Bridge Rounds for Biotech Startups: When to Raise and How to Structure Them

Bridge Rounds: When to Raise and How to Structure Them for Biotech Startups

For a biotech startup, the path from discovery to a priced round is rarely a straight line. Promising preclinical data may be on the horizon, but your cash runway might not last long enough to reach it. This gap, between your current cash position and the next major value inflection point, is where many promising companies face their toughest challenge. Raising a full Series A or B is premature, but standing still is not an option. This is the precise scenario where a bridge round becomes a critical strategic tool for biotech cash flow management, designed to fund the specific work that unlocks the next level of valuation.

Is a Bridge Round Your Best Path Forward?

Before exploring how to raise bridge funding for biotech startups, it is essential to determine if it is the right move for your company. A bridge round is not a sign of failure; it is a tactical form of interim financing for biotech companies designed to cross a specific chasm. The decision hinges on one key factor: a bridge round is appropriate only when there is a clear line of sight to a milestone that will materially increase company valuation within the next 6 to 12 months. This could be completing a key toxicology study, demonstrating efficacy in an animal model, or finalizing a crucial part of a discovery platform.

This is not a 'keep the lights on' fundraise. It is a targeted capital injection to fund a de-risking event. The reality for most pre-seed to Series B startups is more pragmatic: if you cannot point to a specific, achievable milestone that will make your company significantly more valuable to the next set of investors, a bridge round may not be your best option. It can lead to a cycle of dilutive, small raises that harm momentum. However, when used correctly, it is a powerful instrument for extending runway in biotech and preparing for Series A in biotech on much stronger terms.

It is also crucial to distinguish a bridge round from other biotech startup funding options. It is not a seed extension, which typically involves extending a previous round on the same terms to add more capital. Nor is it a formal down round, where a company raises money at a lower valuation than its previous round. A bridge is specifically intended to be a short-term financial instrument that converts into a future, higher-priced round.

The signaling risk associated with a bridge round also varies by stage. At the pre-seed or seed stage, such rounds are common and carry minimal stigma. Post-Series A, however, a bridge can sometimes be perceived as a signal that the company has missed key milestones or that the market has cooled on its prospects. This makes a clear and compelling narrative even more critical for later-stage companies.

How to Calculate the Right Amount for Bridge Funding for Biotech Startups

One of the most common pain points for founders is calculating the precise amount needed for a bridge. Raise too little, and you fail to reach your milestone. Raise too much, and you take on unnecessary dilution. The goal is precision, not a guess. This process starts with a milestone-based budget, something you can build in a spreadsheet without a full-time CFO.

Step 1: Identify and Cost the Critical Milestone

First, identify the single most critical value-inflection point you need to hit. For an asset-based biotech, this might be the cost of the final preclinical study required for an IND filing. For a platform company, it could be the cost of a validation study with a pharma partner. Itemize every direct cost associated with hitting that milestone: lab consumables, CRO fees, specialist salaries, and any required capital expenditures. Be exhaustive in this process.

Step 2: Calculate Your Total Required Runway

Next, calculate the time required to achieve this milestone. If the study takes six months, that is your starting point. From there, the recommended runway calculation is a three-part formula:

1. Time to Milestone: The direct time needed to complete the core research and development work.
2. Buffer Period (3-4 Months): An essential contingency for unexpected delays. The buffer is non-negotiable in biotech R&D, where scientific and logistical challenges are common.
3. Fundraising Window (3-4 Months): The time you will need to actively fundraise and close your next priced round (e.g., Series A) after the milestone is achieved.

For example, if your milestone takes 6 months, add a 3-month buffer and a 4-month fundraising period. Your total runway need is 13 months. You must then calculate your total burn over this period, including both the specific project costs and your regular operational burn (payroll, rent, G&A). This detailed calculation, likely built in a spreadsheet connected to your accounting software like QuickBooks or Xero, answers the question, 'How much do we actually need?', replacing anxiety with a data-driven ask.

Structuring the Deal: Key Terms for Interim Financing in Biotech

With your target amount set, the next challenge is structuring the deal. Most bridge rounds for early-stage companies in the US and UK use convertible instruments, which allow investment to convert into equity at a later date. This avoids the need to set a firm valuation for the company at a time when it is rapidly evolving.

Convertible Notes vs. SAFEs

The two primary instruments are convertible notes and Simple Agreements for Future Equity (SAFEs). A key distinction is that a convertible note is technically debt that accrues interest, while a SAFE is not. For US companies, SAFEs have become extremely common, particularly in the tech sector, due to their simplicity. In the UK and European biotech scenes, convertible notes remain more traditional and are often preferred by investors familiar with their debt-like protections, such as a maturity date.

Negotiating the Core Terms

Three terms are central to any negotiation, shaping how the investment converts and impacting both founder dilution and investor returns.

• Valuation Cap: This sets the maximum valuation at which the bridge investment converts into equity in the next priced round. It effectively guarantees early investors a minimum percentage of ownership by protecting them if the company's valuation soars.
• Discount Rate: This gives investors a percentage reduction on the share price of the next round. A typical discount for bridge investors is 15-25%. It rewards them for taking an earlier risk compared to investors in the priced round. Often, convertible instruments offer the investor the better of the two conversion prices (cap vs. discount).
• Maturity Date (for Convertible Notes): This is the date when the note is due for repayment if a conversion event (like a Series A) has not occurred. For biotech convertible notes, a common maturity date is 18-24 months. This gives the company sufficient time to hit its scientific milestones without the note coming due prematurely.

Consider a brief example. You could offer a $15M valuation cap with a 10% discount or a $12M cap with a 20% discount. The first option is less dilutive if you believe you can raise your Series A at a valuation far above $15M. The second is more attractive to investors if the next round's valuation is uncertain. What founders find actually works is modeling a few scenarios in a spreadsheet to understand the trade-offs and their impact on the capitalization table post-Series A.

To make this tangible, imagine your startup raises a $2M bridge on a convertible note with a $15M valuation cap. Six months later, you raise a $10M Series A at a $20M pre-money valuation. Because the cap ($15M) is lower than the Series A pre-money valuation ($20M), your bridge investors' money converts at the $15M valuation. Their $2M buys them a larger chunk of the company than if they had invested directly in the Series A at the $20M price. This is their reward for coming in early. Understanding this mechanic is crucial for managing dilution and meeting biotech investor expectations.

The Investor Pitch: How to Raise Bridge Funding for Biotech Startups Without Stigma

Approaching investors for a bridge round can be intimidating. The fear is that it will be perceived as a sign of distress. The key to avoiding this stigma is to control the narrative from the outset. You are not asking for a rescue package; you are offering an opportunity. The conversation should be framed around the upcoming, well-defined milestone and the value it will unlock.

Approaching Existing Investors

Start with your existing investors. They have the most to lose if the company fails to reach its potential and the most to gain from its success. Frame this as an insider opportunity for them to increase their stake at favorable terms before the next major valuation step-up. Present your milestone-based budget from the previous section. Show them exactly what their capital will achieve and the calculated runway it provides. This transparency builds confidence and demonstrates disciplined biotech cash flow management.

Pitching to New Investors

When you approach new investors, the pitch is similar but emphasizes access. They are getting a chance to invest in a company that will soon be significantly de-risked and raising at a much higher valuation. A scenario we repeatedly see is founders successfully positioning the bridge as a "pre-Series A" round, signaling momentum and exclusivity. Instead of saying, "We need money to survive," you say, "We are raising a small round to complete our IND-enabling studies, which will be the primary catalyst for our $20M Series A in nine months. We're offering a 20% discount for investors who join us now."

The materials for this conversation are also different. A bridge round pitch deck is typically shorter and more focused than a Series A deck. It should concentrate on progress since the last raise, the specifics of the upcoming milestone, the budget, and the team's ability to execute. Investors are buying access to the next valuation, not plugging a hole in your finances. This reframes the entire dynamic and aligns everyone toward the same goal: hitting the milestone that strengthens the company for its next priced round.

Conclusion: A Strategic Path to Your Next Priced Round

Successfully navigating interim financing for biotech startups requires a strategic, not reactive, mindset. A bridge round is a specific tool for a specific job: funding the company's progress to a tangible, value-creating milestone. For founders managing this process, often without a dedicated finance team, the approach can be distilled into a clear sequence of actions that prioritize clarity and discipline.

First, validate that a bridge is the correct instrument. It is appropriate only when you have a clear line of sight to a de-risking event within 6 to 12 months. Without that, you may need to reconsider your core strategy or explore other funding options.

Second, calculate your needs with precision. Use the milestone-based budgeting approach: Time to Milestone, plus a non-negotiable buffer, plus a realistic fundraising window. This data-driven ask is your most powerful tool in investor conversations.

Third, structure the deal thoughtfully. Understand the mechanics of convertible notes and SAFEs, particularly the interplay between the valuation cap and discount. Model the dilution to avoid surprises and align terms with both your goals and investor expectations.

Finally, own the narrative. Frame the raise as a strategic opportunity for insiders and new investors to participate just before a major inflection point. You are selling progress and access, not asking for a lifeline. By following this framework, a bridge round becomes what it should be: a strong and steady path to your next major fundraise.

Frequently Asked Questions

Q: What is the difference between a bridge round and a seed extension?

A: A bridge round is typically a new financing round with new terms (like a valuation cap) designed to get a company to a specific milestone before a larger, new priced round (e.g., a Series A). A seed extension usually involves raising more money from existing investors on the same terms as the original seed round.

Q: How long does it take to close a bridge round?

A: Bridge rounds are generally faster to close than priced equity rounds because the legal documentation (like a SAFE or convertible note) is simpler and valuation is deferred. A well-orchestrated process, primarily with existing investors, can often be completed in four to eight weeks.

Q: Can new investors participate in a bridge round?

A: Yes, though it is most common to start with existing investors who already have a vested interest. Bringing in new investors can be a strong signal of momentum. It can also be an opportunity for a new lead investor for your next round to secure their position early.

Q: What happens if a company raises a bridge but still fails to reach its milestone?

A: This is a challenging situation. If the maturity date on a convertible note is reached without a new funding round, investors may have the right to demand repayment or convert their debt into equity at a very low valuation. This highlights the importance of setting realistic, achievable milestones for the bridge financing.