The term traunch refers to a series of payments that are to be made periodically only if certain goals are reached.
A practical example of the use of this concept can be found in start-up campaigns, where split fundraisers are often made and continued only if a certain goal is reached.
This particular staggered methodology is used for several reasons, such as the need to have to limit risk through a time-diluted investment approach.
Let's say a start-up needed $10 million in funding. Since the investor might find it too risky to invest 10 million in one lump sum, then he or she might decide to do so in a diluted manner, such as through 4 traunches of 2.5 million each.
This means that, from the investor's point of view, splitting the investment into traunches reduces its risk. Then, depending on the startup's performance, the investor may decide to proceed with the payment of the next traunch.
Since this procedure could be detrimental to the start-up, it is necessary to find a clear counter point that allows both parties to gain benefits. Where on the one hand the investor needs to be guaranteed a reduction in the risk of its investment, while the start-up needs to be guaranteed funding that, although it may not represent 100 percent of what it needs, can still help it grow and develop.
The need to have to reduce the risk of investments in start-ups lies precisely in the fact that they are usually projects whose future development cannot be known in advance.
From an investment perspective, we could say that investing in a start-up represents a potentially very profitable operation, but at the same time a risky one since one does not yet know the stability of the company one is investing in.
- Traunch is a term for a type of diluted payment by an investor.
- It is used in environments such as venture capital and start-ups
- It is a necessary measure to ensure a reduced risk margin for the investor
- In certain cases, start-ups may find it difficult to manage diluted funding because they are unable to fully carry out their intentions
- In the event that the start-up does not achieve predetermined goals, the investor will not make the next traunch payment