A traunch is several payments that will be distributed during a specific time period in exchange for certain performance indicators being met define traunch. It is often utilized within the venture capital (VC) circles to describe the rounds of fundraising that are used to finance startups.
“Traunch” is a term that comes from the French word “traunch” is derived from”tranche” which comes from French term “tranche,” meaning “slice.” The term”tranche” is utilized in the context of securitization in conjunction is the case with Mortgage-backed Securities (MBS).
Understanding Traunches
One way that investors try to minimize the risks associated with investing in companies that are just starting out is to divide their capital investments into distinct tranches. For instance, a new company may want to get $5 million of funding. Instead of paying the whole amount at once, the financier may offer a contract where the $5 million is divided in two traunches–$2.5 million now and the other $2.5 million to be paid at an undetermined date subject to certain milestones in performance being met.
From the perspective of investors from the perspective of an investor, splitting investments into traunches reduces risk because it allows investors to defer some of the funding planned in the event that the company does not show the business plan is advancing. These could include targets for performance for the development of products and revenue goals, as well as additional fundraising, or any other objectives. Most companies have limited time to meet the targets laid out in each report, which is a problem that arises from the beginning of the startup process.
It is difficult for Startups
However, this less flexibilities can create problems for startups in many ways. In the case of hiring, just a small portion of the capital investment will make it hard for the company to get the right people to develop its product. In addition, even if candidates are selected, the absence of an adequate funding source can hinder the retention of these applicants.define traunch
Investments in traunch can also result in an inconsistency of rewards between the investor and the business. From an entrepreneur’s point of view it can be tempting to not communicate with the investor about the issues that the company is facing, especially when the issues could make the next traunch be unpaid. The traunch arrangement could encourage entrepreneurs to alter their performance numbers and make investors believe they are progressing towards their goals.
In general, they could cause difficulties for entrepreneurs to adjust their business model in order to accommodate new opportunities, and also avoid unexpected risk. In the end, there’s no assurance that the objectives set at the beginning of an investment will remain relevant in the years to come. In this way the traunch model can make entrepreneurs choose to prioritise not important milestones when better opportunities may arise.define traunch
Real-World Examples of the Traunch
Imagine you are an entrepreneur who is the head of a new business that has recently signed an unconfirmed investment. According to the terms of the agreement the company will receive $1 million in the present and $2 million over the next 12 months. Then, $7 million over 24 months.
In order to secure these additional round of funding, you need to attain certain targets. In in the coming 12 months you will need to employ for a variety of jobs. In the next 24 , you need to produce at least $500,000 of income. If you fail to meet these goals, it means that you’ll lose the next round of funding.
Although you have agreed to these conditions, you are worried that you will be unable to comply with these requirements. You are concerned that the employees that you are looking to recruit are hesitant to join the business due to the fact that you won’t be able to provide them with longer than 12 months from the beginning. You also anticipate that it may be difficult to find the clients and partner agreements that you need to reach your revenue goals.
If your business’s long-term prospects are uncertain potential partners and customers might want to put off entering into agreements with your company until it has better financial foundation. This can cause you to struggle to meet your revenue goals.
