In the startup world S.O.S. means ‘save our startup‘ and the most common life saving device is a bridge loan. Typically a current investor will pony up just enough capital to get the company to either breakeven or the next funding event. But more often than not bridges are simply a way to allow a CEO to stay in a state of denial hoping that a magical solution will present itself. Worse yet, bridge loans send a VERY bad signal to future investors. Fred Wilson explains it:
“So bridge loans are often bad investments made defensively. And so they are red flags to other investors. When a new investor looks at a company and sees a bridge loan in place, they will understand that all is not well… And it will make closing a financing more challenging.”
It takes a startup about six months to raise a major investment round. If you haven’t made significant headway during the first ninety days it is time to take a good hard look at your burn. Your most important job as CEO is to save the company. It may be painful, but you must start cutting costs – renegotiating agreements with employees and vendors – whatever it takes. You need to get your burn rate down so that you can cut it completely if you end up running out of runway.
Of course, most CEOs (including me) don’t start cutting deep or fast enough to prevent the need for a bridge loan. Ironically, VCs know that the bridge loan is almost ALWAYS a bad idea a ‘bridge to no where’, but they can’t help themselves. So if you need to take that bridge loan make sure can find a way to ensure that it buys you the time you need to save your company. Oh, and start looking for a new role within the company or a new job because your days are numbered. The best way to explain the need for a bridge to a new investor is to introduce him to you – the soon to be former CEO – they will only consider the investment if they can convince themselves that you were the problem.