OK, so turning over my weekly VC Cliche of the week post to the readers was a resounding success last week.
I got 36 comments and about 50 cliches in all.
I posted all of the cliches on the front page and the explanations are in the comments.
Go take a look at them, some really good ones in there.
But this week I am going back to the traditional format where I give you a cliche and expound on it a bit.
This week I am talking about bridge loans. Bridges are venture financings where the investors loan the company some money to tide them over until something happens. There are a lot of reasons for doing a bridge loan. But one thing is for sure, if you do a bridge, it has to be a bridge to somewhere.
The first venture deal I ever worked on was a loser. A big loser. We had something like five or six bridge loans into the company before we finally put ourselves (and the company) out of our misery.
We were fooling ourselves that eventually we’d find a new investor who would come in and fund the company. So we kept loaning the company in hopes that the new investor would show up. They didn’t. Because hope is not a strategy.
I suspect that if you get to the end of the first bridge and nothing good has happened, its time to stop bridging. Because it has to be a bridge to somewhere.
That "somewhere" could be an insider financing. In fact, its often a good idea to backstop a bridge with an insider financing. That gives the company the opportunity to go get whatever it is they want to get done with the confidence that if they fail, they have a backstop.
The "whatever they want to get done" is usually an external venture financing with new money at a higher price. Or it could be a sale of the company.
The latter scenario in particular is a good reason for a bridge. There is no reason to put a ton more money into a company, and cause lots of dilution, if the Company is going to be sold shortly. So putting a bridge in place to fund the Company during its talks with buyers is often an excellent idea.
If the company is sold, that is somewhere.
if the company is financed by new money, that is somewhere.
If the company is financed by insiders, that is somewhere.
But another bridge is nowhere.
So when doing a bridge, make sure its a bridge to somewhere.