Abnormal return (Alpha)
Alpha (α) is a term used in investing to describe an investment strategy's ability to beat the market, or its "edge." Alpha is thus also often referred to as “excess return” or “abnormal rate of return,” which refers to the idea that markets are efficient, and so there is no way to systematically earn returns that exceed the broad market as a whole.
An accelerator is a support network – sometimes virtual and some other times in a physical location, that concentrates on professional mentoring, services, and expertise available for the start-ups “accelerated” there. The aim is to make the company grow faster and make faster ideations, tests and expose founders and teams to other start-ups in the same structure. Accelerators may or may not take equity and invest hard cash.
Agile web development refers to a particular way of performing tasks. In an agile team, programmers will work according to sprints, that can be of weekly or biweekly periodicity. Often having the phases of design, development, testing, deployment and review, those sprints are one of the kernels of modern software development methodology.
An algorithm is a sequence of steps for accomplishing an objective, with instructions documented for it. It comes from programming and Mathematics vocabulary.
An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash. Alternative investments can include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Real estate is also often classified as an alternative investment.
Capital injected by investors during each financing round.
Angel Investors (Angels)
An angel investor (also known as a private investor, seed investor or angel funder) is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company. Often, angel investors are found among an entrepreneur's family and friends. The funds that angel investors provide may be a one-time investment to help the business get off the ground or an ongoing injection to support and carry the company through its difficult early stages.
An Application Programming Interface enables two different programs to communicate with each other as a translator allows people speaking two different languages understand each other. Software engineers and developers can use the code on the APIs to build modules and apps within other apps and pay only for what they use, without the need to buy infrastructure and maintain it.
APP (Aggregate purchase price)
Price paid for all the shares of a security, where APP = Original purchase price shares purchased.
Annual Recurring Revenue is a metric that shows the money that comes in every year for the life of a subscription (or contract). More specifically, ARR is the value of the recurring revenue of a business's term subscriptions normalized for a single calendar year.
Assets are things that hold value to a company or an individual can benefit from in the future. Your assets can be stock, bitcoin, your car, your education, even your dog. (Assets= Equity + Liability.)
A bear market is when a market experiences prolonged price declines. It typically describes a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.
is a measure of the volatility—or systematic risk—of a security or portfolio compared to the market as a whole (usually the S&P 500).
The Black-Scholes model, also known as the Black-Scholes-Merton (BSM) model, is one of the most important concepts in modern financial theory. This mathematical equation estimates the theoretical value of derivatives based on other investment instruments, taking into account the impact of time and other risk factors.
When your start up is developing or selling a “frontier technology” or a disruptive new way of thinking and doing things, the company is on the bleeding edge.
Build-measure-learn-cycle. It is a loop of ideas and opportunities that form a model to take businesses to the next level. Let us give you step-by-step instructions on applying BML to your business. Step 1: Have a plan, shooting in the dark gets you nowhere. Step 2: Get your prototype ready, or MVP as we startup nerds like to call it. Step 3: Measure your results, is this what you wanted for your end result? This step will define the next step. Step 4: If you are not satisfied with your end results, get back to the drawing board and PIVOT. If satisfied, congratulations! Time to hit the market.
A bridge loan is a short-term loan used until a person or company secures permanent financing or pays an existing obligation. It allows the borrower to meet current obligations by providing immediate cash flow.
The burn rate is typically used to describe the rate at which a new company is spending its venture capital to finance overhead before generating positive cash flow from operations. It is a measure of negative cash flow.
It is not all about the money but it is about generating value. What value do you offer your consumer? Why would they pick your service over that of the competition? Your business model is your framework to creating a successful business that can achieve long-term goals. For a business model you may require something called value proposition.
Business risk is the exposure a company or organization has to factor(s) that will lower its profits or lead it to fail.
CAC (Customer acquisition cost)
Customer acquisition costs are the costs that are used to introduce new customers to the company's products and services. CAC is calculated by dividing total acquisition costs by total new customers over a set period.
List of existing shareholders and the types of shares they own that effectively make up the start-up’s market capitalization.
CAPM (Capital Asset Pricing Model)
Describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital.
Also called the performance (anywhere between 15% - 30% of the growth on invested capital in a given year)
The term cash flow refers to the net amount of cash and cash equivalents being transferred in and out of a company. Cash received represents inflows, while money spent represents outflows.
The cash ratio is a measurement of a company's liquidity. It specifically calculates the ratio of a company's total cash and cash equivalents to its current liabilities. The metric evaluates a company's ability to repay its short-term debt with cash or near-cash resources, such as easily marketable securities.
Also known as the Certificate of Incorporation. Public document filed with the state/county the company is incorporated. VC´s prefer to file this document in the state/county with the best-developed and best-understood corporate law that protects investors.
The churn rate, also known as the rate of attrition or customer churn, is the rate at which customers stop doing business with an entity. It is most commonly expressed as the percentage of service subscribers who discontinue their subscriptions within a given time period.
As soon as a start-up accepts the investor’s term sheet.
COGS (Cost of Goods Sold)
refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the goods. It excludes indirect expenses, such as distribution costs and sales force costs.
Amount of capital that general partners commit when the firm is raising a new fund
Based on industry multiples. Classify the best start-ups into a percentile ranking system and compare your venture to those in the industry. TikTok would value itself based on Facebook’s or Instagram’s multiple in a comparable stage.
Conflict of interest
Conflict of interest occurs when an entity or individual becomes unreliable because of a clash between personal (or self-serving) interests and professional duties or responsibilities.
Corporation of several different, sometimes unrelated, businesses. In a conglomerate, one company owns a controlling stake in several smaller companies, conducting business separately and independently.
A form of debt financing that is convertible to equity contingent on some threshold.
Cost of capital
Function of the discount rate and equity and debt mix
Uncertainty around investing in a foreign country. Think about investing in Russia or Ukraine, during the current invasion. Country risk can be mitigated by requiring a higher percentage of return on the returns of a perceived safe country.
A form of capital raising that doesn’t involve private investors. Founders can raise funds from crowdfunding websites such as AngelList.
Customer journey is an expression that describes each and every point of contact and interaction a customer has with a business, a product or a service. From visiting a website to getting interested and buying a product, up to post-sales support.
Valuation based on the discounted free cash flow of the company. Since most start-ups don’t have DCF, it can also be replicated using operating income or revenue.
Function of screening and sourcing. Private companies often focus on providing proprietary deal flow to exclusive clientele.
A deliverable is a measured result, a product or an add-on that is planned and implemented in any project.
Demand registration rights
Allow investors to force the company to register a transaction for their shares.
Dilution occurs when a company issues new shares that result in a decrease in existing stockholders' ownership percentage of that company.
Payments made to preference shareholders depending on the company's operating income. During financing rounds dividends will be paid to series A on an as-converted basis when, as, and if paid on the common stock. Think royalties/product sold.
DRIP (Dividend Reinvestment Plan)
is a program that allows investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date.
Due diligence is an investigation, audit, or review performed to confirm facts or details of a matter under consideration. In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party.
Earnings Before Interest After Taxes
Earnings Before Interest and Taxes
Earnings Before Interest, Depreciation and Amortization
Earnings Before Interest, Taxes, Depreciation, and Amortization
Early-stage, mid-stage and late-stage
Stages of financing. Early stage = pre-seed and seed; mid stage = Series A, B, C and late stage = Pre-IPO and IPO
Economic Growth Rate
An economic growth rate is the percentage change in the value of all of the goods and services produced during a specific period of time, as compared to an earlier period.
If you’re an entrepreneur and assuming you could start your business anywhere where would you go?
As an individual equity could be applied to your car, house or your business. Let’s say your house is worth 10,000 €, and you are selling it. You still have 4000€ of unpaid mortgage, so if you sell the house and get 10,000€ your equity is 6000€. (Equity= Assets – Liability)
Terminate your position in the company by reducing the value of the investment position to zero.
Forward looking valuation of the company in x years toward a successful exit for the investor (i.e., one where that matches or exceeds their expected return)
Expected retention percentage
Ownership percentage of the company that the investor expects to retain between investment and exit.
Factors in the time value of money (TVM). Has to be greater than the IRR. If you expect to receive 500$ on your 100$ investment in 4 years, my expected return is ((500-100)/100) ^ (1/4) = 41.42%.
Acronym referring to the stocks of the five most popular and best-performing American technology companies. Meta (Facebook), Amazon, Apple, Netflix, Alphabet (Google)
Financial Intermediary – Bridge between two transacting parties. (Banks, VCs, Angels)
Outreach program to potential customers to extrapolate their review of the market into scalable production and product development.
“Freemium” is built on the words free and premium, and it is a method where a startup offers free content or product licenses in order to acquire customers and users. Usually, the free version of the product or service is limited in scope compared to the fully fledged paid option, and it serves to entice the interest of the potential client.
Fund of funds
A fund that invests in funds of other firms. Typically charge a lower management fee and carry percentage.
The senior management of VC and PE companies who take an active part in the day-to-day workings of the business.
The equity in an LBO structure, that scales exponentially with time and investment cycles.
Projected life of investments. 3-t years for Angels and 5-10 years for VC’s and PE.
An intrapreneur is effectively an entrepreneur but who works within the corporate structure. They lead innovative projects which can include launching new services or products within this usually strict corporate structure.
IPO (Initial Public Offering)
Is a share listing of a company on the stock exchange of a nation, effectively making it a publicly traded company.
IRR (Internal rate of return)
Is the minimum return that makes the project viable. The return at which NPV, difference between the present value of cash inflows and the present value of cash outflows of the project is zero
Iteration is making small changes to your product/service based on how your customers are accepting your product. Remember not many of these changes make it, the idea is to try different things and repeat while aiming to do better. In short iteration is trying fast and failing fast and moving on! It is also the core process of Growth Hacking.
The lean startup favours iteration over rigid planning. The terms we have discussed MVP, iteration, pivoting are a few fine words that have existed before the official rising of lean startup and form the principles of lean startup.
As an individual your liabilities would be your student loans, weekly groceries, monthly bills and payments you need to make in order to thrive. In businesses liabilities are debts you own to employees, other businesses, bank loans, taxes and operational expenses. (Liabilities = Assets – Equity)
Investors in VC and PE act as limited partners as they don’t have a say in the selection, monitoring and exit of investment opportunities.
Pay-out schedule in case of dissolution of the company. Tells an investor where they stand in the capital structure hierarchy
Startup companies need to add value to their offerings as much as they can. When teams talk about a low hanging fruit, it means they are speaking about a product that is ready or almost ready to be offered and has immediate potential for monetization and creating cashflow.
Fees charged on a yearly basis on the AUM of the fund
Does the current management have the capabilities to make this business work?
Events that trigger an automatic conversion such as a Qualified Public Offering (QPO), thereby converting the debt financing to equity as stipulated in the agreement.
Non-diversifiable risk. The risk that all market participants are exposed to.
Does this venture have a large and addressable market? Distinguish between total addressable market and total acquirable market.
When a product is designed as mobile-first, it prioritizes mobile devices as their first screens, rather than laptops and desktops. The product is built for the small screen and then often responsive, meaning it adapts to different sizes and formats.
Tract the selected companies over the holding period of the investment
MVP (Minimum viable product)
A MVP is a version of a product with just enough features to be usable by early customers who can then provide feedback for future product development
NDA (Nondisclosure Agreement)
NDA protects sensitive information that is not meant for anyone else’s ears except people involved. If you sign an NDA when you start in a new job, you can’t tell anyone about the secrets at your workplace. Secret things protected with NDA can be their business model, recipe of a product, new innovations or other similar things.
NPV (Net present value)
The present value of expenses and incomes expected from undertaking a project.
Business plan of a start-up. Gives a summary of all the crucial information about a company. VC’s often combine multiple pitch decks to create pitchbook to present to partners.
Selected investment from a pool of larger assets based on a predefined set of criteria
Post-money valuation is a company's estimated worth after outside financing and/or capital injections are added to its balance sheet. Post-money valuation refers to the approximate market value given to a start-up after a round of financing from venture capitalists or angel investors have been completed.
Preboom, Boom and Post boom
Stages of investment cycles based on macroeconomic variables.
Valuation of the start-up excluding the current financing round.
Pre-Seed funding is the earliest funding round where a startup raises money to validate its problem-solution hypotheses, propositions, and demand. Pre-seed capital is required to set the base for the business operations to start and ensure that the founders' business is a viable one
Problem solution fit is the foundation for product market fit. Remember Value proposition? Why would the customer buy or subscribe to the product or service? Do some exploring by a series of tests and validate if your solution is actually solving the customer’s problems.
Product market fit is the specialisation process after problem solution fit. This part is all about developing your product / service, talking to your target group and finding out who exactly are your customers. In addition, this is something startup accelerators work with often, and guide the startups to find the right product market fit.
Proof of Concept
PoC, Proof of concept, is the starting stage of your product/service. Is it a practical idea that will work in the real world? Your proof of concept is your backing for why your product deserves a shot and why there is a need for it. You start with an idea, you iterate a few times and then land on your proof of concept, in order to gather support for your product.
Also known as a down round, these provisions are established to protect minority shareholders from an unsolicited dilution.
Conditions under which investors demand that the company redeem (pay back) their initial investment.
Amount of acquired customers that stays as customers. It’s important to nurture the customers you already have, otherwise they’ll eventually feel abandoned and not cared for and will probably take their business elsewhere. Think about your CAC, think about how much it is costing you to acquire a new customer to later neglect them just to spend more money on getting a new customer.
Ticket size. Minimum amount that the investor must invest to participate in the financing round.
Retargeting it the way companies try to attract people who already showed interest in their product through visiting their websites. Banners, e-mail sequences and P2P messaging are channels used to expose the potential customer to the specific product again and try to convert him/her into a client.
The SaaS acronym means software-as-a-service. Instead of investing in a lot of infrastructure and high costs, one can scale up according to their needs, while paying a monthly subscription that is proportional to the software usage or traffic
Your business is considered scalable if it is managing to grow rapidly at the face of increasing demands. Thanks to the advancements in technology, you can now satisfy the needs of multiple customers even if you do not have multiple providers. Are you adapting easily to the changing environment and keeping up with what the world demands of you?
Seed money, sometimes known as seed funding or seed capital, is a form of securities offering in which an investor invests capital in a startup company in exchange for an equity stake or convertible note stake in the company
Select a cohort of companies from a larger set based on certain criteria
Also called tunnelling or investor expropriation. When investors with controlling interest use their power to divert wealth to themselves rather than the pool of investors.
As you might expect, a shareholder agreement is an agreement between parties who have invested to the company and own a share of it. Usually, it is made to protect the investment and set out fair rules between investor dudes and govern of the company so that nobody gets bamboozled.
In venture, SPVs are used to pool money from a group of investors to make a single investment in a startup.
If you analyse the start-ups that are in business over the last 10 years to make a general statement about start-ups, you would be wrong because you also have to include the start-ups that went out of business over the 10-year horizon.
Outlines the proposed valuation, type of security, and proposed control rights for the investors.
Traction is a measure of growth. It is the rate at which a business captures value from its users. Having traction is proof that your company is continuously evolving. The progress could be incremental or a sudden breakthrough, as long as there’s something to prove that your startup is getting where it’s supposed to be, it can be called traction.
In some cases the investors may propose multi-stage financing where each subsequent bloc of financing will only be available to the company if completes a particular condition set forth by investors.
UI (User Interface)
The way through which a user interacts with an application or website. Your computer’s operating system is a perfect example of UI.
Unicorn startups are a rarity because they are privately held startups valued at over 1 billion. SpaceX is an example of a unicorn.
Unfair Competitive Advantage
If you have something so unique that is almost impossible for anyone to copy, and also something that your customers really need and value, you have an unfair competitive advantage over your competitors.
USP (Unique Selling Proposition)
Does your product or service have a feature that makes it better from all the competitors? If your customers are willing to buy your product instead of competitors (and pay even a bit more), you have a USP!
UX (User Experience)
When using a certain product, system or service, ask yourself how easy and efficient it is to use it, and how well does it solve your problem and respond to your needs.
The term value add is commonly used in the startup and corporate setting to describe anything that makes a given product, service, feature, or other topic of discussion objectively or subjectively better. Anything that enhances the value of an existing value proposition.
Value capture is a model in which a business is able to create profit from its transactions. Think of it as growing an apple tree yielding delicious apples, you have your value there but you need to sell those apples to capture value. One easy way to test your ability to capture value is to see if you can raise prices without losing customers.
Financial Intermediary that takes investors capital and injects it into private companies.
The rights of each shareholder depending on the class of shore they own.
Wireframes are diagrams used by designers to communicate to developers how a website or an app shall be structured, and it serves as the blueprint upon which the code is developed. It has layout, graphic elements’ locations, interface touch points and it focuses on functionality, not beauty.
Anything can be tailored to be sold as a service. Think about it for a minute and compare all the service apps on your phone at the moment. Many of your applications are SaaS, software as a service. Multitasking while you are reading this post and watching Netflix? Netflix is a PaaS, platform as a service. Basically, XaaS stands for everything you can sell as a service.