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Startup Funding Explained: How To Raise a Bridge Round [in 2020] | Dose 017 - YouTube
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Welcome to the Dreamit Dose.
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When startups feel they don't have
enough traction or proof points,
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they will often revert to raising a bridge.
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Hearing the term bridge round
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usually has a negative
connotation in investors minds.
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Especially when startups don't
position it correctly and hit
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key points that investors
really want to hear.
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Raising a bridge is really not hard
if you know what you're doing.
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Let's dive in.
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When you say "We're raising
a bridge", as an investor,
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the first thing I think is, oh shit,
they're probably in trouble.
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Here's how you change that perception.
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First, let's talk about why
you're raising a bridge.
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Usually there's 3 core reasons
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and it's important to know
which one you fit into.
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The first and most
common scenario is,
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you didn't achieve the traction
needed to raise your next round
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and you're running out of cash.
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The next reason is, you might
want to take on a bit more cash
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to hit key goals that are going
to increase your valuation
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so your next round is less dilutive.
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Lastly, perhaps market
conditions have changed.
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For example,
new competitors have emerged
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or the market's heating up
more rapidly than expected.
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Let's go deeper into reason 1,
low traction and low cash.
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The most common situation
startups find themselves in
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when raising a bridge round.
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You need to be super careful about
negative signaling in this situation.
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Why is this negative?
Because investors will assume
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that most likely you
weren't able to hit your goals
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and you may be failing.
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So you'll need to convince them that,
this time, your plan is going to work.
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Realize, you're starting
from a disadvantage
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and your story is going to need
to be incredibly compelling.
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If you're in reason 2, you've
decided you need a bit more cash
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to build out the company, product,
traction, or other proof points.
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By doing a bridge for this reason,
you can raise your next round in a better,
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less dilutive valuation before bringing
in your next large round of capital.
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But, be careful here.
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Investors may try to pick this apart
to really see if you're in reason 1,
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low traction low cash.
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So you'll need to explain how your
valuation is going to step up in a big way,
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and this couldn't be foreseen.
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The last reason is changing market conditions.
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Perhaps there's some new competitor
that's emerged, the market is heating up,
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or there's some other fast moving dynamic
that's changed your funding needs.
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That's fine as long as
you can tell a credible story.
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Once again, investors may
call b.s. and just think you're
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trying to reposition your bridge
round into a more favorable light.
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Whichever core reason you fit
into, make sure from the start
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you're clear on why you're
choosing to do a bridge round.
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Now, let's make sure you avoid
building a bridge to nowhere.
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Because when you say you're raising
a bridge, I think a bridge to where?
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As an investor, I want to make
sure you're building a bridge
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that's going to get you
to where you need to go.
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Not that you're building a pier that
you're gonna walk off the end of.
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So you need to have a great story
on how this bridge is going to
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get you to your goals, fundable
milestones, or cash flow break even.
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So in your pitch, you
need to make sure to cover...
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the goals you'll hit with this bridge,
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why you feel these goals
are fundable milestones
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that create significant value
inflection points for a larger round,
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evidence that you've picked
the right fundable milestones,
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and make sure you bake in
enough cash and time
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to close your next round once
you've hit your key milestones.
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Typically, this is at least
3 additional months.
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Next, we need to talk about
structuring a bridge round.
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Most of the time it's
done as a convertible note.
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So investors really don't know the
valuation until the next priced round.
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So you're asking
investors to put money in,
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not really knowing what it's worth.
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To help them
get over their concerns,
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You will usually offer a
discount to the next round.
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Typically 20%.
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Another way to get them over the hump
is to put a valuation cap on the bridge.
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That way the next round's valuation
doesn't run away from them.
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Realize, investing in a
bridge is really high risk.
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And the investor is thinking,
is it really worth a 20% discount
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where I might lose all of my money,
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or should I just wait and invest in the
next round and not get the discount?
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And you better be sure to be
ready to answer this one...
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"Are previous investors going to
be putting money into the bridge?"
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For the most part,
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insiders doubling down shows
they still believe in you.
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If they're not coming into
the round, that's going to be
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some serious negative signaling
you're going to need to overcome.
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Make sure you have clear
and convincing answers if
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any previous investors
are not coming in.
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For example, I have 2 angels
that were in my last round
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and they're both tapped out.
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Or, my seed round
was just one fund
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and they're out of dry powder
and can't continue to invest.
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Lastly, one of the most critical things
an investor is going to look for
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is your momentum.
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So what momentum do you
have in your sales velocity,
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revenue, LTV to CAC ratio,
cost of customer acquisition,
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rate of trials, and close ratio?
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Things along these lines
that show that you're moving
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in the right direction.
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Investors like to invest in lines,
not points.
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So they don't want to just hear about a
point in time like your current revenue.
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They wan't understand
how things are changing
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and what momentum is
going on inside your model
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and how your company is growing.
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That's it. That's how
you raise a bridge round.
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Be clear on why you're raising the bridge.
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Be careful about negative signaling.
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Make sure you're building
a bridge, not a pier.
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Hit your fundable milestones.
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Structure your bridge with
the right discount and cap.
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Make sure to stand
in an investor's shoes,
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and understand if the
discount really worth the risk.
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Do you have insider support?
If not, why not?
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And remember, momentum is everything.
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That's your Dreamit Dose
in way over 5 minutes.
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Please leave your questions
in the comments section.
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Also, please like and subscribe.
We have a lot more coming.
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And, check out Dreamit Live with
interesting guests and live Q and A.
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Thanks for watching.
See you next time.
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