Seed VCs Are Funding Bridge Rounds That Lead Nowhere

Seed-stage VCs often fund bridge (rounds) to nowhere.

The question is: why?

I've got no doubts about why seed founders push for bridges. It's been a really tough fundraising environment lately, founders will scrap and claw for every chance to keep their businesses afloat (respect!)

I'm a little fuzzier on the "why" for the investor side, however. The data below is not pretty.

𝗗𝗮𝘁𝗮 𝗘𝘅𝗽𝗹𝗮𝗶𝗻𝗲𝗿

• We looked at 7,152 companies that raised a priced seed round.

• Split the data into those that raised a bridge round after seed (orange) and those that didn't (blue).

• Bridge rounds in this case meant priced funding after seed by insiders on the cap table, typically a smaller round than the initial seed, in the same named series (usually something like "seed-preferred-2", etc).

𝗠𝗮𝗷𝗼𝗿 𝗙𝗶𝗻𝗱𝗶𝗻𝗴

• Bridged companies make it to Series A about half as often as non-bridged companies, give or take. And the data is worse still for convertible bridges.

𝗣𝗲𝗿𝘀𝗼𝗻𝗮𝗹 𝗧𝗮𝗸𝗲𝘀

Two replies often come up around bridge rounds. The first is that the bridge is to get the company over a hurdle right before it is acquired, but the data on that is pretty awful (a percentage point or two added to the graduation rate in the chart).

The second is that the VC is actually trying to get more capital into one of their winners BEFORE a new investor comes and steeply marks up the company. I'm sure that happens, but clearly less often than it's spoken about.

𝗧𝗵𝗲 𝗿𝗲𝗮𝗹 𝗾𝘂𝗲𝘀𝘁𝗶𝗼𝗻: 𝘄𝗼𝘂𝗹𝗱 𝗰𝗮𝗽𝗶𝘁𝗮𝗹 𝗯𝗲 𝗯𝗲𝘁𝘁𝗲𝗿 𝘀𝗽𝗲𝗻𝘁 𝗶𝗻𝘃𝗲𝘀𝘁𝗶𝗻𝗴 𝗶𝗻𝘁𝗼 𝗮 𝗻𝗲𝘄 𝗰𝗼𝗺𝗽𝗮𝗻𝘆 𝗼𝗿 𝗯𝗿𝗶𝗱𝗴𝗶𝗻𝗴 𝗮 𝗰𝘂𝗿𝗿𝗲𝗻𝘁 𝗽𝗼𝗿𝘁𝗳𝗼𝗹𝗶𝗼 𝗰𝗼𝗺𝗽𝗮𝗻𝘆?

Unfortunately for the current seed founders, I think the answer is usually "invest in a new company".

Lots of human factors here clearly which matter a great deal - but the raw data is cold on bridges.

#startups #founders #seedVC #seed