Bridge Investment: How Gangway Rounds Fuel Startup Success

bridge investment

In the fast-paced world of startup finance, a bridge investment, commonly known as a bridge round, plays a crucial role for emerging companies seeking a modest amount of funding to reach their next major financing milestone.

These rounds often come into play when startups veer off course and fail to hit key targets.

Recently, I’ve noticed a particular variation of the bridge round becoming increasingly popular, to the point where it has almost become a specialty among myself and my fellow investors. We’ve dubbed it the “gangway” round, inspired by the bridge that links a pier with 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.

bridge investment 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.

bridge investment

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.

bridge investment

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.

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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.

CriteriaGangway RoundTraditional Bridge Round
PurposeTo onboard committed customers.To bridge to the next major financing.
Reason for OccurrenceCustomers committed but haven't paid; adjustments needed.Missed milestones or falling behind.
Amount Typically Raised$50,000 to $100,000Varies
Common Financial Tool UsedConvertible notesVaries
Dilution Impact on FounderLimited (due to use of convertible notes)Dependent on agreement

Legal and Financial Considerations

When engaging in a gangway round, startups and investors must navigate a complex landscape of legal and financial obligations to ensure mutual benefits and compliance with regulations. Here are critical considerations to bear in mind:

  • Convertible Notes: These instruments often facilitate gangway rounds, offering flexibility but necessitating careful structuring. Key terms include the interest rate, maturity date, valuation cap, and discount rate. It’s crucial to understand how these terms impact future financing rounds and equity distribution.
  • Securities Law Compliance: In many jurisdictions, offering and selling securities, including convertible notes, are subject to securities laws. Ensuring compliance requires careful documentation, including offering memoranda or exemptions.
  • Valuation Caps: A critical negotiation point that protects investors from dilution in future rounds. Startups must balance offering attractive terms to investors with preserving founder equity.
  • Due Diligence: Both startups and investors should conduct thorough due diligence. For startups, this means understanding the investor’s track record and ensuring they align with the company’s goals. Investors will scrutinize the startup’s financials, customer contracts, and the feasibility of onboarding plans.
  • Legal Documentation: Engaging experienced legal counsel is vital to draft and review the convertible note agreement, ensuring it reflects the agreed-upon terms and protects both parties’ interests.

Strategic Planning for Startups Considering a Gangway Round

For startups considering a gangway round, strategic planning is crucial to maximize the benefits while minimizing risks. Consider the following strategies:

  • Assess Readiness: Evaluate whether your startup genuinely needs a gangway round. Analyze your customer onboarding process, cash flow projections, and how the funding will bridge you to the next milestone.
  • Set Clear Objectives: Define what success looks like post-gangway round. Whether it’s doubling revenue, enhancing product offerings, or expanding the customer base, having clear goals will guide the use of funds.
  • Engage with Current Investors: Before seeking new funding, discuss your plans with existing investors. They can offer insights, may wish to participate, and their support can validate your startup to potential new investors.
  • Prepare a Robust Pitch: Investors will want to see a detailed plan for how the gangway round will accelerate growth. Include data on customer commitments, projected onboarding timelines, and how this round fits into your broader financial strategy.
  • Plan for the Future: Consider how a gangway round affects future financing. Be mindful of the terms and how they might influence valuation and equity distribution in subsequent rounds.

Gangway Rounds: The Future of Bridge Investment?

The entrepreneurial scene is changing rapidly, and one trend catching my attention involves conversations with startup founders.

These founders are often at a pivotal point, having achieved around $150,000 in annual sales and are now seeking about $50,000 in bridge investment not just to maintain their business but to double their revenue. Their strategy focuses on effectively integrating committed customers.

Seeing the promise in these ventures, my co-investors and I have adopted a hands-on approach. We make swift decisions within a week and aim to transfer funds within two days, securing valuation caps that are significantly better than what’s typically seen in the market, sometimes by as much as 50%.

This recurring scenario suggests that the gangway round, as a specialized form of bridge financing, has carved out its niche in the startup ecosystem. Looking ahead, several trends could shape its future:

  • Wider Adoption: As the startup landscape becomes increasingly competitive, gangway rounds may become a more common strategy for startups needing to quickly capitalize on customer commitments.
  • Innovation in Terms: We might see innovation in the structuring of convertible notes, with terms that are even more founder-friendly or offer unique incentives for investors.
  • Integration with Traditional Financing: Gangway rounds could become a standardized part of the fundraising cycle, with venture capitalists and angel investors viewing them as a critical step in a startup’s growth trajectory.
  • Regulatory Evolution: Legal frameworks may evolve to better accommodate gangway rounds, offering clearer guidelines and protections for both startups and investors.
  • Focus on Sustainability: As investors become more conscious of sustainable and socially responsible investing, gangway rounds that fund customer onboarding in green technologies or social enterprises may gain popularity.

Gangway rounds represent a strategic financing option for startups at a critical juncture. By understanding the legal and financial intricacies, strategically planning their approach, and staying informed about trends in startup financing, founders can leverage gangway rounds to fuel their growth and success.

Gangway Photo via Shutterstock

Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.