Bridge financing refers to a short-term funding round that provides capital to a start-up to "bridge" the gap between two larger financing rounds. Bridge financing is often used in situations where a start-up has already raised capital but needs additional funds to sustain operations until it can secure a larger investment. Let´s look at the two most common reasons why a start-up raises capital through bridge.
1. If a start-up is experiencing low traction and simultaneously running out of cash
This is perhaps the worst scenario for seeking financing through such a round. For a start-up to be successful and raise money through a bridge, it must craft an incredible story to convince investors that their money will indeed lead to traction growth. However, this is a reason that start-ups should avoid, as from the investors' perspective, this reason is called "pier" financing, essentially becoming a bridge that leads nowhere. A common response from founders as to why they raise capital for this reason is to buy time. However, it's important to realize that investors don't invest in time, but rather to achieve the desired return. To achieve this, start-ups need traction. Every start-up may have a different indicator by which traction is measured. Similarly, this indicator may change as the start-up matures. If a start-up has reached this point, it is usually very difficult to convince an investor to participate in the mentioned bridge, and it is questionable whether it has a future.
2. If a start-up needs time to significantly improve already achieved KPIs
Which should result in a significant increase in the start-up's valuation in the next investment round. This is certainly a reason that investors prefer to see for entering bridge financing. However, from the perspective of the start-up, it is crucial to demonstrate that this reason is not just covering up reason number 1, i.e., actually low traction, which would absolutely prevent the start-up from being successful in the next investment round. Also, it's important to remember that investors like momentum, a certain trend. They don't invest solely based on currently achieved values but need to see a positive trend in the development of these data for at least the last quarter. Therefore, founders should always carefully consider how they will demonstrate their traction and must not forget that they need to prove it based on real data.
