When I am fly fishing, I go out with a plan and as I start fishing, I usually soon find I must deviate from what I expected to do. Sometimes the fish are keyed on a specific insect hatching that I did not expect to see at that time of day in that place on the water. Or I might spot a large fish in a location I did not anticipate. And quite often the fly that I expected to attract the fish does not work well, or even at all. So I change my plan and that usually results in catching more fish and improving my time on the water in a beautiful place.
That is also where bridge loans can be especially useful: when your plan need a significant alteration.
Here are some events that have made companies I've coached very glad they could do a bridge loan:
- Got started right away. Waiting three to nine months for a second venture firm to join your seed round can be dangerous, allowing competitors to leap ahead of you. I'm watching this happen right now with one of my startups. They have sales traction and are becoming acknowledged as THE company in a new space thanks to a bridge loan from a first class startup.
- Powerful strategic partner arrives, unexpectedly. In this case the public giant was amazed at how well the startups' software ran on the giant's machine. The result is a commitment to showcase the startup and a declaration of desire to invest in it. That will alter the plan for the B round, allowing a bridge loan so the B round can take place later, when the startup has grow more and has a higher valuation.
- Lead venture firm wants to continue but others in the syndicate do not or can not. You want a VC who will stick with you in the hard times. They will bridge you through the dark valleys. It is not uncommon for other VCs to stop putting fresh cash into your startup when the trouble arrives. Some run out of cash. Others are stymied by their contact with their limited partners.Or they simply get cold feet and give up.
- Buy time to get to higher valuation. Startups confident of their growth can attain milestones that give a huge boost to their valuation. This includes sales to a couple of giant public corporations and delivering the next version that makes the machine greatly out-perform the competition. Then you will find investors eager to sign checks instead of reluctant. And your dilution will be significantly lower.The extra cost (discount on the per share price) of the bridge will be overcome by the much higher valuation.
BOTTOM LINE: Bridge loans are not a sign of bad things happening to your startup. They have a special role to play in your growth. Rarely is the plan of the startup executed as you anticipated. There are too many surprises along the way. Bridge loans finance the unexpected events. Done well, they can be a very positive tool in your march to IPO and are a good tool to use as you build your unfair competitive advantage.