What Is a Traunch?
Let me explain what a traunch is—it's one in a series of payments disbursed over a set period, but only if you hit certain performance metrics. You'll see this term a lot in venture capital, where it describes the funding rounds that support startup companies.
The word 'traunch' comes from the French 'tranche,' which means 'slice.' You might also hear 'tranche' in securitization contexts, like with mortgage-backed securities.
Key Takeaways
- A traunch is one of several investments tied to meeting performance targets.
- It's common in VC investing to lower risks for investors.
- These traunched investments can be tough on entrepreneurs, cutting their flexibility and shortening timelines for business growth.
Understanding Traunches
Investors use traunches to cut down on the risks of backing startups by breaking their capital into parts. Say your startup needs $5 million; instead of giving it all at once, the investor might split it into two traunches—$2.5 million now and the rest later, but only if you meet specific milestones.
From where I stand as an investor, this setup lets you hold back funds until the company shows real progress on its plan. That could mean hitting product development goals, revenue numbers, more fundraising, or other targets. Startups usually have tight windows to meet these, which adds to the early-stage challenges.
Difficulty for Startups
This lack of flexibility hits startups hard in several ways. When you're hiring, getting only part of the funds upfront makes it tough to bring in the team you need to build your product effectively. And even if you hire them, the uncertainty around future funding can make it hard to keep them on board.
Traunch structures can also create incentive mismatches between you as the entrepreneur and the investor. You might hesitate to share business problems with the investor, especially if they could block the next payment. It could even push you to fudge performance numbers or mislead about progress.
On a bigger scale, traunches make it hard for you to pivot your business model for new chances or dodge unexpected risks. The goals set at the start might not stay relevant, forcing you to chase outdated milestones instead of better opportunities.
Real-World Example of a Traunch
Imagine you're founding a startup that's just signed a traunched investment deal. You get $1 million right away, $2 million in 12 months, and $7 million more in 24 months.
To unlock those later funds, you have to hit goals like hiring key positions in the next 12 months and generating at least $500,000 in revenue by 24 months. Miss them, and you lose the next traunch.
You might worry about meeting these, though. Potential hires could balk at joining if you can't promise job security beyond 12 months. Attracting customers and partners could be rough too, as they might hold off until your funding looks more stable, which in turn makes hitting that revenue target even harder.
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