PJC Blog

For those who have been held up in a cave for the past few months, the credit markets have been in turmoil.  Across all markets, financing companies with debt and equity has become more challenging.  While the impact on venture-backed companies has not been as acute as financial institutions, there has clearly been an impact on financing early stage companies.  Valuations have contracted, firms have increased capital reserved for existing investments, and the bar has been raised in the minds of many investors.

For companies seeking to raise follow-on capital, this can present a challenge--particularly for those that are close to key milestones ... but haven't quite reached them.  In an era of higher bars and lower valuations, this often presents a disconnect between the valuation expectations of new investors and those of management and existing investors.  What to do?

Enter the bridge financing.  In the past couple quarters we have seen a reasonably significant increase in bridge financings.  Bridge financings in Q3 were up 83% over the prior year.  The data in the chart are through September 30. 

While the growth may not seem off-the-charts, think of the growth relative to financing rounds into early stage companies .  In Q3, the ratio of early stage rounds to all bridge financings for venture-backed companies was about 1.2:1 -- a ratio that had never been below 2 before this year.  It would not at all be surprising to see this trend continue through Q4.  In an environment where investors are already trimming operating expenses, the focus on driving portfolio companies to cash flow break-even will be even more acute in those companies with bridge financings in place.