Lately, there have been a ton of bridge rounds coming into our investment pipeline.
Why?
A lot of Seed-stage companies built their operational plans around a Series A benchmark of around $1 million ARR. But from late last year through most of this year, the goalposts have moved.
Even after working to extend runway over the last 12 months, these Seed-stage companies are finding themselves short on cash and not quite at the metrics required to raise a Series A. So they’re trying to close that gap.
The fact that there’s so many bridge rounds, down rounds and even pay-to-play cram downs — which are really dilutive and painful for founders and existing investors — is just a sign of the challenge in today’s fundraising environment.
The IPO Trickle-Down Effect
Another data point that’s worth mentioning: Major funds — billion-dollar-plus funds, tier-one venture capital firms with big brand names — are cutting their fund sizes. That basically means they’re either returning money to their limited partners, or they’re not able to raise their target fund size. The pool of available capital is shrinking, and it will most likely continue to shrink.
If you think about the stages of growth from a Pre-Seed company all the way to IPO, there are also different stages of investors at each milestone. Each investor is packaging up and selling a product — their portfolio — to that next stage of investor. Right now, that last stage of investors, the public market, is not really a customer. And that has frozen things.
Until that opens up — which may be starting to occur, with the recent IPOs of Arm, Instacart and Klayvio — the pre-IPO investors are mainly staying on the sidelines. This creates a challenge for growth stage VCs, as they don’t really know what to invest in, because the pre-IPO investors won’t tell them what they want to see. And there’s just all this ambiguity and hesitancy in the market, and that trickles down.
Now, the early stages are still fairly active, although price points have reduced by 20% to 40%. But as far as what early-stage investors are selling to the next stage of investor, there’s still not 100% alignment. And until that occurs, there’s going to be a much higher bar for what enables early-stage companies to raise future financing.
Preserve Your Optionality
Optionality is the guiding principle of York IE’s investment strategy. That’s why we’re so committed to helping the companies we invest in through Advisory as a Service — because if you’re profitable, you don’t need to rely on outside financing.
“The really exciting thing about working with York IE is the access to Advisory as a Service,” says Andy Freivogel, co-founder and CEO of Science on Call, a member of our latest investment cohort. “We don’t want to build out large teams. We just want to solve problems for our customers by leveraging all the resources that York IE brings to the table.”
No matter the funding climate, remember: Capital efficiency is paramount.