How tranches can affect your startup fundraising
On Monday's blog post I mentioned the idea of investors using tranches to fund a startup. Investors don't always write a blank check for your startup to use at its own discretion. In fact, sometimes a funding commitment is setup over a series of investments. These are called tranches. Using tranches can protect both the startup and the investor, although doing so mostly favors investors.
Here are some ways that tranches can affect your startup fundraising.
Tighten your belt
When an investor wants to stage their funding commitment over a series of tranches it means that your startup will have to do a real good job of budgeting and analyzing your cash flow needs. If the order of the funding tranches, and the amount to be released per tranche, is not set up to match your startup's anticipated cash flow needs then you will end up running out of cash and have to start delaying planned expenditures.
Funding tranches are often paired with significant milestones or goals that an investor wants to see hit before they will release subsequent rounds of capital. So, under such a scenario, your team will have goals lingering over your head that need to be met in order to avoid cash flow issues. This can create added stress, but can also act as a good motivator and way to make sure you are staying on track.
For the love of paperwork
The saying is, "that which gets measured gets done". Having your startup funding come in over a series of tranches most likely means that you are doing to need to document the heck out of your progress. While that isn't necessarily a bad thing, it can create a bandwidth issue. Especially if your investor(s) want reports produced in a certain format and at frequent intervals. This can affect your startup by creating a lot of extra paperwork you will have to produce and take time away from more critical activities.
What about your startup? Have you received funding that was set up over a series of tranches? If so, did you see it as a positive or negative thing and how did you go about managing that process?