Startups receive bridge rounds of funding from existing investors in two different contexts.
The first is to give them additional runway to achieve an important milestone which will position them to raise a larger round at a higher valuation.
The second is because existing investors don’t sufficiently believe in the company’s future to fund a large round, the company has been unable to find a new investor, and existing investors would rather have the company continue to survive in the hope that it will find funding or reach profitability than to see it close.
Since most startups fail, the latter is a more common scenario than the former.
Correctly distinguishing between the two reasons why bridge rounds take place is an important skill for investors evaluating new investments in companies with a history of past funding.
Also published on Medium.