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Since 2015, the General Partners at Enjoy The Work (ETW) have advised the founders of more than 125 startups. The firm’s mission is to help founders become great CEOs.
I co-founded my first startup in 2008. For those of you around back then, it was not the best time to raise capital. It took 18 months and more than 120 pitches before I received my first (onerous) term sheet. And all of that while I took zero salary. The good ole days 🙂
But once we did raise funds, the business was unlocked. We invested in more product/engineering resources, improved our offering, spent on sales and marketing, and grew our profile, customer base, and revenues. But not everything went to plan. In fact, after working with dozens and dozens of startups, I now know that the plan is more of a way of thinking than an actual map to follow. When we did veer from our intended path, we realized we would need more capital than anticipated. And while going to new outside investors, of course, was an option for a variety of reasons, our existing investors felt like the more plausible path.
It was time for an inside round. Some call it a bridge. Let’s explain.*
Bridge rounds are named as such because they are the financial structures that span from one milestone to the other. From Series A to Series B. Or from growth to exit. Bridge rounds are usually funded by investors a founder already knows, and they’re usually designed to get the company back on track to fundable metrics.
Because raising an inside round means that something didn’t go according to plan.
It suggests that outside investors are not interested or (worse) have already rejected you. And frequently, it involves less capital than desired — meaning lean times are ahead.
In 2023, we’re building a lot of bridges. Lean times aren’t ahead; they’re here.
What that means for your company depends on its stage and condition. But regardless of where you are today, know that to survive, most startups will need an inside round at some point in their story.
The blueprint for inside rounds is distinct from outside raises. And founders should have both fundraising skill sets in their toolkits. So let’s get started.
I use the terms “inside round” and “bridge round” interchangeably in this post.
Consider that, as a company, you live in 1 of 4 potential states:
For the last decade, getting the next financing round was almost always the target.
The capital was incredibly plentiful. Zero percent interest rates meant investors could take more risks as losses were less painful (versus being able to earn 5% on treasuries risk-free).
Today, capital has become scarce. Public market comps have plummeted, investors have been unsure of how to price new deals, and the standards for milestone achievement have been elevated. Said differently — there are fewer deals at more expensive prices, and more startups are getting rejected.
Selling in a down market is rarely what a founder would choose. And yet, for many companies, cash-flow positive has been too high a hill to climb. That leaves two options:
Cutting costs and returning to current investors for further capital is the strategy du jour.
And these types of rounds are common.
In fact, inside rounds are so common that investors explicitly have reserve policies in place for their eventuality.
My first company needed a bridge to survive long enough for us to reach an exit. My last startup, which exited wonderfully for just shy of $1B, raised three separate bridges during its life.
But not all inside rounds are created equal — and knowing which one you’re pursuing is key to success.
1. 100% Inside.
This means that all of the capital your startup needs to reach the next milestone will come from your existing investors. And that means your primary investor still has to have the conviction that the returns that they dreamed about when they first wrote you a check are still possible.
2. Led by insiders, supported by outsiders.
Your existing investors still believe. And they have capital in reserve to support you. But … They have limits on what they can deploy. Which means you’ll need to go hunt for the rest.
3. Led by outsiders, supported by insiders.
Your existing investors still love you. They just might not be in love with you anymore. They are willing to put more capital to work, but only on the condition that you find someone new to lead the way. This means that they won’t provide you with specific terms to use to attract other parties. As you can imagine, this type of bridge is considerably harder than the prior two.
4. 100% Outside.
I imagine you can see why this type of inside round is the hardest type to raise.
Your existing investors might be out of the running for a number of reasons. Their fund might be exhausted. Or an internal shakeup left your specific partner out of a job. Or sometimes, your insiders simply lose faith.
In case it’s not obvious, the reason this type of bridge is so difficult is that the first signal outside investors examine is whether insiders (aka those who already know the startup best) will support the current financing.
Quick aside — do 100% outside bridges ever succeed?
Yes! Despite the long odds, these rounds do come together. Outsiders know that lack of inside support is not perfectly correlated with market potential. If a startup meets an investor’s thesis, if there are rational reasons for lack of inside support, and if the immediate trajectory of the business suggests an inflection point is within reach, then an outsider might see an opportunity for a great investment at a discount price.
First, inside rounds are guided by your lead investor. If your lead does not participate, the probability of you raising drops precipitously. Why? Because they know more about your company than anyone else on the planet. And other investors assume that if your lead investor isn’t investing, something is wrong.
Second, angels rarely bridge. They simply lack the capital for it.
Third, the moment you can see a potential inside round in your future, bring your insiders up to speed. They can help you understand their firm’s condition and politics and what might be required to earn support.
Fourth, the earlier you recognize your need for a bridge round, the easier it is to raise. No one wants to fund the desperate…
Fifth, most successful inside rounds are supported, if not fully led, by your board members, so most bridge rounds start as a board discussion, not as an investment pitch.
Are there exceptions to this process?
Yes — strategics!
Strategics often are willing to pay for access. Meaning… they see strategic value in the relationship independent of the investment itself, and they’re willing to provide capital off-cycle to secure a partnership.
Approaching strategics about a capital raise is a delicate exercise and requires a practiced touch. It deserves its own post, but for now, just remember:
How does the inside round pitch deck differ from a typical fundraising deck?
You need to know and gauge insider support from the jump. That’s why this round starts with a board conversation and a board deck. The deck ideally contains all the strategic options the company might consider as well as the corresponding tradeoffs (e.g., raising outside equity, raising debt, raising inside the capital, doing a layoff, etc.). Your story, financial model, and deck must cohere to survive the ensuing scrutiny. While an outside round pitch deck might be visually heavy and long on narrative, inside round materials lead with a depth of data to support investment from those who already know the overarching story.
Is the financial model also different from classic outside capital raises?
Yes and no. Your financial model has to reflect the scenario you recommend. It has to contemplate and show what will happen after you’ve crossed the bridge to your next milestone. It has to include contingencies: What will happen if you still cannot reach your next milestone? Will you race to profitability or look for an exit?
And, as in a traditional raise, you need to inspire confidence that you’ll be able to hit the metrics in your model and demonstrate that the bridge can lead to an outsized return.
Some last reminders …
Make your board members look good. They likely won’t have unilateral authority to provide you capital. The higher the quality of your story, materials, and financials, the better your board members will be able to sell (if not defend) their recommendation to their colleagues.
Bridges are rarely warm and fuzzy discussions amongst venture partnerships. Emphasize the progress you’ve made since your last raise. The more you can demonstrate that you spent the dollars-to-date wisely, the easier it will be for investors to support additional funding.
Remember that the economics of venture is such that the only bets that matter are the ones that might lead to giant outcomes. Investors will minimize (if not cut off completely) resource expenditure if they believe it can no longer reach venture returns.
And that means that even after you make your board members look good; even after you show them the scenarios; even after you have the board deck and the financial plan and the model and the story all lined up, and even after you lay it out for them — they still need to believe crossing the raging river is worth it. And for that to happen, you have to believe it too.