Bridge Round
Also written Bridge financing · Bridge funding
Short-term financing that funds a company's working capital between two funding rounds, provided by banks, debt funds, venture debt funds or venture capital funds.
In plain language
Funding rounds do not arrive on schedule. A start-up plans its cash to last until the next round, the round takes longer than expected, and the bank balance runs down.
A bridge round is the short-term money that carries the company across that gap. It pays for working capital until the next round closes, and it is usually repaid out of that round.
The alternative is often worse: raising equity in a hurry, at a lower valuation than the last round — a down round — which dilutes the founders and existing investors heavily.
How it works
Definition (Chapter 11, section 11.1.1). Some companies require short-term financing to fund working capital requirements between two rounds of funding. This is a bridge round. Banks, debt funds or even venture capital funds provide it; investors at this stage are venture capital funds, debt funds and venture debt funds.
Venture debt as the bridge (Chapter 2). Venture debt is lending to start-ups that have already raised institutional venture capital equity. It can become a bridge financing source when further equity rounds are getting delayed or the company is facing the risk of a down round. It meets spikes in cash requirements without further dilution, carries a higher interest rate than normal commercial loans, is typically unsecured, and is usually paid back in about 2–3 years from subsequent equity rounds.
Why lenders accept the risk (Chapter 11). Venture debt has a contractual maturity of 2–3 years — shorter than venture capital — often has shares or other collateral, and is senior to equity. It usually carries an equity kicker. The risk is insufficient or negative cash flow at the borrower; if the next round never comes, the lender can be left with untraded founder shares and a sticky loan.
Down round (Chapter 11, footnote 108). A financing round in which the company's valuation is less than in the previous round — caused by adverse performance or by external factors that reduce investor confidence. Avoiding one is often the whole point of the bridge.
Runway. The bridge is sized to the gap between the cash a company has and the months its burn requires before the next round — which is why cash burn is one of the growth-monitoring indicators investors track.
The formula
Runway (months) = Cash in hand / Monthly cash burn
Bridge required = (Months to next round - Runway) x Monthly cash burn
A worked example
Tarang EdTech (all figures illustrative) raised a Series A 14 months ago.
| Line | Figure |
|---|---|
| Cash in hand | Rs 12 crore |
| Monthly cash burn | Rs 1.5 crore |
| Runway | 12 ÷ 1.5 = 8 months |
| Series B expected in | 12 months |
| Gap | 4 months |
| Bridge required | 4 × Rs 1.5 crore = Rs 6 crore |
Option 1 — raise equity now. Investors offer to value the company at Rs 120 crore against a Series A valuation of Rs 150 crore. That is a down round, and existing holders are diluted at the lower price.
Option 2 — a bridge. A venture debt fund lends Rs 6 crore for 2 years, unsecured, at a rate above commercial bank lending, with an equity kicker. Nobody is diluted now.
Twelve months later the Series B closes at Rs 240 crore. Tarang repays the Rs 6 crore from the proceeds. The founders sold equity at Rs 240 crore instead of Rs 120 crore — the bridge cost interest and a small kicker, and bought a valuation twice as high.
If the Series B had not come, the loan would have been due with no refinancing — the sticky-loan outcome the workbook warns lenders about.
Why NISM asks about it
Chapter 11 (Investment Strategies, Investment Process and Governance of Funds), section 11.1.1 defines the bridge round among the stages of fund-raising and section 11.1.2 covers venture debt and down rounds; Chapter 2 (Types of Investments), section 2.3.1 describes venture debt as bridge financing. Expect a stage-matching question ("short-term financing between two rounds" = bridge round) and a question on who provides it.
Common exam traps
- A bridge funds working capital between two rounds — not listing formalities (that is the mezzanine round) and not the first idea-stage money (pre-seed).
- Providers include banks, debt funds and even VC funds, per the workbook.
- Venture debt avoids dilution now; a down round causes it.
- Venture debt is typically unsecured, yet senior to equity, and often backed by shares or other collateral.
- Repayment is expected from the next equity round, usually within 2–3 years — which is exactly the risk if that round is delayed.
- A down round is a lower valuation than the previous round, not simply a small round.
Where this is taught
Free preparation for NISM Series XIX-CRelated terms
- Venture DebtSpecialised lending to start-ups that have already raised institutional venture equity — unsecured, priced above commercial rates, repaid in two to three years, usually with an equity kicker attached.
- Cash BurnThe rate at which a start-up spends its cash — set against the money in the bank, it says how many months of runway are left before the next round has to close.
- Equity KickerAn equity sweetener attached to a loan — warrants, preference shares or a right to convert part of the debt at an agreed valuation — usually up to 10% of the loan amount in Indian venture debt.
- Mezzanine RoundThe last private round before listing: pre-IPO money that pays for listing formalities, often with anchor investors allotted shares at a discount to the IPO price and ESOP holders selling out.
- Pre-seed capitalThe first money into a start-up, given to founders to develop and validate an idea — to show it is sustainable, scalable and saleable — usually from family and friends, since there is no revenue yet.
- Down roundA financing round priced below the valuation of the previous round — the event that triggers anti-dilution protection and re-prices every earlier investor's conversion.
- Early-stage capitalThe third round of a young company's life — money to set up initial operations and basic production once it has customers, raised in Pre-Series A, Series A or Series B.
- Later-stage capitalCapital from Series C onwards to scale a business — new markets, geographies, product segments or acquisitions — typically from private equity funds and institutional investors, as angels and VCs exit.
- Sticky loan in venture debtWhat venture debt becomes when the borrower's fortunes turn: the lending AIF is left holding founder shares in a distressed company as collateral, and because they are untraded the loan cannot be readily recovered.