In the dynamic realm of startup finance, a bridge investment often materializes as a bridge round, where burgeoning companies endeavor to gather a modest sum to propel them to their subsequent significant financing phase.
Such bridge rounds typically arise when startups deviate from their plans and miss vital milestones.
Lately, a distinct variation of this bridge round has captured my attention, gaining such prevalence that it’s practically become a forte among me and my co-investors. I’ve coined it the “gangway” round, drawing inspiration from the bridge that connects a pier to a ship.
Definition of a Bridge Investment Round:
- Efforts by startups to raise small funding amounts.
- Occurs when startups have missed a milestone or fallen behind plan.
Gangway Round is a Special Kind of Bridge Investment
The term “gangway round” refers to a unique kind of bridge investment that has recently been gaining traction in the start-up landscape. At its core, a gangway round aims to assist young businesses in acquiring the necessary funding to efficiently onboard customers.
These are customers who’ve demonstrated a clear intent to purchase the company’s products, often going as far as formalizing their intent through contracts, yet haven’t completed the payment process.
This emerging financial strategy fills an essential gap, catering to a niche need in the start-up ecosystem.
Characteristics of Gangway Round:
- Bridge investment specifically to onboard committed customers.
- Commonly used when startups need to make modifications to their offerings before customers start using them.
- Essential when startups have secured customers but lack funds for onboarding.
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Challenges Faced by Startup Founders
Navigating the intricate maze of entrepreneurship, startup founders often confront a myriad of challenges, especially in the early stages. These hurdles, ranging from product adaptation to customer acquisition, can greatly influence a startup’s trajectory.
Convincing Customers and Modifying Offerings
Founders of startups, especially those with high growth potential, are driven by their passion and vision. This enthusiasm often enables them to persuade potential customers about the value of their products and services.
However, there’s a recurrent challenge: some customers, after initially agreeing, may require modifications to the product for a variety of reasons.
Whether it’s due to changing needs or feedback from trial runs, there’s often a gap between product commitment and product usage, with onboarding processes sometimes delayed until payments are secured.
Miscalculations by Novice Founders
The entrepreneurial journey is filled with learning curves, especially for those who are new to the industry.
Many rookie founders grapple with challenges they hadn’t foreseen: from underestimating the duration and resources required to convert potential leads into loyal customers, to not anticipating the extent of product tweaks required post-feedback, or even the depth of onboarding complexities.
Another significant challenge is gauging payment timelines, especially when dealing with large corporations known for extended payment cycles.
Consequently, these startups find themselves in a tricky situation. They’ve successfully secured customer commitments but are cash-strapped when it comes to fulfilling their end of the bargain, highlighting the need for a bridge round of funding.
Trends in Investment Pitches
Over the last several months, there’s been a noticeable trend in the investment world. An increasing number of pitches from startups are centered around post-seed financing rounds.
The amounts in question typically hover between $50,000 and $100,000. The primary objective behind seeking such amounts? To fast-track the onboarding of customers who’ve already committed.
These specific rounds, termed as gangway rounds, have captured the attention of investors globally. For those investors who have a penchant for making swift, informed decisions, such rounds represent a golden opportunity, promising both impact and returns.
Advantages of Using Convertible Notes in Gangway Rounds
Convertible notes have emerged as powerful financial instruments in the startup financing world, offering a plethora of benefits. Their structured flexibility and strategic advantages not only safeguard founders but also appeal to investors
Minimizing Founder Dilution
Convertible notes have emerged as a preferred financial instrument for many founders, especially during gangway rounds. One of their most appealing features is the protection they offer against significant equity dilution.
These notes come with clauses ensuring that only the recent funding, and not the preceding ones, would be influenced by potential low valuations in the future.
For instance, imagine a scenario where a startup has previously secured $500,000 at a $5 million valuation cap using a convertible note.
Now, if the same startup opts for a gangway round and manages to raise $50,000 at a $2 million valuation cap, only this latter amount would be impacted during subsequent funding rounds, safeguarding the founder’s equity.
Attractive Deals for New Investors
Convertible notes also offer founders the flexibility to curate deals that are mutually beneficial. While they address their immediate liquidity challenges, they can simultaneously present new investors with lucrative return prospects.
Given that the funds raised are earmarked for a specific purpose—bridging the cash flow gap and ensuring payments from customers—investors often perceive these rounds as relatively low risk.
They recognize that their investments are targeted towards addressing a tangible, immediate business challenge.
Ensuring Harmony Among Existing Investors
Gangway rounds also come with the advantage of fostering continued trust and collaboration with existing investors. By proactively offering the same terms of the new round to current stakeholders, founders can reinforce their commitment to transparency and inclusivity.
This strategy not only allays any potential concerns but also deepens the bond with existing backers. After all, if existing investors were given the choice to reinvest and chose not to, they are less likely to harbor any resentment for external funding at more favorable terms.
This harmony is crucial for the long-term success and collaborative spirit of the startup.
Gangway Round vs. Traditional Bridge Investment Round
While both the Gangway and traditional Bridge Rounds serve as financial bridges for startups, they have distinct differences. Below is a comparison of the two.
|Criteria||Gangway Round||Traditional Bridge Round|
|Purpose||To onboard committed customers.||To bridge to the next major financing.|
|Reason for Occurrence||Customers committed but haven't paid; adjustments needed.||Missed milestones or falling behind.|
|Amount Typically Raised||$50,000 to $100,000||Varies|
|Common Financial Tool Used||Convertible notes||Varies|
|Dilution Impact on Founder||Limited (due to use of convertible notes)||Dependent on agreement|
The entrepreneurial landscape has been evolving rapidly, and a trend I’ve observed lately revolves around dialogue with startup founders.
Many of these founders are at an interesting juncture in their journey: they’ve secured roughly $150,000 in annual sales, yet are seeking an infusion of approximately $50,000. This isn’t merely to sustain their businesses, but to double their revenue.
The strategy? Efficiently onboarding customers who’ve already shown commitment. Recognizing the potential in these ventures, my co-investors and I have taken a proactive stance.
By making decisive choices within a week and ensuring funds are wired in a mere two days, we’ve been able to secure valuation caps significantly more favorable than market norms — sometimes as much as half.
Given the recurring nature of these scenarios, there’s an intriguing prospect that this approach could carve out its own niche in the investment arena.
Gangway Photo via Shutterstock