Bridge Rounds on the Rise as VC Market Slows, Carta Report Reveals

As this year’s slowdown in venture capital continued through Q3, VCs increasingly used bridge rounds “to keep their portfolio companies afloat—or to position them for a stronger rebound when dealmaking picks up,” according to an update from Carta.

Bridge rounds are “unpriced financing rounds that occur between primary financings.”

Typically, a lead investor in the most recent priced round “leads the bridge round.”

In August, Carta reported “an uptick in late-stage bridge round activity: From Q1 to Q2, Series D and Series E+ companies saw a significant rise in the percentage of fundraising rounds that were bridge rounds (+7 and +14 percentage points, respectively).”

Amid the volatility and contraction that plagued the public markets throughout the first half of the year, private companies at these later stages “saw their valuations drop.”

The team at Carta further noted that many may “have turned to bridge rounds to wait out the unfavorable macro climate, with the hope of raising their next round or making a public exit in a bull market.”

As noted in the update from Carta, early-stage startups “were less affected as of the close of Q2, with the percentage of Series A bridge rounds ticking up 3% quarter over quarter and seed stage remaining flat. Series B saw a slight decrease in bridge rounds in Q2, with the percentage of financings that were bridge rounds falling by 1 percentage point.”

But in Q3, traditional dealmaking “slowed across stages, and the length of time between early-stage rounds increased.” The trend toward bridge rounds also “extended beyond late-stage startups into the earlier stages: Companies at the seed, Series A and Series B stages all saw a rise in the number of unpriced rounds relative to total financings in Q3.”

As mentioned in a blog post, the jump in bridge rounds “for early-stage startups comes after they initially faced a more favorable capital raising environment than late-stage private companies in early 2022: When later-stage dealmaking began to falter in response to economic uncertainties, early-stage dealmaking continued strong through the first months of the year (albeit at a slower pace than in 2021) because early-stage deals are less impacted when the public markets struggle.”

But as the venture funding downturn continued, even early-stage companies were “unable to avoid the consequences of decreased fundraising activity and falling valuations.”

Startups almost always “prefer a bridge round before they agree to a down or flat round. VCs, on the other hand, have often shied away from bridge rounds, for fear of throwing good money after bad.”

This reluctance “made sense in a robust funding environment, when dollars and rounds raised were both on the rise.”

But it’s giving way “amid 2022’s retreat in venture funding.”

Luke Tubergen, a general partner at the Ember Fund, says traditional VC firms “have shifted their focus to doubling down on portfolio companies rather than seeking new opportunities, with many taking a ‘wait-and-see’ approach until there’s more certainty about whether the U.S. economy enters a recession.”

Founded in 2015, Ember Fund “specializes in hybrid bridge-financing deals for early-stage consumer companies.”

Unlike in a typical bridge round, where the financing is led by one of the startup’s existing investors, Ember often first “invests between primary rounds, to support companies in need of capital.”

Ember focuses on companies “generating revenue (usually between $2 million and $20 million) in part because brands that sell products quickly often need more inventory but don’t want to take out a traditional bank loan or ask their original investors for more money.”

Ember offers these companies “a debt-equity investment structure: The firm pays cash for a tranche of preferred shares and receives between 1% and 4% of the company’s equity. Ember also charges a financing fee of around 7.5% for loans starting at $250,000.”

Companies can then “use the capital to buy up inventory until their next priced round.” Ember’s bridge financing is “meant to last anywhere between four months to two years and comes with a team of advisors from the Ember Lab.”

Often, Ember will “make a follow-on investment as soon as the portfolio company pays back any loans.”

Tubergen says:

“We’ve found that [our strategy] really has positioned us well for a time like this.”

He makes this statement while “referring to 2022’s combination of strong consumer demand and decreased venture funding.” In October, retail sales “ticked up 1.3%, according to the U.S. Census Bureau, surpassing analyst forecasts and defying the Federal Reserve’s attempts to tamp down inflation.”

Tubergen explains:

“I have seen a lot of companies that are looking for cash. And they’re looking to operate their business and grow their business, but are not wanting to put a valuation on it and test the true VC market.”

In other words, they’re “extending their runways to adapt to higher prices and the changing capital-raising environment.”

For more details on this update, check here.

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