Bridge round for Swiss SaaS: What to consider?

 

When companies are running low on cash, they need to find new capital to keep the company afloat. As the name suggests, bridge rounds aim to close the gap between two rounds and in some cases, might not need an additional round. 

 

  • Bridge rounds are common these days
  • Bridge rounds don’t necessarily are a negative signal (some are)
  • Bridge rounds can be very dilutive since if done via equity will probably be done at the last valuation
  • SaaS companies can access Growth loans as a non-dilutive bridge finance option while at the same time diversifying their capital stack
  • Bridge rounds can be structured via debt, convertible debt, or equity



What are the main use cases of bridge rounds?


  • Extend the runway until the market environment improves

The goal of a bridge round is to keep the company running until the next, and usually larger, financing round can be closed. They have historically been used to large extent in pre-IPO companies to wait until equity markets timing is favorable. Nowadays, bridge rounds have also become popular in young companies following the same logic: wait until the funding environment improves.

  • Hit certain KPIs and milestones to improve valuation

A company may feel that it is close to hitting certain milestones such as reaching a revenue target, closing important clients, or launching a new feature. Once the company reaches these new milestones, it can raise at much more favorable conditions or open up discussions with other investors that were not accessible before.

  • The optionality of moving into profitability

After adjusting costs in the last few months, many companies can see their path to profitability. With no clear decision on the strategy to pursue, keeping flexibility about future funding options can be priceless. Once a company is profitable, it will have more path options.

  • Financial problems

Companies that are struggling to get traction and facing a short runway will need to raise a round if they want to avoid shutting down. There are several reasons why a company might be in this situation and a bridge round won’t necessarily solve it.




What are the benefits of bridge rounds?


  • Get additional capital

Companies can keep running their business and growth initiatives despite difficult market environments

  • Keep valuation

If raised via equity-like instruments, these rounds can be priced at the same price as the last round, avoiding endless discussions on valuations. If raised via debt, there are no valuation discussions.

  • Improve trust

Obtaining a bridge round can be perceived as a positive sign by external investors, increasing the company's reliability and visibility.

  • Fast process

Bridge rounds are typically faster and easier to implement, significantly reducing management’s time spent on fundraising. 



The impact on Governance

 

When bridge rounds are structured via equity-like instruments, in many cases it will alter the controlling structure. This can create unwanted voting and veto rights both for the founders and the investors. This should be given special consideration since many times these details are omitted during the implementation and only noticed later on.



How can bridge rounds be structured?


Bridge rounds can be structured in different ways:


  • Convertible loans

Existing or new investors can provide fast funding via convertible loans. For companies that already raised external capital and since this is not a new round, it is likely that the valuation cap will be the post-money valuation of the last round.

  • Preferred shares

If all the bridge round investors are the same as the last priced round, then preferred shares can be used and terms will likely be the same as the last round.

  • Non-dilutive growth loans

Non-dilutive growth loans can be an attractive option since they are fast and typically the least expensive alternative. Since there is no equity transaction, there are no valuation discussions or changes of control. One caveat is that it only works for companies that are in growth mode and have healthy metrics. The other advantage of non-dilutive growth loans is that it keeps full optionality in case more equity or debt is sought in the future. Although it comes with flexible payment options, loans need to be paid back. Our Lendity Growth solution is specially designed for this use case. You can also check our calculator for estimating a funding amount.



BOX: How does non-dilutive growth loans work?



What to keep in mind when raising a Bridge Round?


  • A clear narrative about the bridge round

Founders should have a clear explanation of the use of the funds and what is expected down the road. Is this round used to seize growth opportunities? Is it to develop new features? Enter a new market? Founders should also be able to clearly articulate what direction the company is going and what are future plans.

  • Everything is negotiable, from both sides.

Since some investors perceive a bridge round with a sense of urgency, they will try to obtain special terms. Beware of your concessions and the impact they can have on your future negotiations with current or new inventors. At the same time, you might need to make sacrifices, such as in certain expenses or plans.

  • Perception by stakeholders and second-order effects

Bridge Rounds have implications for the company’s stakeholders, including customers, investors as well as current and future employees (think ESOPs). When doing a Bridge Round, make sure to think about all the second-order effects. First-order effects such as “getting a Bridge Loan” are easier to grasp, but second-order effects are not. Always be thinking, “and then what?”.

  • Start as early as possible

Most entrepreneurs start funding rounds too late. Make sure you start early on in the process, with a 9 to 12 months runway ideally. This will give you a lot of options and avoid you from ending up with the wrong investor (think marriage) because of urgency. More funding means more optionality, more credibility, and more bargaining power. If you start late, the power balance will shift strongly towards the investors. Time is critical, start as early as possible.

 


A word on VCs and Bridge Rounds

 

VCs don’t like to do bridge round, since each time they invest they expect a round to be priced at least 2x to 3x the last round. Furthermore, when they invest in a new round, they prefer having a new investor leading the round. 

 

Sometimes VCs have “reserves”, which is a pocket of funds reserved for just a few of their investments, and typically the best ones. But unless a VC has been a lead investor in your previous investment, it will be unlikely that they keep reserves for you. So in case your lead investor is not willing (or doesn’t have dry powder) to bridge you, the situation looks very difficult since other investors will question the decision. 

 

At this stage, you will need to significantly adjust costs (and your growth prospects) while bringing new external investors, either in debt, equity, or a combination of both that allow you to get ideally no less than 9 to 12 months of additional runway (especially since there will not be a second bridge round in the future). The terms will be not ideal but this will give you enough time to figure out a next raise or potential path to profitability.

 

 

A word about SaaS finances

 

It is very important to keep your SaaS finances accurate. The main reason why companies do a Bridge Round is that they run out of money. If you don’t have in-house resources to track your financial resources, make sure that you get experienced external help, even if it is fractional. Always track your Zero Cash Date (https://www.saastr.com/knowing-and-sharing-your-zero-cash-date/)  so you can take early action when needed.