Hard-tech investors are collectively rushing into the lending business.

At the airport in the wee hours, an investment partner booked the last flight ticket for that night. In his suitcase, apart from a change of clothes, there was a contract revised overnight. He planned to catch the founder of an embodied intelligence startup before dawn — to be precise, to wait for him right outside the office door. The founder had been hounded by calls from more than a dozen institutions all day, so he simply turned off his phone to get some peace. But when he opened the door, two investors were already sitting in the corridor, and one of them had the contract open at the signature page.

This is a daily scene unfolding in China's hard tech financing circle this year.

In the past, investors camped outside the office to get more face time and fight for a larger share of the investment. Now some of them directly slap the transfer receipt of a bridge loan on the table: "Never mind the financing schedule for now, this sum of money can be credited to your account today, just take it and use it first."

I first heard that VCs were doing bridge loans two years ago.

A PR staff from a certain fund of funds talked about their recent situation, saying "We've been extremely busy lately, providing bridge loans to our portfolio companies." Back then, IPO exits were still stuck in a huge backlog, and investment institutions were also facing capital pressure, so they would be extremely cautious about uncertain projects.

Some enterprises could not raise enough money and their capital chains were on the verge of breaking. Old shareholders did not want to continue investing, but if they did not offer a helping hand, the projects would collapse immediately. As a last resort, they offered emergency support to help the enterprises get a bridge loan to tide over the difficulties.

But since the beginning of this year, bridge loans have suddenly become a highly sought-after business among VC institutions.

At a recent closed-door meeting, investors privately discussed a new trend — bridge loans.

"We have received a lot of such projects recently. In the past, we used bridge loans only for emergency rescue, but now we find it can also help us lock in target projects."

Some VC partners have closed several bridge loan deals within a year, and they are more excited talking about this business than formal equity investment. There is a vivid saying in the industry that this business is experiencing a complete reversal of its public image.

In the past, it was a life-saving injection in the ICU: when an enterprise's capital chain was about to break, old shareholders reluctantly advanced a sum of money to pull the project back from the cliff. Now, it has transformed into a stepping stone to grab high-quality projects.

What makes short-term loans with an annualized interest rate of around 3% so attractive to investors holding large amounts of capital? The answer lies in a tiny, overlooked clause in the contract.

Disassembling "Loan-to-Equity Conversion"

Bridge loans themselves are nothing new.

It is quite common and reasonable for institutions to lend money to their portfolio companies for turnover needs.

The real killer move is that investors will add a "conversion right" clause in the contract: when the enterprise launches the next round of financing, part of the loan can be directly converted into equity investment, and it can even be linked to the enterprise's operation milestones — if certain technical indicators are met or a certain product line reaches mass production, the equity conversion quota can be further increased.

This design is almost a risk-free deal for investors.

If the enterprise's valuation keeps rising, investors can convert the loan into equity at the "discounted price" locked when they lent the money, which is equivalent to getting a ticket for the next round of investment in advance, with the price fixed long before the financing opens.

If the enterprise does not perform well, investors will not lose money either. They can choose not to convert the loan into equity, and just collect the principal plus interest as scheduled, which has a far higher safety margin than pure equity investment.

The industry has given this operation a very appropriate nickname — "call option", where the option fee is replaced by interest, and the strike price is replaced by a discount of the next round's valuation.

Such operations are not completely without boundaries.

Regulators have long stipulated that private equity funds providing loans or guarantees to their portfolio companies shall not exceed a term of one year, and the quota shall not exceed 20% of the fund's paid-in size.

In other words, this business is inherently subject to "purchase restrictions", so it is no wonder that institutions are scrambling to make full use of this 20% quota.

If you are a step late, the spot may be occupied by others.

In fact, similar strategies appeared in the market as early as around 2018, but the purpose at that time was simpler — purely for position locking. After the TS (Term Sheet) is signed but the formal agreement is not finalized, or the pre-investment restructuring still needs time, when the enterprise is in urgent need of capital, the institution will advance a sum of money first.

Sometimes the enterprise does not lack money at all, but in order to bind the investors more closely, the enterprise even takes the initiative to request a bridge loan. At that time, the loan term was usually controlled within half a year, and what investors cared most about was that the equity conversion right would not be restricted by time.

Even if the loan matures, the investor can unilaterally extend it, and the enterprise is required not to repay the loan in advance, otherwise the equity conversion right held by the investor will be invalidated.

Now this set of gameplay has been repackaged. What investors are pursuing is no longer just "locking in projects", but buying a "spot reservation insurance" in advance for potential unicorns.

Enterprises get rid of the short-term cash flow pressure of repayment through "loan-to-equity conversion", while investment institutions pre-reserve their subscription quota for the next round of financing, without worrying about their shareholding ratio being diluted by the surging giant investors coming later.

How popular is this business? Even banks are starting to feel threatened.

An enterprise that manufactures core components for robots is negotiating for capital with a bank and its old VC shareholder at the same time. On the bank's side, the account manager spent more than half a year going through the process, coordinating with the risk control department, doing on-site inspections, and fighting for the credit limit. Finally, the credit approval was obtained and the interest rate was negotiated at a favorable level, which was supposed to be a sure deal.

But when the bank called to notify the enterprise, the other party replied casually: "Sorry, we have already received the bridge loan from our VC. The interest rate is similar, but they are willing to convert most of the loan directly into equity, so our cash flow pressure is even smaller."

The bank tried to remedy the situation by bringing out the "investment-loan linkage" policy to join the game, only to find that regulations stipulate that banks can only subscribe for up to 2% of the enterprise's equity. Compared with the VC's equity conversion quota of millions or tens of millions of dollars, banks have almost no ability to compete.

Hot Money Siege

The sudden emergence of a large number of bridge loans is, in the final analysis, a result of overheating financing in certain tracks.

Embodied intelligence and AI chips are the two tracks that burn the most capital and attract the most investment at present.

In the first half of this year, the total financing amount of China's embodied intelligence sector has exceeded the total amount of last year. Although different institutions have slightly different statistical calibers, the consensus is that the total amount falls in the range of 400 billion to nearly 600 billion yuan, with more than 200 financing events.

Behind the bustling scene is cruel stratification: the top 20 companies have taken away about 70% of the total capital of the whole industry, while the remaining more than 200 companies can only get an average of tens of millions of yuan each, which is not even enough to cover their basic expenses.

The valuations of several leading companies have exceeded 20 billion yuan. One of them raised 45 billion yuan in just four months, which is equivalent to one third of the total financing amount of the more than 200 mid-tier and tail-tier companies.

How fast can the financing rhythm be?

One day in early March this year, three different embodied intelligence companies almost successively announced the completion of a new round of financing, with amounts ranging from several hundred million yuan to more than 20 billion yuan. They announced the news almost at the same time as if they had made an appointment in advance, leaving onlookers stunned.

Some investors privately complained about a case: a brain-computer interface enterprise had not even completed the delivery of the last round of financing, but the next round had already started, with its valuation directly rising two to three times.

Such cases are not isolated. Many hard tech projects have not received the money from the previous round of financing, but the next two rounds of negotiation have already been finished. With the financing rhythm compressed to such an extent, the mindset of old shareholders is easy to imagine: they see that the project they invested in is about to open a new round of financing, but the subscription quota has already been snatched by others.

The financing of leading companies is extremely hot. For some extremely popular projects, investors cannot conduct due diligence, and the investment decision time is very short. Even so, investors are still scrambling to get in.

For top-tier projects, investors almost hold the attitude that "we will invest even if we have to kneel". No performance bet, no repurchase requirement, no complicated due diligence — as long as they can get a follow-on investment spot, they will remit the money immediately.

In order to squeeze into the investment list, institutions not only dare not suppress the valuation, but also have to compete to provide more resources. Supply chain docking, local policy subsidies, customer matching, and even computing power support — all available resources are put on the table.

Even manufacturing giants have entered the market. An automotive enterprise invested in four or five embodied intelligence companies within half a year. It is not so much scattered betting as buying an insurance for its future production lines in advance.

An industry insider used three words to summarize the changes of this industry in the past year: acceleration, differentiation, and restructuring.

Others reminded that the previous wave of collective entry into the market was largely "position-locking investment" out of fear of missing the window period, and not every sum of capital was invested in the right direction.

Data shows that the fundraising amount of China's venture capital market in the first quarter of this year increased by more than 80% year on year, and 90% of the capital flowed to seven tracks: AI, robots, world models, quantum technology, controlled nuclear fusion, integrated circuits, and commercial aerospace.

The concentration of hot money on limited top-tier projects directly leads to a shorter and shorter financing cycle, and the rising valuation makes people feel anxious.

Bridge loans plus "loan-to-equity conversion" just provide old shareholders with a decent remedy.

With the goodwill of "I'll send you money to spend first, buddy", they lock in the guaranteed quota for the next round in advance.

Enterprises get cash flow that arrives on the same day, and investors get an anti-dilution entry ticket. Even if the final negotiation fails, they at least get a reputation of "offering help in the snow".

To put it deeper, this is also a survival rule forced out by the market. Everyone is afraid of being the one who is left with no flower in the drum-passing game when the drum stops.

Emergency Rescue, or Pre-emptive Land Enclosure?

In the actual operation of VC/PE, "bridge loans" mainly appear in two scenarios.

One is when the project is extremely sought-after, and bridge loans are used to lock in the investment right in advance. The other is when the portfolio enterprise is facing tight capital chain, and old shareholders step in to offer life-saving support.

The first gameplay is not originally created by domestic VCs. Top capitals in Silicon Valley have played it long ago.

The typical routine is: before the project officially launches the next round of high-valuation financing, top-tier institutions give the founder a bridge loan or a SAFE agreement first, without setting a price at the moment, and agree that when the enterprise triggers the next round of financing, the loan will be automatically converted into equity at about 20% discount of the new round's valuation.

The enterprise can get cash on the same day to expand and recruit new employees, while the VC takes the opportunity to add an "exclusivity right" clause in the agreement. If the enterprise is found to be secretly contacting other institutions during the exclusive period, the bridge loan usually needs to be repaid within a few days, plus a high punitive interest.

On one hand, for the highly sought-after top-tier projects, VCs treat bridge loans as a stepping stone, eager to send the money directly to the founder. On the other hand, for ordinary projects that cannot get new round of financing, old shareholders treat bridge loans as a "noose", with clauses written more strictly than one another.

From the "bet on national destiny" style of making a one-time bet, to the "calculate every marginal benefit" style of meticulous calculation, this boom of bridge loans is, in the final analysis, a collective risk aversion in the primary market.

Capitals are not only afraid of missing the next humanoid robot unicorn, but also fed up with the endless high valuation bubbles and the unrealized book floating returns that never come true.

So everyone has chosen the smartest path unanimously: while aiming at the future, they fasten a bulletproof rope around their waist first.

For entrepreneurs, the sum of money that "arrives on the same day" is really tempting.

But there is no free lunch in the world. When investors no longer make equity bets purely out of faith, behind every seemingly helpful loan contract, clauses of exclusivity, discount, and exit path have long been quietly written in.

As for the investor who camped in the corridor at the beginning, no one knows whether he finally got the investment quota. But one thing is certain: on the flight in the next early morning, there will be another person who has already booked his ticket.

This article is from WeChat Official Account "thecapital" (ID: thecapital), Author: A Bu, authorized by 36Kr for distribution.