We usually think of bridge rounds as throwing good money after bad. But new data shows that some bridge rounds can be an amazing bet.
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Bridge rounds with a top tier VC are some of the best performing investments in venture capital. They have returned a multiple of over 5x in less than 4 years, according to a new analysis from AngelList:
…on an indexed basis, the top-tier / bridge segment is the best performing segment. We find that for investments aged 2+ years (completed after 2018), the gross TVPI of capital in bridge deals with top-tier VCs vastly outperforms all other segments:
Case in point: a consumer app I re-invested in this summer. I first invested in this startup’s seed round last fall.
Since then, it had more than 5x-ed revenue. Burn is low and the company is firing on all cylinders.
Seeing the same great performance I did, several top tier VC’s joined the round. But the valuation was only a little higher than the fall of 2021.
Given the opportunity to put more capital into one of my winners, I backed up the truck. And I hope to invest even more in their Series A!
Why is this such a great bet?
I already knew the company well, and I saw it execute on its plan over a period of 9 months. Meanwhile, the revenue multiple I paid this time was far lower than before!
So what’s in it for the founder?
They can quickly raise capital from investors they already know and trust. Then, they can get back to building.
They’ve still preserved the option to get a Series A at a much higher valuation. And now they have the cash to get them there.
The outperformance of bridge rounds with top tier VC’s is no accident. Many top firms opportunistically offer more money to their top performers, even when they’re not raising.
If you’re getting the investor updates and you saw the company just tripled revenue, why wouldn’t you offer them another $1 million? What’s the point of waiting for someone else to steal the deal from you?
But we have to distinguish these awesome bridge rounds from their evil twin: the bridge to nowhere.
A company in my portfolio that’s barely growing and burning tons of cash raised a small bridge recently.
Tellingly, no top tier VC participated. They were only able to raise from a few angels.
I declined to participate. I’m happy to help the company in other ways, but follow-on capital is reserved for top performers.
No exceptions.
I’m excited to keep re-investing in the stars of my portfolio. I can’t wait to see them use that cash to take over the world!
Do you do bridge rounds? Why or why not?
Leave a comment at the bottom and let me know!
Have a great weekend everybody!
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