DEFINITION of Traunch
A traunch is one of a series of fund allotments earmarked for a specific purpose, such as a financing round in a start-up. Traunches are used by venture capital firms as a means of minimizing risk. Some experts believe that "traunch" is a misspelling of "tranche," which means a slice or portion, and is used to describe instruments such as mortgage-backed securities that can be sliced into smaller pieces for sale to investors.
BREAKING DOWN Traunch
For example, a development-stage company that has sought venture capital funding may initially receive a $2-million traunch out of a $5-million financing round, with the balance to be received after a month.
Ways a Traunch Is Used
The structure of a traunch investment has a variety of controls and restrictions that can pose challenges for the company to receive funds and the investor alike. The terms that are established for the rollout of the remaining funding are set at when the deal is negotiated. This can include milestones the company must achieve in order to receive its subsequent installments of funding. The challenge is that circumstances may drastically change after those terms are set, which could affect the company’s ability to meet those goals, or even make those goals obsolete or irrelevant.
With the money to be released in installments, it can create difficulties in terms of expanding the staff at the company being invested in. When recruiters seek the top talent to fill their ranks, the fact that some of the cash that should be backing the company is being held back may be taken as a negative sign by potential hires. It can paint a picture of instability that drives talent to look elsewhere.
Since the next rounds of the investment will not be released unless targets are met within a certain timeframe, the company awaiting the funds might not be as forthcoming about its actual progress. They might hold off reporting issues to investors in order to better guarantee the funds will be released to them. Rather than collaborating with their investors to work toward the common goal of seeing the company succeed, the startup might actually operate defensively, trying to do its best without input from investors. The concern on the startups' part might be that the investors will withhold future payments from the traunch investment if they do not like what they see.
The flipside to that stance is that the investor may be fully justified in halting further payments because the company is not on track to achieve the goals laid out.