Bridge rounds for Swiss SaaS: What to consider
When companies run 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 funding rounds. In some cases, it might even be the last funding round as companies move into profitability.
- Bridge rounds have been widely used in later-stage companies and are becoming popular in early-stage ones
- Bridge rounds are not necessarily a negative signal (although some are)
- Bridge rounds can be structured via debt, convertible debt, or equity
- Equity bridge rounds are typically priced at the previous valuation, creating significant dilution
- Swiss SaaS companies can now access growth loans as bridge financing. Besides being non-dilutive, they help diversify the capital stack
What are the primary 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 completed. Historically, they have been used in pre-IPO situations to delay a listing until equity markets are favorable. Bridge rounds are now prevalent in younger companies following the same logic: waiting until the funding environment improves.
Hit certain KPIs and milestones to improve valuation
Companies about to hit milestones, such as reaching a specific revenue target, closing an important client, or launching a new feature, can benefit by delaying a round. Once these milestones are achieved, they can rise at more favorable conditions or open up discussions with investors that were not accessible before.
The optionality of moving into profitability
After the recent cost-cutting wave, many companies can already project a path to profitability. Bridge rounds used to reach profitability create optionality about future funding alternatives. Profitable companies can decide to follow the path of self-financed growth or raise additional external capital. There are always more funding options available and better terms when profitable.
Solve financial problems
Companies struggling to get traction and facing a short runway must raise a round to avoid shutting down. A company might be in this situation for several reasons, and a bridge round won’t necessarily solve it.
Benefits of bridge rounds
Get additional capital
Companies can keep running their business and growth initiatives despite challenging market environments
Keep valuation
If raised via equity-like instruments, these rounds can be priced at the same price as the last round. Although they will be highly dilutive, it avoids 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 and other stakeholders, 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.
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 have 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.
Equity
If all the bridge round investors are the same as the last priced round, then shares are typically used, and terms will likely be the same as the previous round.
Non-dilutive growth loans
Non-dilutive growth loans can be attractive 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 in growth mode with healthy metrics. The other advantage of non-dilutive growth loans is that companies retain complete optionality in case more equity or debt is sought in the future. Although it comes with flexible payment options, loans must be paid back.
Our Lendity Growth solution is specially designed for this use case. If you are a Swiss SaaS, you can estimate a possible funding amount using this calculator. Also, our Enterprise Value Retention calculator helps obtain a high-level estimation of how much Enterprise Value can be retained by existing shareholders when using non-dilutive debt vs. equity.
The impact on Governance
When bridge rounds are structured via equity-like instruments, it will often alter the controlling structure. This situation can create unwanted voting and veto rights for the founders and the investors. This point should be given special consideration since these details are often omitted during the implementation and only noticed later.
What to keep in mind when raising a Bridge Round?
A clear narrative about the bridge round
Founders should clearly explain 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? Why wasn’t the previous round enough to hit the needed metrics for the next round? Founders should also be able to clearly articulate the company’s current and future plans.
Everything is negotiable from both sides
Since some investors perceive a sense of urgency when negotiating a bridge round, they will aim for 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 cutting certain expenses, initiatives, or plans.
Perception by stakeholders and second-order effects
Bridge Rounds have implications for the company’s stakeholders, including customers, investors, and 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. Aim to start early on in the process, with a 9-to-12 months runway. It will give you many options and prevent you from ending up with the wrong investor (think marriage problems) because of the urgency. More cash available means more optionality, credibility, and 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 typically don’t like to bridge rounds since they expect a new round to be priced 2x to 3x the last round. Also, they prefer having a new investor leading the round.
Sometimes VCs have “reserves”, a pocket of cash reserved for just a few of their investments, and typically the best-performing ones. But unless a VC has been a lead investor in a previous investment, they will unlikely keep reserves. So if your lead investor is unwilling (or doesn’t have dry powder anymore) to bridge you, the situation looks complicated since other investors will question the lead’s decision.
At this stage, you will need to cut costs (and your growth prospects) while bringing new external investors in debt, equity, or a combination of both. Your aim should be getting no less than 9 to 12 months of additional runway since a second bridge round is unlikely. The terms will not be ideal but will give you enough time to figure out a next raise or potential path to profitability.
SaaS financial housekeeping
It is essential 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, ensure you get experienced external help, even if it is fractional. Always track your Zero Cash Date to take early action when needed.