BRIDGE OVER “TROUBLED?” WATER

According to the latest data from Carta and also observed in our three fund portfolios, the number of bridge financings is extremely high compared to traditional up-rounds. But, not all bridges are created equal! As an investor, it’s important to understand exactly the kinds of bridges that your fund managers are getting you into (and avoiding). Here are just a few types that we have experienced in the last 12 months in this choppy market.

The underperformer - The company has failed to hit milestones due to poor management and needs money to stay alive. Strangely, many insiders will consider doing this but we generally avoid participating in these unless we are being defensive against highly punitive terms and success is at least still possible.

The changeover - The investors and management have a misalignment on goals or relationship and the bridge requires new money from new investors.

The market correction - The company has exceeded commercial milestones but investors have shied away from this space lately or valuations have dropped, but the insiders believe management is still capable of a big outcome.

The pre-emptive - The company has performed so well that the insiders set terms to increase their ownership through a super-pro-rata follow-on that saves the founder the effort of fundraising. We love these and have completed several in the past two years. The one drawback is that we are not allowed to mark them up in our books so some investors can misunderstand their value in the short term.

To make bridge rounds even more complicated, some are priced (shares) but many are SAFEs or convertible notes. They might have valuations that are either higher or lower than previous valuations, but the most common case is a flat round for the first three examples and an upround for the pre-emptive bridges. So next time you hear that a company did a bridge financing, ask a few questions to determine if you are disappointed or excited.