Now that I’ve been angel investing for 18 months, some startups are coming back and asking for more. Should I double down, or stand pat?
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Zachary Ginsburg of Calm Ventures wrote a great blog post on the subject. He was kind enough to let me excerpt it here.
Zach deals with the toughest re-investment calls of all: bridge rounds. These rounds happen between big, full-fledged rounds like Seed and Series A.
They can be a great opportunity – or a way to throw good money after bad. Below, Zach explains how to tell the difference.
I saw another GP post about bridge rounds and thought I’d chime in with some quick commentary as I’ve thought about this quite a bit.
There are generally 3 types of bridge rounds I see.
- Bucket #1 Company’s performing well but not well enough to justify a larger priced round and/or at their target valuation. In this current market where multiples have compressed 50-80%, this is happening more frequently.
- Bucket #2 Company underperformed for some semi-legitimate reason (supply chain issue, capacity issue, product bug, R&D required more time than expected, revenue lagging traction, etc.), but you build conviction that this is a temporary hitch with the original investment thesis more or less intact, though likely with some added runway risk or other risk.
- Bucket #3 Company’s underperforming, and the round is one last ditch effort to make something happen i.e., a bridge to death.
- I’m also adding a #4 & #5 bucket which occur though less often: #4, the company’s raising to provide sufficient runway to get them through an acquisition, and #5, the company is making a soft or hard pivot, but the investors still have conviction in the company leadership. Sometimes this occurs as a bridge, sometimes I see it as a recap.
I’ve seen buckets #1, #2 and #3 dozens of times. #1 and #3 are generally (but definitely not always…) easy to spot – #2 is trickier.
My view is that if I can get in a bridge round that falls into the 1st bucket – the company’s performing well, but requires additional runway to hit the benchmarks required to raise a larger, priced round at a sufficient markup – I typically take it. It’s one of the few times for LPs to get significant value in a high performing company in venture, and these rounds have been some of our best performing deals. Without disclosing names, here are a few that come to mind:
- Series A bridge for a B2B SaaS co at a ~$35M pre-money valuation that subsequently raised multiple large, priced rounds, the last taking place at an $800M+ valuation from a tier 1 venture fund. At the time, it was pretty clear this company fell into the first bucket.
- Series A bridge for a consumer tech company at a $95M pre-money valuation; raised multiple subsequent priced rounds, the most recent one valuing the company at over $1B from a tier1 lead. The company pretty clearly fell into the first bucket.
- Series A bridge for a consumer tech company at a $20m valuation cap; less than 12 months later, they raised at a $140M valuation from a tier1 lead. It was not clear if this company would succeed and definitely fell into the #2 bucket. In this case, COVID was the reason for underperformance, and while there was significantly more risk, we felt that if they could manage through it, they could quickly raise at a substantial (3-5x+ markup), which they did.
- Seed bridge for an autonomous tech company at a $20M pre-money valuation. Acquired 1 year later for $250M. The Company was performing well; my general instincts at the time was that this was a bucket #1 deal.
Why would a high performing company offer investors value in a bridge? One common reason is because the company is just looking for a small amount of capital and to close quickly so that it can continue to execute. They’re less concerned with the small dilution hit, and thinking bigger picture, and will very likely more than make up for it in the next round when they actually raise a significant amount of capital.
These are just my very high level thoughts to give you a sense of how I view the bridge landscape. All bridges are not bad and as mentioned, many have been amazing performers for us. On the other side, I’ve invested in bridges that I thought fell into bucket #2, but ended up being #3 (one comes to mind, and it was extremely disappointing). It’s a judgement call; when you’re right, the upside can be substantial and if you’re wrong you can lose your own capital and LP capital fast. From an LP perspective – I’d judge the deal on its merits (is this a good deal or a bridge to death; are the reasons for the bridge versus a priced round legitimate), and I’d make sure the round provides sufficient runway (min 12 months runway; 18-24+ better) to avoid a quick death.
I love the way Zach breaks down every possible scenario. I agree 100% that if you can invest in a company that’s growing fast at a similar price to what you paid a year ago, that’s an amazing bet.
Do you invest in bridge rounds? Why or why not?
Leave a comment at the bottom and let me know! See you tomorrow!
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