Cogniphy Prosper Pulse

Bridge rounds have become increasingly common in India’s startup ecosystem. At Cogniphy, we often grapple with how to perceive bridge financings – are they a stopgap lifeline or a red flag? In this post, we will share our perspective on bridge rounds and offer a checklist for investors to evaluate such opportunities.

“Bridge rounds walk a fine line between providing startups with a lifeline and sending up red flags. As investors, we must evaluate each bridge opportunity critically, balancing risks and rewards.”

What Are Bridge Rounds and Why Do Startups Pursue Them?

Bridge rounds provide startups with smaller capital infusions between larger funding rounds to extend runway. Indian startups raise bridges for several reasons:

• Extend cash runway to hit milestones for next round – For example, hyperlocal delivery startup Dunzo raised a $11 million bridge from existing investors before its $240 million Series E to expand dark stores.
• Fund growth initiatives to accelerate metrics – Consumer brand Mamaearth raised a ₹50 crore debt bridge to invest in brand building before its $52 million Series C.
• Avoid down rounds in tough markets – In 2021, many Indian startups like Rebel Foods, Cars24, and Spinny raised bridges to stay afloat until market conditions improved.
• Postpone valuation negotiations during downturns – Edtech startup Unacademy raised a $50 million convertible note in 2022 amid valuation markdowns, delaying its next priced round.

Examples like these show how bridge rounds can be strategic for Indian startups navigating volatile markets. But bridge financings also raise risks.

“Avoiding down rounds by raising bridges can be savvy provided the terms aren’t predatory and the startup has a viable path to future fundraising.”

The Risks and Red Flags of Bridge Rounds

While bridges can be useful, as an investor we analyze certain risks:

• Frequent bridges may indicate challenges raising sizeable rounds. This raises questions about business fundamentals.
• Bridge terms like liquidation preferences, ratchets, and high interest rates can harm startups’ long-term prospects.
• Without eventual priced rounds, convertible instruments become debt burdens. Repaying debt divertes capital from growth.
• Existing investors may cap bridges below desired amounts to test startups’ ability to attract new capital.

For example, Indian edtech startup Vedantu has raised 5 bridge rounds since 2021 as growth slowed. Such frequent bridges are concerning signals.

Bridge rounds shouldn’t become roadblocks that divert startups from scaling. Evaluating risks like repeated bridges, unfavorable terms, and lack of new investors prevents investing in losing bridges.

“Frequent bridge rounds are like paying rent for your startup’s survival. At some point, you need to start building equity.”

Best Practices for Indian Startups Raising Bridges

For Indian startups, we recommend positioning bridge rounds effectively:

• Pitch the bridge as a strategic, proactive decision to extend runway or fund growth. Avoid framing it as a desperate lifeline.
• Offer favorable terms to bridge investors, like discounts on conversion valuations. But avoid excessive dilution or investor-weighted provisions.
• Bring on pro rata participation from existing investors, but attracting new capital validates business fundamentals.
• Outline post-bridge milestones clearly and keep investors updated on progress towards next round.

With intentional framing and setup, Indian startups can raise investor-friendly bridges that provide runway yet retain leverage for future rounds.

“Raising a bridge from existing investors alone is like preaching to the choir. Bringing fresh capital to a bridge validates your fundamentals to new investors.”

Evaluating Bridge Round Opportunities as an Investor

When evaluating bridge investments, we use this checklist to assess risks and upside:

• Runway Extension: Does the bridge funding adequately extend the startup’s runway?
• Milestone Viability: Can the startup feasibly hit targeted milestones with bridge capital?
• Founder Mindset: Is the founder transparent about rationale and committed to the startup’s success?
• Investor Participation: Are existing investors pro rata participants? Does the bridge include new capital sources?
• Terms: Are the terms founder-friendly? Do they allow for sufficient upside?
• Market Conditions: Will market sentiment improve significantly pre-next round?
• Fundraising Feasibility: Based on business fundamentals, does the startup have a viable path to raise its next round?

This framework allows investors to balance bridge risks with the potential for outsized returns from funding high-traction startups through volatile markets.

The Future of Bridge Rounds in India

With startup funding cooling, bridge rounds will likely become more prevalent in India.

The future of startup funding in India remains turbulent and unpredictable. As investors, we must walk the bridge round tightrope carefully, scrutinizing both risks and potential with a balanced data-driven approach.

Startups that strategically utilize bridge capital to extend runway and seize growth in downturns can become our unicorns during eventual upswings.

With prudent analysis and selective investing, bridge rounds can play a crucial role for India’s startup ecosystem to weather funding winters and emerge stronger than ever. India’s startup growth story relies on investors and entrepreneurs working together to create bridges to the future, not roadblocks to progress.

The key points in this conclusion are:

• The uncertain funding environment requires careful evaluation of bridge rounds
• Investors should take a balanced view weighing both risks and rewards
• Strategic bridge capital allows startups to survive downturns and thrive in upturns
• Prudent analysis and selective bridge investing is key for India’s startup ecosystem
• Bridge rounds, when done right, provide bridges to the future not roadblocks

We hope this piece provides Indian startup investors with insights on reasoning through the risks and rewards of bridge financings. Please share your thoughts on successfully navigating bridge investments in the comments below!