Bridge Financing over the River Scared
Good things come to those who wait. If you can't wait, get a loan
It's been six months since I began writing this column about Gazooba Corp., my own personal juggling act in the three-ring circus that is the Internet economy. Just before the first installment appeared, I was in Boston with the usual crowd of analysts, doing some serious tête-à-tête-ing about our company's outsourced viral-marketing model. Between appointments I swung by the cozy offices of Inc. magazine to meet with the editors for whom I was chronicling my adventures.
As I sat in a conference room overlooking the silvery swells of Boston Harbor, the Inc. staff plied me with sandwiches, solicited the skinny on the more hyperbolic tales pouring forth from Silicon Valley, and told me how much they were looking forward to my next column. "I can't wait to start writing it!" I replied through a mouthful of chicken Caesar wrap.
Bravado, thy name is Andy. In truth, I wasn't sure that in a month's time there would be a company to write about.
But before I proceed, I'd like to take a moment and apologize to those readers who seek out these pages each month in search of a humorous respite. I did try to make this column, like all my columns, amusing. But since it concerns (a) a dark night of the soul and (b) some pretty arid financial lingo, there aren't a lot of monkeys in this particular barrel. Take it as a lesson: building a dot-com company is not always the glorious funfest it's cracked up to be.
The clouds on my horizon that particular day were, not surprisingly, of the financial variety. In June 1999 my cofounders, Shanti and Zen, and I had closed Gazooba's first round of investment, selling Series A preferred shares to a group of venture-capital funds and angels. We planned to follow up with a larger Series B round at the end of the year, by which time we expected a slew of Web companies to have pounced on the Gazooba model. And, in fact, by December we had built a large customer base composed of small and midsize sites. What we didn't have in our corner of the ring was the heavyweights: the big-name customers that would help our valuation in the B round. A number of large companies told us they liked our program, which lets Web businesses reward visitors who refer friends to their sites. The reward is Gazooba points, which are redeemable for cash, electronics, even charitable contributions. But the sticking point was those companies' demand for a private-label version of the service. One major telecom company, for example, wanted to offer its customers free minutes instead of our beloved Gazooba points.
Well, if the market demanded a business-to-business provider of customer-referral programs, then dagnabit, Gazooba would become a business-to-business provider of customer-referral programs. But there was a problem. While popular wisdom holds that Internet companies can change business models on a dime, that's not strictly true. On a quarter, maybe. On a Susan B. Anthony, 80% of the time. The point is, this was going to take a while, and a while was something we didn't have. Our cash was almost gone. Finding takers for our Series B would be nearly impossible until we'd proved the new business model. And Gazooba's board meeting was rapidly approaching.
Needing a quick infusion of wisdom, I got on the phone to Brian Goncher, our part-time chief financial officer. In the vernacular of Regis Philbin, Brian is Gazooba's lifeline. When we started the company, he got us an account at Silicon Valley Bank (SVB and Imperial Bank are where all the really cool start-ups do their banking) and helped secure an equipment-lease line for about a third of our capitalization, even though we were track-record-less. I asked Brian about my options for getting more cash into our coffers.
"Well, you could go out for a second round now," said the CFO doubtfully, like a gardener trying to dissuade some fool who wants to plant grass seed in January. "But it'll probably take you a few months to develop the new platform. So why don't you ask the investors for a bridge?"
I briefly considered the old "Interesting ... but tell me why you'd go with that particular strategy" bluff. Instead I decided to come clean. "What's a bridge?" I asked.
A bridge, Brian explained, is a loan designed for companies that are so close to some value-hiking milestone they can taste it and consequently don't want to sell shares on the cheap. In financial terms it's a convertible note in which the principal and interest convert to stock upon the completion of the next round of financing. In metaphorical terms (and who doesn't prefer a metaphor when one is available?), a bridge loan is to a cash-poor start-up on the verge of a breakthrough as a PowerBar is to a marathon runner about to bonk at the 20-mile mark. It's the last ounce of fuel that propels you toward the finish line.
I needn't have been embarrassed by my lack of knowledge, it turns out. Since bridge loans sometimes signal that a company isn't performing well enough to raise a full round, they tend to be closely held family secrets, like the uncle who lives in the basement and thinks he's Teddy Roosevelt. In the dot-com world there are 672 separate occasions when companies put out press releases. Asking for a bridge loan is one of maybe three occasions when they don't.
It seems as if every time someone persuades me to do anything -- hire an employee, rent space from a landlord, retain a professional-services contractor -- the next sentence out of that person's mouth begins with "You realize they'll want ..." This was no exception. "You realize they'll want warrant coverage," said Brian, explaining that the lenders -- our investors -- would expect to be rewarded for their additional risk. They get interest, of course, but the more tantalizing carrots are warrants: rights to buy additional stock at an attractive price. That meant that the founders' ownership -- my ownership -- would be diluted, a prospect that didn't exactly turn my frown upside down. Zen, as usual, put things in perspective. "We have to unclimb the mountain," he said, sounding wise beyond his years but in fact shamelessly stealing from a piece in Wired about how the Internet economy requires companies to constantly abandon old peaks in order to reach new heights. For the good of Gazooba, I straightened my shoulders and donned my rappelling gear.
With Brian's help, I built a spreadsheet showing how much money we'd need over the next four months to make over the business model and land some heavy fish. This is not a process for the squeamish: the resulting figure was almost as much as we'd raised in the first round. Before presenting the number to the board, I tried it out on our lead investor. "Well, what do the other investors think?" he asked. "Are they planning to participate?" "I'll get back to you," I replied, and called someone else. "Is the lead investor going to do this?" she asked. I went though several more of these chicken-and-egg conversations before getting the reassurance I craved.
I presented the plan for the bridge loan at our December meeting. Our board members showed amazing support for our new direction and signed off on the plan. And yes, they asked for a lot of warrants as compensation. But Brian, our trusty reality check, assured me that their demands were in line with those he'd seen at other companies. We did the deal.
As I write this in March, Gazooba has signed up several large corporate customers and is about to go live with the first. Investors are calling our board members asking how they can get a piece of us. As a result of that success, I am now confident enough to bring our own batty uncle out into the sunlight. No, a bridge loan isn't something to be ashamed of. But don't go looking for our press release.
Andrew Raskin is the cofounder and CEO of Gazooba Corp., based in San Francisco.
Episode 1: A New Beginning
The Game of the Name
Take My Job Offer, Please. Pretty Please
There's No Such Thing as a Free Launch
Bridge Financing over the River Scared
Let the Good Times Roll
There's a New Man in Town
I Really Must Be Going
Editor's note: E-Diaries will appear every other month beginning in August in order to give Raskin more time to run his company.
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