Drip Feed

What Is a Drip Feed?

A drip feed is the course of slowly propelling funds or capital in stages as opposed to infusing a large lump sum right off the bat. A drip feed can help fund a startup or build up a retail investor's investment pool.

Understanding Drip Feeds

The term drip feed is utilized to portray the consistent course of investing (or infusing) capital into a specific goal. That goal could be into another startup company by a venture capitalist or into an investment (like a mutual fund) by a retail investor. The interaction happens as the company or investment requires the capital.

At the point when a venture capitalist contributes through a drip feed, the firm works with very little surplus capital. Consequently, the startup will obtain money as necessary. By doing the cash infusions through a drip feed, the venture capitalist is likewise sheltered from some risk.

Since there are small infusions of capital at different stages, it mitigates the risk of losing the whole investment at the same time in case the startup fails and collapses. Hence, it allows the startup an opportunity to keep up with and grow its operations, meanwhile keeping its financial sponsor sheltered from too much risk.

Individual investors can benefit from this type of system too. It lessens the risk of entering positions in overrated securities, since the investments are spread out. This technique likewise tolerably smooths out any changes in the market, since they benefit from dollar-cost averaging (DCA) — a fixed dollar contribution amount every month, for instance, will bring about greater equity shares being purchased at low market prices than at high prices.

However, as a tradeoff for the safety of this additional perfection, investors sacrifice the possibly higher returns they could have checked whether they had basically made a lump sum investment at low market prices.

Drip Feed versus Lump Sum: What's Better?

There are several distinct ways of thinking — all of which give preference to either drip feeding an investment or just giving over a large lump sum.

Drip feeds frequently work when very little is had some significant awareness of the investment, assuming it is too new or when the risk factors are indistinct. On the off chance that a venture capitalist or investor plans to feel free to fund a project or investment and is somewhat questionable about its future, it very well might be really smart to go the route of the drip feed.

By giving out money in stages as opposed to at the same time, the risk, as referenced above, gets decreased, particularly in the event that the project or investment vehicle were to collapse or fail. Markets are likewise truly unusual, so sometimes it is better (particularly for retail investors) to give out small amounts at various times as opposed to your whole savings at the same time.

However, then again, in the event that a venture capitalist were to expect quick returns and the startup was guaranteed to succeed and deliver, a lump sum might appear to be the better option. A similar would be true for an individual investor who was seeking a short turnaround in a return on their investment.

Highlights

• A drip feed is the course of slowly propelling funds or capital in stages as opposed to infusing a large initial lump sum.
• A drip feed can assist with moderating the risk of losing a whole investment in case the startup fails.
• At the point when a venture capitalist contributes through a drip feed, the firm works with minimal surplus capital, so the startup gains money as needs be.