Tweener Rounds

**Originally published 7/9/2013

As we continue to move to a Frictionless Financing environment, there has recently been a lot of talk about “gap” investing, or what I call “tweener” rounds. At Promus Ventures, so far 25% of our new platform investments fall into these gap financings. We generally invest a minimum of $350K at the seed stage and like to participate meaningfully more in future rounds, but have also started as late as Series B with a higher allocation.

Back in my basketball days, “tweeners” were guys that could straddle playing two positions. Small forwards and shooting guards tend to be tweeners. I define gap rounds only in the context of companies with the ability to raise a larger round now (versus companies yet to see product/market fit and have run out of cash).

This is how I would characterize a gap round:

• Startup has already raised a seed round, is seeing good traction, and has ability to do a meaningful ($3M+) round now
• Founders see two/three major inflection points they feel they can conquer in next 9–12 months
• Trade-off is to raise a larger round now (resulting in more dilution) or raise an additional $500K-$1M round that if hurdles are met will result in higher valuation (and ultimately less dilution)

We love to see founders so confident in their team’s execution abilities that they turn down larger rounds on the table for smaller rounds with less dilution. We have actually seen this play out numerous times late in our seed rounds as new larger groups come in with the “why don’t we just skip to the A” conversation.

It’s ultimately the founders’ call, not mine, whether they want to take this or not. Cash = oxygen, so founders who turn down the extra cash now have to make a gut check whether to go out further on the ledge. (Interestingly, no founders we have worked with when presented with this opportunity have ever taken more dilution for more cash early in their life cycle).

I’m not sure what advantage investors have in tweener rounds. Just because founders decide to not go for a larger round doesn’t mean there should be a valuation discount. The gap round is just another round, and will be properly valued like any other round given the company’s traction and prospects.

Ultimately, every round in a company’s life is a gap round. There is always a larger customer that is close to signing and another product iteration around the corner. Founders have to walk the cash/dilution tightrope everyday, and optimizing this is difficult. As early-stage financings become more liquid and commonplace, financing round labels like “friends and family,” “seed,” “seed-prime,” “gap,” “Series A” will (thankfully) go away.