A bridge round is exactly what it sounds like. It is financing that connects your startup from its current position to its next major liquidity event or funding round.
Founders often treat fundraising as discrete steps. You raise a Seed round. Then you raise a Series A. Then you raise a Series B. Real life is rarely that clean.
Sometimes you run out of cash before you hit the specific milestones required to unlock that next large tranche of venture capital. This is where the bridge comes in. It provides just enough capital to keep operations going until the company is attractive enough for the next major equity pricing.
The Function of Interim Capital
#The primary resource you are buying with a bridge round is time. You are purchasing a few more months of runway to solve a specific problem.
Most startups utilize this financing for specific reasons:
- To finish product development before a launch
- To close a significant enterprise contract that validates valuation
- To survive a temporary market downturn until investor sentiment improves
- To maintain operations while negotiating an acquisition
It is distinct from a standard round because it is usually not intended to fuel massive growth. It is intended to sustain the business.
Structure and Instruments
#Bridge rounds rarely involve pricing the company. Setting a valuation when the company is potentially distressed or between milestones is difficult and dangerous for founders.
Instead, these rounds typically use convertible debt or SAFEs (Simple Agreement for Future Equity). These instruments allow investors to give you cash now in exchange for the right to convert that cash into equity later, usually at a discount.
This structure appeals to existing investors. They want to protect their initial investment. If they do not bridge you, their previous equity might go to zero if the company fails. However, they will often demand favorable terms for taking on this extra risk.
Comparison to Extensions
#You might hear the terms seed extension and bridge round used interchangeably. There is a nuance in sentiment.
An extension often implies the company is doing well and wants to take a bit more cash to grow faster before the next round. A bridge round often implies the company missed a target and needs help getting back on track.
The mechanics are often the same. The narrative is different.
The Risks and Unknowns
#Taking a bridge round is not a neutral act. It sends a signal to the market. Future investors will look at your capitalization table and ask why you needed this money.
If you needed the money because you missed your sales projections, that is a red flag. If you needed the money because a global pandemic froze the venture markets, that is understandable.
You must calculate the cost of dilution. Bridge rounds often come with warrants or steep discounts. This can significantly reduce founder ownership.
Founders need to be scientific about this decision. You must look at your data and ask if more time will actually change the outcome.
Is this financing a bridge to a solid destination? Or is it a pier that leads nowhere? If you cannot articulate exactly what milestone this money unlocks, you might just be delaying the inevitable.