A Bridge Too Far

Much has been said about the slowdown in Venture Capital dollars flowing to startups, particularly early-stage startups, but not much has been said about the fundamentals of why.

With our vantage point as buyers of startups, a large portion of those being venture-backed, and as occasional seed investors, we’ve been sitting shotgun.

If 2023 was the year of the of the bridge round (and we’re seeing that it was), 2024 is the year of a bridge too far.

For startups that previously raised capital, regardless of stage, but have not yet reached product market fit or sustainability, there was a case to be made to existing investors in these companies that a bridge round was necessary to reach either of those states. For many, the abundance of capital prior to rate hikes took most founders by surprise. They were undercapitalized and premature when it came to reaching profitability.

The bridge rounds came to help them narrow the gap between current and future state. This was in the best interest of both the founders and their investors.

For the founders, they simply needed more time to show more compelling growth or to get into the black. For the investors, delaying the shutdown of a portfolio company can be critically important to their ability to tell the stories needed for future funds, most of which are having a very hard time doing. The bridge rounds were the inevitable extension of hope.

The problem with this, from the founders we’ve spoken with, is that it’s exceptionally difficult to be both a venture growth company and a profitable business.

‍Those requirements are typically at odds with one another, particularly in the early-stages. These founders discovered that as they reached or nearly reached profitability, they were no longer venture-backable, given the lack of extreme growth given the focus on profitability. Not many investors want to back a company that's barely breakeven and growing slowly.

It was a bridge too far. These founders did what their investors wanted them to do, but there wasn’t additional dollars available for companies of that profile they encouraged. A lot of founders feel very burned by this dynamic, as they should.

Turning to the investor perspective quickly, the case was an easier one to make in 2023. The companies they invested in were promising, compelling companies. They just needed more time.

So they were able to spin up new vehicles for this or tap into their existing fund for the bridge round. However, venture capital is built on exits. And not just any kind of exit, exceptional exits. Alongside this strain at the earliest stages of company building and financing, the willingness of strategic buyers to step in and transact as capital became more expensive became less and less.  Those exceptional exits have been hard to come by lately.

For these investors, the on-paper markups are getting harder to support given the lack of true bank account returns.

This siphoned off support for existing portfolio companies that weren’t clearly in their top 10% of companies. Only the fittest survive. This is why we’ve seen an influx of startups shutting down and are likely at the very beginning of that.

This feels very much like a “them’s the breaks” type of moment for the founders of these companies and their teams. Those 90% of companies that aren’t in the upper-echelon of the portfolio are most exposed.

So much of the brand of venture capital is built on the friendly positioning that allows them to sit in the passenger seat and reap the benefits of the exceptional outcomes that occasionally happen within a portfolio, and avoid the real world impact of portfolio failures, but there’s an increasingly human cost to the founders and their team that are bearing the brunt of the power law in practice.

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