Venture Capital and Startup Jargon, Demystified
The worlds of startups and VC have tons of jargon. Even after being immersed in this space for a decade, I still come across words I’ve never heard before. Thank you, Google.
So many amazing entrepreneurs and VCs have created free online resources to help us figure out what all this jargon means. Some of those resources include VCG’s VC Vocab, Breaking into VC by James Konsky (@JamesKonsky), and Bruno Faviero’s VC 101 deck (@Bfaviero).
Overlooked founders have an even harder time navigating VC and startup lingo because they haven’t had the same networks to learn from. As venture capitalists, it’s important that we simplify, or clearly define what we’re asking for and what exactly we are talking about.
All of the lingoes in VC might be tricky to keep up with, but just know that you’re not alone. You’re not the only one out there confused. I’m right there with you.
Keep reading from a glossary of VC and startup terms, brought to you by Overlooked Ventures. Terms are sorted alphabetically within two larger sections: Startups and Venture Capital/Fundraising.
Accelerator & Incubator
A startup accelerator or incubator offers education, mentorship, and financing for early-stage and growth companies. Startups must apply to an accelerator or incubator and typically participate in a program for a fixed amount of time.
An acquisition is when a company purchases one part or all of another company. The company that acquires the other company will be in control.
The burn rate shows how much money is being spent before the startup begins to make money on its own. This rate shows how long a startup can keep operating until it sees revenue.
Business model canvas
A business model canvas is a visual tool used by early companies to define their business idea. It is made up of 9 different sections and these “blocks” can be categorized in one of the following categories: Feasibility, desirability, and viability. Tip: You can use Cobble for free to build your business model canvas. Sign up here.
CAC, or cost to acquire a customer, is the amount of money a company spends to land a new customer for their product or service. This metric is valuable for determining ROI (return on investment) for marketing activities
A cap table, or capitalization table, typically takes the form of a spreadsheet and breakdowns a company’s shareholders’ equity.
Churn, also referred to as customer churn or churn rate, is the rate at which customers stop using a startup’s product or service.
Customer Lifetime Value (LTV)
The lifetime value (LTV) metric tells a startup the lifetime value of a customer to the business. This means it tracks the current monetary value of a single customer and then predicts the future net profit.
A decacorn is a private company that is valued at over 10 Billion dollars.
Dilution occurs when a company issues more shares. This action, which typically happens during a fundraising round or an option pool (shares of stock reserved for employees of a private company), decreases the equity ownership of existing shareholders.
Gross margin refers to the amount of money made before deducting expenses. Gross margin = revenue — the cost of goods sold.
MRR / ARR
MMR: Monthly Recurring Revenue measures the predictable revenue that a business will bring in each month. If a company charges $10 per month and has 20 customers, then it can expect an MRR of $200.
ARR: Annual Recurring Revenue measures the predictable revenue that a business will bring in each year. If a company charges $1000 per year and has 30 customers, then it can expect an ARR of $30,000.
MVP stands for a minimum viable product. An MVP is a version of a product that can be pushed to the market and used by customers. Many startups will use their MVP to learn and collect feedback from customers to constantly improve their products.
Penetrate the market
Market penetration is a measurement tool that represents how much of the market share is using your product or service compared to the total estimated market. Penetrating the market is increasing a company’s market share.
Companies will pivot, or change their strategy, in order to keep up with the market. A startup might pivot because of a lack of product-market fit or because the company isn’t financially viable.
Retention rate is the number of customers a company has retained over a given period of time (the opposite of churn rate).
TAM (Total Addressable Market): TAM is the total market demand for your business product or service. Think big!
SAM (Serviceable Available Market): SAM is the segment of the market that you could capture with your current product or service based on things like geography, pricing, and business model.
SOM (Serviceable Obtainable Market): SOM is the section of your SAM that your company will realistically be able to reach. SOMs often act as a short-term goal.
A unicorn is a private company valued at over 1 Billion dollars.
UVP stands for unique value proposition. A unique value proposition is a statement that defines what your company does and the value-add, benefits, and strengths that it offers.
USP stands for unique selling proposition and is a version of your UVP tailored to a company’s target market. In order to create a strong USP, a company must understand its target customer, what they need, and why they need it.
Venture Capital & Fundraising Terms
506(c) is a rule by the SEC that allows a venture capital fund to solicit and generally advertise in order to obtain funding provided that all investors in the fund (LPs) are accredited.
A capital call is used by venture capital firms to request and collect funds from limited partners when needed. Capital calls are necessary because when an LP agrees to invest in the fund, they guarantee that they will have the funds available when the venture capital firm requests the capital. Capital calls take place when a firm investment is nearing its close. Once a capital call is issued, LPs have a set amount of time to provide the capital (typically 1–2 weeks time frame).
Families create a family office, a legal entity that manages private investments and wealth for the family. Each family office is unique to the family it serves. A family will form an office if they have a large sum of investable assets.
A general partner, or GP, is the manager of the venture firm. Responsibilities of VC general partners include raising money from limited partners (see below) and sourcing deals.
LPs, or limited partners, are the individuals or entities that invest capital into venture capital funds. LPs can take many forms, such as high-net-worth individuals (HNIs), endowments, trusts, family offices, corporations, and pension funds.
An Operator, or operating partner, is a role at a venture capital firm. Operators are responsible for working with the current portfolio companies and assisting the portfolio teams with day-to-day operations.
RIA stands for a registered investment advisor. RIAs are registered with the Securities and Exchange Commission (SEC). RIAs take the form of a firm and counsels venture capital firms on investments and portfolio.
Investment Methods & Strategy
Conviction isn’t just about making the decision to invest in a company. In venture capital, conviction refers to an investor or firm choosing to invest in markets, founders, and/ or companies that other investors are dismissing.
The delayed costs and benefits that will result from an investment decision made today are known as downstream.
Flywheel refers to an investing strategy coined by Jim Collins. The flywheel approach is defined as identifying companies that can outperform over time and act as a long-term approach to compounding investment returns.
The term moat was coined for economic use by Warren Buffet. A moat refers to the company’s ability to stay competitive and in turn, secure a portion of the market and become profitable. VCs look for moats to generate more returns. Examples of a moat include product differentiation, great customer service, high switching costs, and cost advantage.
When making an initial investment in a company, an investor often includes a pro-rata clause, which gives them the opportunity to invest in one or more of the future fundraising rounds so that they can maintain their stake in the startup.
Signaling risk is a term used by venture capitalists when a large fund invests a large amount in a company’s early round and does not lead or make an investment in the company’s next round.
Sometimes, it will appear that the market a startup is serving is small. However, smaller initial markets can be a vertical wedge into a larger market.
AUM stands for assets under management. AUM is the ****total market value of the investments that a venture capital firm manages.
Basis points are used to represent percentage changes in yields (a yield is a return measure for an investment over a period of time). One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001. A 1% change is 100 basis points. Sometimes, basis points are abbreviated to bp, bps, or bips.
Dry powder is the amount of cash or liquid (a liquid asset can be converted into cash easily) that your company has available.
IRR / MOIC / TVPI
IRR: IRR stands for the internal rate of return and is a metric used to estimate the profitability of potential investments.
MOIC: Gross multiple of invested capital (MOIC) compares the value of an investment’s returns to the amount of money invested into it. MOIC is measured as a multiple. For example, if you invested $1 million in a company and the company is valued at $1.3 million now then your MOIC would be 1.3x. TVPI: TVPI, which stands for Total Value to Paid In, is a simple metric used by investors to analyze the return on investment in a venture fund. TVPI calculates the total value that a fund has produced for investors relative to the amount invested.
A J-curve is a description of how private equity portfolios perform over time. Following the letter J, private equity portfolios decline, increase slowly in value, then increases rapidly.
A pre-money valuation is how much the company is worth before any outside capital is invested into the said company. Often, this term is shortened to pre-money.
A post-money valuation is how much the company is worth after any outside capital is invested into the said company. Often, this term is shortened to post-money.
Pro Forma is a Latin term which means “as a matter of form” or “for the sake of form.” A pro format is a description, spreadsheet, or document that defines the capital structure of the company before and after an investment.
Tier-1 is one of the three tiers that venture capital firms are grouped into. Firms that raise funds in the $300M+ range and have several unicorns in their portfolio are categorized as Tier-1 venture firms. Think Tiger Global or Andreessen Horowitz.
Venture Capital Processes
Dealflow in venture capital is the process of finding/bringing in deals (sourcing, see definition below), evaluating those deals, and making investments in some of those deals. Dealflow is a complex process and can vary from firm to firm. Most dealflow processes include sourcing, screening for thesis-fit, review, due diligence, terms negotiation, and investment.
Due diligence (DD)
Due diligence is a process often required by investors in your company. Due diligence usually involves the investor asking a number of questions and the founder answering those questions so that the investor can evaluate the opportunity. Items covered in due diligence often include financials, intellectual property, physical & legal assets, and more.
A follow-on is an investment a venture capitalist makes in an existing portfolio company. Venture capitalists will typically reserve money to invest in future rounds of existing portfolio investments to protect or bring more value to the initial investment.
A lead in venture capital refers to the lead of the investment round. The lead investor is often the first to enter a round and makes the largest investment in the startup
Macroeconomics is the study of the whole economy behaves. Macroeconomic studies include inflation, GDP, and unemployment. Macroeconomics relates to venture capital as venture capital investing is influenced by the broader economy.
Right of first refusal (ROFR)
The right of first refusal is an agreement signed during a venture capital raise. It requires a company’s shareholders to give the company’s VCs a chance to purchase the stock instead of an outside third party.
Venture capitalists “source” deals, or try to find investment opportunities. Deal sourcing is the first step in the deal flow process (see above). Examples of sourcing deals are applications and referrals.
An investor will warehouse a deal if they have not formed their fund. Warehousing a deal is expressing investment interest before you can officially invest. De-risk for LPs is a large reason for warehousing deals. With warehousing, the fund will be able to get on the investment at a lower valuation (a valuation is an estimate of the company’s worth) that will likely be marked up (a mark up happens when one investment firm invests after another firm at a higher amount) in future rounds.
Bonus Web3 Terms
Decentralized is a term that explains the ownership of Web3. Web3 is decentralized, which means that the internet is owned by individuals themselves. Web3 is different from Web2 because the internet is not controlled by third-party services like Google. Instead, it’s broken into sections and governed by individuals.
Ethereum is a blockchain technology that is well-known for its cryptocurrency ETH.
Minting is when a digital asset, such as an image or video, is converted to a digital asset on the blockchain. NFTs must be minted before they can be sold.
NFTs, or non-fungible tokens, are a unit of data stored on the blockchain. NFTs have unique identification codes that separate them from each other. NFTs represent a digital asset, like digital artwork.
Some NFT projects have a delayed reveal, which means that the artwork doesn’t reveal itself until after it is purchased.
A secondary market is a place for investors to buy and sell securities that were already in circulation and issued by an entity.
In Web3, tokenization happens when an asset’s ownership or rights is broken into small pieces, tokens. These tokens can be held, traded, and sold.
Web3 is a new iteration of the internet and is a “decentralized online ecosystem based on the blockchain.” (WIRED). Web3 is owned by users instead of a central gatekeeper.