Bridge rounds are the late-stage rage

Most startups don’t have a clean run from their pre-seed round through an IPO when it comes to fundraising. Quickly growing tech companies sometimes pause at certain stages, raising a little extra cash against their prior round’s terms, for example.

This becomes especially true when the economy changes for the worse and startups are incentivized to raise an extension round, or bridge round. Why are those rounds potentially more popular in lesser macroeconomic periods? Because if startups can purchase a bit more time to grow before raising their next priced round, they may be able to better defend their most recent valuation, or perhaps even surpass it when they formally raise.

Data from Carta, a software service that supports companies’ cap tables and the like, indicate that bridge rounds — “a type of interim financing that companies may choose while they wait for a larger fundraise,” in its own language — are rising in popularity, as TechCrunch expected given our reporting on the matter. However, where the funding varietal is gaining the most popularity was slightly surprising. The companies with the least capital raised are not those seeing the largest gain in bridge round activity, it turns out.

Please, sir, may I have some more?

Per Carta data in the below chart, bridge rounds remain very popular with seed-stage startups. Series A startups raised more bridge financing than before, Series Bs a bit less frequently than in recent quarters and Series Cs roughly in line with recent highs.

It’s when we get to startups at the Series D and later stage that things get spicy. It appears that the later stage a startup is, the more likely it was in Q2 2022 to raise bridge capital:

Image Credits: Carta. Shared with permission.

At first blush, this might surprise. Why? Because mega-rounds were so popular last year. CB Insights counted some 1,573 rounds in 2021 that were worth $100 million or more, for example. Amid that wave of capital, you might think that the late-stage companies that raised those funds would be flush today and thus less likely to want — or need — a bridge round.

There’s more to the story. Late-stage startups spent a lot last year. Speaking to venture capitalists this year, it’s clear that burn rates at some private-market companies got out of control in 2021. That means that the more a company raised last year, ironically, the more capital it may need today.

Even more, late-stage startups are the most sensitive to public-market movements. That makes them the most likely to want to avoid a new round today with new terms. Why? No one wants to raise a down round. So, a bridge event that adds cash at a flat price, giving the company more time to before raising at a new price, can make sense.

Especially if any of the Series D+ companies that raised a huge round last year was planning on a 2022 IPO. That probably isn’t happening, putting an anticipated fundraise on ice. Hence, bridge financing.

Notably, TechCrunch’s coverage of bridge rounds — extension round in our parlance; the two terms are close enough to synonymity for our purposes — has mostly dealt with earlier-stage startups. It appears that we’ve only captured a fraction of the news. More as soon as we can on the late-stage bridge round market.