Tranche Funding is Not Favorable for Entrepreneurs

Here is another article I published on LinkedIn that I want to share with you:

I’ve had several startup entrepreneurs recently ask me about tranche funding and my opinion of this type of agreement. So, I thought I’d share my humble opinion according to my experience in the Silicon Valley coaching entrepreneurs since 2001.

Tranche funding is basically milestone funding. The investor will wire your company an initial "dose" of capital – say, $250K – to see if you can hit your first milestone as committed. Once that milestone has been reached satisfactorily, the investor will inject another "dose" of $500K and when you hit that milestone expected, they will inject another "dose" of capital. 

Back in 2003-2004, I observed a lot of tranche funding going on after the Internet bubble burst and the market fell in April, 2000. It was a way for risk adverse investors to feel comfortable investing in Series A startups again after the Internet bubble crashed. (Note: Series A  startups back then is equivalent to Series Seed startups today)

The entrepreneurs I knew back then told me that they were continuously in a pressure cooker situation because they felt like they were forever on a shoe string budget where they couldn’t hire top talent, build out a fully baked Version 2.0 or sell their Version 1.0 product with a promise of free upgrades to cautious first customers - because there was no assurance of strong backing from their investors. And, they always felt like they were being tested by their investors to see if they could meet the next enormous “challenge”. And, if the milestones were not met, the CEO/Founder was the first to be blamed – which left the founders community skeptical about investors in general. I still hear tranche funding stories from serial entrepreneurs today and they swear they will never accept those terms again.

One of my favorite young entrepreneurs who got funded by top tier VCs by participating in my Visibility Conference in early 2004 became extremely ill under the heavy stress of tranche funding that he carried over his head that never let up. Eventually, he bought his company back from his investors in good faith and put it to rest. This is not everyone’s story, but it felt like it was rather acknowledged by many back then.

Here is a great article written by a fellow entrepreneur that you should read before deciding if tranche funding is right for you: http://www.forbes.com/sites/entrepreneursorganization/2013/12/20/tranche-investing-will-kill-your-startup-heres-why/#5d3db2f82371.

Happy fundraising!