How To Close Your Fundraise Quickly With Tranches

I answer 6 common questions

When you're fundraising chances are you want to wrap up the round quickly so that you can get back to building your startup, but this is easier said than done.

The best way to move fast with your raise is to get the investors you're targeting to move fast themselves. And investors want to feel like they're getting into a hot deal with a capable founder who understands how to sell a vision.

You can do this by structuring your fundraise in tranches. Let me explain.

6 Common Questions About Fundraising with Tranches

What Are Tranches?

Raising your round in tranches means that you're going to raise capital at different valuations throughout your raise.

Typically, this means letting a few investors in at a lower valuation than you're hoping you can raise the rest of the round at, before you kick off the main fundraise.

Here's a calculator I set up with the help of backup parachute so you can see the impact on your round.

Why Would I Use Tranches as Part of my Raise?

Brand new startups are incredibly risky (and putting a value on them is hard). Getting that first person or firm on your cap table can take longer than the entire rest of the round in some cases. In particular, VCs tend to be more willing to invest if other VCs have already invested.

Rewarding your initial backers with a reduced entry point into the company builds goodwill, and is comparable to what is normally done with a friends and family or angel round. The difference here is that you're already looking ahead to raising more right away.

A lower cap can also be a good way to get well known and highly respected investors involved in your startup right away. Don't underestimate the influence this will have on the rest of your raise.

How Do Investors Feel About Tranches?

While there's no requirement for you to disclose the cap or valuation that initial investors entered at, it's important to not cross over the line with regard to honesty when using tranches.

Some general rules:

  1. Don't offer a lower cap to an investor than what you've already offered to another.

  2. Don't keep an interested investor on the hook to use as leverage with others if you don't have any intention of letting them invest.

  3. Have a truthful and believable narrative behind why you're structuring your round with these tranches.

There's nothing that says you can't do these things, but venture is a small, interconnected world that's powered by blind reference calls.

With that said, the best investors know that getting into an early stage deal at $5M or $10M isn't going to make a big different in the long run and won't sweat you for it.

On a different note, tranches are incredibly attractive for early backers since they will get quick markups on their investment.

What Do I Say When I Want to Kick Off a New Tranche?

It can seem uncomfortable to bring up the idea of a new tranche to investors. You don't need to disclose it but it's typically beneficial to do so because it signals you're getting more interest than you may have expected — if you do it right.

Here's a simple way to bring it up that won't hurt your chances with most investors.

"We wanted to move fast with our round so we opened up a small bit of allocation earlier, but we've closed that are now looking to fill the round at a fair cap."

In the case where you actually weren't planning on opening up another tranche, you can say something like this instead.

"We only planned to raise $x but we're still seeing more interest and so we're exploring taking on more capital that will still let us be comfortable in terms of dilution."

How Many Tranches Should I Use?

There's no limit, but most founders I know keep it to two, or three at the most. This keeps things logistically simple.

How Do I Know How Much Should Be in Each Tranche?

There's no perfect formula. You have three options:

  1. A small first tranche and a larger second tranche ➡️ good for when your runway is short and/or you want to move very quickly

  2. A large first tranche with a small add on ➡️ good for when you're more concerned with dilution than speed to close

  3. Decide as you go ➡️ good for when you don't have a good sense of the market's appetite for your round and/or think you have a shot to land a highly respected investor early on in your raise

💡 How I Can Help

Whenever you’re ready, here are 2 ways for us to work together:

  1. Grab time with me for a 1:1 session on fundraising, GTM and growth, hiring, finding PMF, or anything else

  2. Promote your startup to 36,000+ founders by sponsoring this newsletter

Homework

Use the tranche calculator to see what impact tranches would have on your most recent or upcoming round.

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