NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Next-generation technologies like artificial intelligence, machine learning, Internet of Things, big data, etc., are setting the pace for innovation in today’s world. Considering the scope, and need, of such technologies, many young minds are hoping to leverage them for both impact and profit by launching a startup. While there’s no doubt that hard work and an appetite for both risk and experimentation are paramount to the success of these young enterprises, funding also plays a clear and crucial role.

Though social entrepreneurs working in next-gen tech startups are often well-versed in the intricacies of acquiring early-stage investments, they may be less aware of another type of financing that can be equally vital to their growth: bridge funding.

Bridge funding is also known as interim financing. As the name suggests, it’s designed to bridge any gaps that arise when a company finds itself in need of immediate financial support so as to keep itself up and running until a new source of funding begins. A classic example of this situation is where a startup’s current investor is leaving, but the startup won’t receive money from its new investor for a few more months. Bridge funding is often requested from a venture capital firm in exchange for collateral – whether that comes via shares, equity ownership or some other format – and it goes without saying that the interest rates on such deals tend to be high.

Where do bridge funding and social businesses intersect?

Though it’s better known among traditional tech startups than it is in social business, bridge funding has been a crucial element of support for some emerging social enterprises. One example is Kumbaya, a startup based in Los Angeles that uses technological innovation to provide electricity access for the nearly 1 billion people globally who are deprived of it. Kumbaya offers a platform that provides solar-powered energy and communications solutions, including electricity, lighting and internet connectivity, to customers in rural and off-grid communities. Aiming at sustainable solutions that will transform the lives of countless people struggling with poverty, the startup secured bridge financing to help it reach a Series A round of funding.

However, when similar social initiatives attempt to establish themselves in the market, fund raising can often reduce their focus on impact considerations, as social goals are trumped by investors’ typical focus on return on investment. In such cases, bridge funding provides an attractive solution, as the smaller amounts involved imply more manageable risk to investors – and hence more flexibility to social startups looking to preserve their missions while making the journey from seed to series funding. Bridge funding can also help them avoid the need to use grants to meet their evolving needs – something which can be difficult, given the rigid grant cycles of many foundations.

Bridge funds often come at an opportune time, providing enough funding to not only ensure the startup’s survival, but often to help it finish its product and prepare itself for larger investments – an important consideration for tech startups with complex and unpredictable product design processes. And as social startups like Kumbaya have shown, there are many other reasons why bridge funding can be a valid investment option for emerging market-focused enterprises – especially those focused on leveraging technology for social improvement.

Why do next-gen startups choose bridge funding?

A major benefit of bridge funding can be expressed in one word: speed. Premier bridge funds are known for their fast and effective processing. It is imperative for bridge funds to quickly weigh the potential of financial returns, since these investments often present a clear possibility of losing all the money. Experts analyze the background and vision of the company, their progress, and the reasons they require funds, in order to assess this risk and determine the amount of investment that will serve adequately as a bridge.

Startups appreciate the combination of speedy processing and fund accessibility, as it helps them arrange financing quickly enough to meet their immediate requirements – be it the survival of the venture or a major breakthrough on the technological front. This can act as a “Hail Mary” in crisis situations, and might just play a key factor in the company’s transformation from a struggling startup into “the next big thing.”

That said, startups can benefit from bridge funding in the good times as well. Despite the support of investors, sometimes an enterprise’s secured funds do not cover its required expenditures – and the gap is often fairly achievable, but not for its current investors. Here, bridge funds provide an impetus to the startup to push it through the threshold to larger investments, improving its market image as it works to attract another investor. Even in scenarios where the company hasn’t yet attracted its first investor, bridge funds can often provide sufficient funding to help a startup’s work start to resonate in the capital market, drawing the attention of seed, angel and other large-scale investors.

Where to find bridge funds

A crucial factor in the process of seeking this funding is the selection of the appropriate bridge fund. Both parties must share the same vision regarding the startup’s technology and business model, and its intended uses, growth prospects and future plans. So it is important for a startup to know the priorities and interests of the bridge funds present in the market.

Bridge financing is generally offered by venture capitalist firms, but it is also available through investment banks. Here is a list of some companies that offer, and sometimes specialize in, bridge funding:

• Prestige Capital – Harvey L. Kaminski, CEO and President
• Invico Capital – Allison M Taylor, CEO and Portfolio Manager
• Boundary Holding – Rajat Khare, Founder
• Wamda Capital – Fadi Ghandour, Managing Partner
• STC Capital – Christopher Woelffer, CEO and President

Many social startups are creating the technologies of tomorrow – but they often need financing today. Bridge funding can provide them with a reliable financial lifeline in times of need. These funders can help create a sector where money does not act as a barrier to the development of impactful new innovations – social startups would be well-advised to familiarize themselves with these funding options.

Sahaj Desai is a writer based in Delhi, India.

Photo courtesy of Tama66.