. Don’t mistake the data and expectations that each will have , and be as quantifiable as you can when discussing traction, growth, and roadmaps.
Is the round capped? Who has right of first refusal for subsequent rounds? How will this impact dilution and future rounds?
Each firm, and even individual investor, will have their own perspective on bridge rounds and what they expect to see, partially based on experience and partially based on their unique investment philosophies. The terms of these rounds will be highly influenced by these subjective opinions and existing terms, and the terms of each subsequent rounds may be less favorable to the founders than the preceding rounds. You’ll be contractually bound by who is eligible to participate and whether the round is capped based on these terms. It’s possible that you’ll prefer to open a new round altogether, so don’t make assumptions without verifying with your legal counsel.
This must be explicit. Is this bridge round the difference between launching a targeted marketing campaign to reach more prospects, with benchmark CAC (customer acquisition cost), lead conversion metrics, and revenue figures to outline what you hope to accomplish?
Are you hoping to hire new SDRs (sales development reps) or CSMs (customer success managers) to address a critical bottleneck in the sales funnel?
Why these steps and hires? Why can’t you make them without a bridge round? What can they expect to see to indicate that your strategy is working, before the entirety of this round of investment is exhausted?
Make sure you’ve outlined your goals and options in advance. Once you do, optimally funding steps will become more apparent.
This is critical to developing an effective strategy for long-term growth. The entirety of the conversation is likely hinging on vanity metrics if you can’t address this key point.
Let me explain. Say you go to your investors saying you want to raise a bridge round to build out a shippable demo for the healthcare market, because you’ve gotten some initial interest in that market even without outbound marketing efforts targeting them.
If you’re looking to expand into additional market categories before fully investing in your existing one, a few things may be happening.
You may have exhausted the low-hanging fruit in the initial market and looking for a quick fix to buy some time before investors catch on that you don’t have a long-term strategy.
I’ve seen this countless times. Hit a plateau in one market? Let’s sell into another!
This is usually the first sign that you’re barreling toward decreased momentum, margins, and differentiation, and typically belies a lack of true strategy or market understanding.
Once you hit a plateau, it’s time to double down on optimizing tactics and execution. Email marketing campaigns not performing like they used to? Analyze the list segmentation, content, offers, copy, and time you sent the messages BEFORE assuming that you need to expand into a new market or new market category.
It’s much less risky, and supports rather than detracts from a unified long-term strategy.
As mentioned in the first point, this is not a hope and pray for magic momentum strategy. You should be clear on the end goal of the round, and how much you need to get there, and why you’re raising a bridge instead of just opening up the next round of funding. These reasons need to be compelling and based on strategic initiatives, not what’s easiest for the founders or most likely to close quickly.
Keep the entire conversation focused from the point of view of your investors, their likely concerns, and their priorities. This is as much an opportunity to build your relationship as it is a risk of eroding it. The more demonstrable this is, the easier the conversation will be and the more confidence your seed investors will retain in you.
If you’re looking to raise a Series A-2 round for example, investors will want to understand cashflow and whether you’re already planning to raise a Series B in short order. This would dilute their investment, so expect more restrictive terms and less negotiating room if so.
Did you hit unforeseen internal (hiring missteps, lack of strategic alignment, missed sales projections, etc.) or external (new market entrants or competitive edges, unfavorable regulatory changes, sudden changes in consumer behavior, etc.) obstacles? Why didn’t the last round they invested in suffice to get you to the next stage?
Did you miss development deadlines? Is your marketing ROI lower than expected?
It’s very important to remove the speculation and assumptions from these answers. If you don’t know, or haven’t researched a question your investors raise, it is much better to say that than to make something up.
- This is what happened;
- This is what we’ve learned;
- This is where we’re going;
- This is what we need to learn, or where we’re currently stuck;
- This is how we’ll test it.
You can follow this framework to answer investors’ questions:
Regardless of the answer or situation, following this framework for questions that trip you up ensures that you don’t rattle off untested assumptions that will erode your credibility.
It’s not great not to have an answer to a question that investors come up with in a 30-minute meeting. But there shouldn’t really be any surprises with existing investors — they should be in the loop with regular status updates.
Your investors should have some understanding of the market that you’re in by now. It’s far better to be honest about what you don’t know than to guess and try to make up something demonstrably false.
It’s much better to be seen as an honest entrepreneur who needs guidance, than a dishonest or egotistical one who’s keeping things from your investors.
Investors expect you to pivot, but knowing when to pivot isn’t magic. It’s a process that starts with a measurable strategy with quantifiable, tangible indicators at every step. Your product roadmap will and should evolve as the market does, and being clear about your long-term goals before proposing a bridge round is critical for maintaining control and strategic direction over your startup.
This article was contributed by Managing Partner Rebecca Sadwick Shaddix.
