Every month I get emails from CEOs and investors that say something like this: “We are seeking a bridge for our company. Since we already raised our seed and you do post-seed, we thought you would be ideal to speak to about this.”
My admittedly terse reply is always: “Bullpen does not do bridges.” Because I send this reply somewhat regularly, I have concluded there is a lot of confusion about how a post-seed round differs from a bridge round.
Two years ago, no one knew what post-seed was. The term started to catch after TechCrunch published “Seed Is A Process.” I believed, and still believe, that entrepreneurs need to understand the differences between pre-seed, seed and post-seed to minimize dilution and maximize survival. Most people now know about post-seed, but some still have the wrong idea.
After recently opening one of these “bridge” emails, I decided to define these words in more detail. For the purposes of the chart below, post-seed is synonymous with seed prime, seed extension, top up, build round, or pre A.
|Current runway in company||Less than six months||Greater than six months|
|Opening CEO statement||“I need a few months to see if ________ will work.”||“I am 2 or 3 quarters away from de-risking my ______.”|
|Ratio of new funds to prior round||A fraction: For example, $500,000 after a $2 million round||A multiple: For example, a $3 million round after a $2 million round|
|Total new runway of the financing||About six months||12-18 months|
|Structure of new money||Debt note||Priced round|
|Poker analogy||Flip one more card to see if something good happens||Push your chips into the pot because it is working, but early|
|Ability to attract third-party investor||Zero to Low: Only an existing investor would put more money in||Moderate: A post-seed fund might invest depending on the company’s metrics|
As the chart shows, there are fundamental differences between a bridge and a post-seed round. A bridge, by definition, is a distressed round in which only those investors with existing financial interests in the company would consider committing more money. In these situations, the prior investment of time and money makes those investors “pot committed” to an incremental small bet.
When a CEO says, “We’re looking for a six-month bridge to extend our runway,” that is not an attractive offer to a third-party investor. If a rock star said, “Hey, I need 300K for drug rehab. I’ll get back on stage and give you a stake in my next hit album once I’m clean,” would you front the money? When you ask NEW investors for a bridge, you’re pleading guilty to an unhealthy relationship with capital. (In some cases, new investors joining a bridge might make sense. For example, later-stage investors betting that the bridge will hit a key milestone might participate to get the inside track for leading a future round.)
Some CEOs and investors try to disguise their hand, to run with our poker analogies. They position the bridge positively: “Everything is solid, and we just need six months of money to execute our plan.”
The “tell” is that the bridge is a small fraction of the prior round. The post-seed round is non-trivially bigger. The intended use of capital is another tell. If the money will go toward product revisions and development salaries, the company doesn’t have product-market fit — that’s a bridge.
A real post-seed round is the final seed money before a “super-sized” Series A round. Post-seed companies have product-market fit. They need money for sales and marketing, not a makeover.
It doesn’t matter whether a round is priced or a convertible note. The form of the post-seed round is less important than the performance of the company. The important thing is that the company has prudently spent the prior invested capital to the point of showing high potential, but it has not yet achieved the metrics for a super-sized Series A. The post-seed round is a small raise that gives management a chance to drive quickly to a performance level that warrants a large round.
Most of the newer generation of VCs don’t hide what they’re looking for. We put it right on the front page of our websites. I wrote this both for selfish reasons (my inbox) and for altruistic reasons — for the sake of entrepreneurs and investors who deal with enough adversity and being told “No” already. Consider this my post-seed PSA.