Startup Investing Key Terms

 

Accelerator

An accelerator is a program offered for early-stage startups to provide them with mentorship, guidance, and access to avenues of fundraising. These programs typically have a set timeframe where a group (cohort) of startups goes through it at the same time. The focus is on “accelerating” the growth of the companies involved and getting them to the next stage in their development.

Accredited Investor

A person or a business entity who is allowed to deal in securities that may not be registered with financial authorities.

Acquisition

Simply put, an acquisition is when one company purchases all or a portion of another company. Acquisitions can happen for a variety of reasons, including the acquirer wanting to grow their current marketshare, add new technology, or simply buy out their competition.

Angel Investor

An angel investor is an individual who provides financial backing to early-stage startups and companies to aid in their growth. In exchange for their investment, angel investors are typically given some type of equity (ownership) stake in the company.

Historically, angel investors were high net worth individuals and found companies to invest in through invitation or referrals through their network. Today, angel investing has opened to the masses thanks to the legislation of the JOBS Act and the establishment of Regulation Crowdfunding (Reg CF).

Bootstrapped

The term bootstrapped refers to a company that was built and grown purely with hard work and savings of the founder(s).

Burn Rate

The speed at which a company or startup spends or loses money. This is a critical metric when evaluating a startup because it shows how long any cash-on-hand or new capital will last.

CAC (Customer Acquisition Cost)

Customer Acquisition Cost, also referred to as CAC, is a company’s cost of earning a new customer. This is another key metric because it shows how far the marketing spend of a startup can go.

By pairing a company’s CAC with the Lifetime Value of a customer (LTV), you’re able to project and estimate future revenue. 

Capital

In it’s simplest form, capital is cash.

Common Stock

Shares entitling their holder to dividends that vary in amount and may even be missed, depending on the fortunes of the company.

Deal Flow

Deal Flow is a term synonymous with angel investing; many consider it the lifeblood of successful investors. It refers to the flow of investment opportunities an investor or investment group has access to.

With startup investing, deal flow often comes from an investor’s network by way of referrals.

Due Diligence

In the context of startup investing, Due Diligence refers to the process of evaluating a company’s investment potential.

While the exact process of due diligence varies from one investor to the next, it usually includes (at minimum) a thorough review of a company’s team, marketing, revenue, product-market fit, and potential upside. 

Exit

Broadly speaking, an exit is a conscious plan to dispose of an investment in a business venture or financial asset. Business exit strategies include IPOs, acquisitions, or buy-outs but may also include strategic default or bankruptcy to exit a failing company.

IPO (Initial Public Offering)

The process by which a private company can go public by sale of its stocks to the general public. After IPO, the company’s shares are traded in an open market. Those shares can be further sold by investors through secondary market trading.

Incubator

Similar to a startup accelerator, incubators are focused on expediting a startup’s growth. Incubators are generally non-profit programs and work with earlier-phase startups, many of which don’t have a solid business plan yet.

Pitch Deck

This is the presentation startups use to tell the story of their company when meeting with potential investors.

Preferred Stock

A stock that entitles the holder to a fixed dividend, whose payment takes priority over that of common-stock dividends.

Private Equity (PE)

Private equity refers to investments made into privately held companies.

Regulation Crowdfunding (Reg CF)

Brought on by the signing of the JOBS Act, Regulation Crowdfunding (Reg CF) allows companies to raise money from individual investors by selling shares or issuing debt through SEC-regulated, online portals. Reg CF has played a major role in making angel investing accessible to the masses.

Seed Round

Refers to a series of related investments in which 15 or less investors “seed” a new company with anywhere from $50,000 to $2 million. This money is often used to support initial market research and early product development.

Series A

In a Series A round, startups are expected to have a plan for developing a business model, even if they haven’t proven it yet. They’re also expected to use the money raised to increase revenue.

Series B

With a Series B round, a company has already found their product/market fit and needs help expanding; includes not only gaining more customers, but also growing the team so that the company can serve that growing customer base.

Series C

At this investing round, a company is doing very well and is ready to expand to new markets, acquire other businesses, or develop new products.

Series D

Series D rounds are more complicated than the previous rounds. There are several possibilities with Series D rounds. Usually, a company has discovered a

new opportunity for expansion before going for an IPO, but just need another boost to get there OR the company hasn’t hit the expectations laid out after raising their Series C round. This is called a “down round”.

Series E

Companies that reach this point of funding may be raising for many of the reasons listed in the Series D round. They’ve failed to meet expectations; they want to stay private longer; or they need a little more help before going public.

TAM (Total Addressable Market)

TAM or Total Addressable Market is used to determine the revenue potential of a specific product or service. If everyone was using this product/service, what would it be worth?

Term Sheet

A term sheet is a document that outlines the terms and conditions of a deal. It defines the key points of the agreement between the founder and investor. This document isn’t legally binding, rather it is the precursor to the final, legal document.

Tranche

A tranche is a portion or piece of something (it’s a French word). In the world of angel investing, specifically Regulation Crowdfunding, tranches are used to break up a startup’s investing round into segments. This allows a startup to tie a specific valuation (or discount) to a portion of their total round (ie. investors participating in the first 10% of the round are investing at a 20% discounted valuation).

Unicorn

A unicorn is a company with a valuation of $1 billion or more.

Valuation

The process of determining a companies worth or value is called valuation. The method used to decide on a valuation depends on the type of startup, its stage, and its industry.

Venture Capitalist (VC)

A venture capitalist is an investor focused on investing in private companies with high growth potential. In exchange for the capital they invest, they receive ownership stake in the company.