Demystifying Startup Jargon
“There’s a lot of language that can really intimidate people and put them off. There needs to be a simplification of language in the funding sector to make it more accessible, especially around SaaS metrics and finance.” – Zandra Moore, CEO at Panintelligence.
Entering into the entrepreneur space can be daunting, especially for entrepreneurs who don’t have a grounding in funding, finance, and investment. They need to run the gauntlet of investment and finance, while also climbing the very steep learning hill of acronyms and industry-specific terminology. From non-dilutive capital to uncapped convertibles, shareholder agreements and dry powder, there’s a lot to learn, and often in a very short period of time.
Here you’ll find some of the most common startup terminology to help you navigate conversations across funding and finance with vocabulary that will keep you in the loop, and ahead of the game.
Accelerator: Centers or hubs where entrepreneurs can gain access to mentors, funding and support when they’re in the early stages of their business. Often, accelerator hubs are targeted at specific niches or industries, and can provide companies with an essential boost when they’re struggling to scale.
Angel Investor: Private investors with personal wealth that focus on financing small business ventures in exchange for equity. They make money on the percentage of the company that they own and their earnings or investments can be combined with venture capital funds or syndicates, which will all share a percentage of the profit.
Angel Syndicate: A group of individual angel investors that combine resources and strategy to invest into early-stage startups. Their goal is to pick a winner and share in the profit. The lead of the syndicate determines the carry (see below).
Bootstrap: ‘Pulled up by the bootstraps’ is a saying that’s been around since the 1800s to describe a person who has taken themselves to the next level and elevated their role, standing and financial status without any outside help. It’s got the same meaning for startups and finance—the entrepreneur has used their own funding to get their business off the ground.
Burn Rate: This term is used to determine the pace at which a company is using its capital to finance its overheads before it starts to see a positive return on the investment, or positive cashflow. It’s really the speed at which a company is losing money and is determined by subtracting expenses from revenue.
CAC: One of many acronyms that defines startup language, CAC stands for ‘customer acquisition cost’ and is used to determine your sales and marketing deliverables and value adds. You calculate it by adding up the costs of your sales and marketing, then dividing this number by the number of new customers you’ve gained over a specific period, usually a month.
Carry: Short for carried interest—the percentage of profit paid to the lead of a fund, angel syndicate or special purpose vehicle (SPV). The most common percentage used by the lead when launching a fund is around 20%.
Cap Table: Cap table is short for capitalization table and refers to the equity capitalization for a company. It’s a tool that’s often used for early stage companies and startups to list all the securities that the company has issued, such as stocks or ownership percentages.
Convertible: Convertibles allow for investors and entrepreneurs to value the company at a later date in the future. This is a clever way of helping early startups to gain access to funding while still uncertain of their valuation, or if they’re at a stage where it’s just too soon to get an accurate valuation. Convertibles can be capped or uncapped. A capped convertible places a limit on the valuation point at which investor notes convert to equity; with an uncapped convertible, the investor has no guarantee around the equity that their funding purchases.
Dilutive and Non-Dilutive Capital: When an investor offers dilutive funding, they are asking for a slice of your business that can include anything from control of decision making within the company to a share of future profits. Non-dilutive funding is the opposite—the investor is not expecting you to hand over parts of the company in exchange for their investment; they just want to see some return on their investment and for your company to shine.
Dry Powder: Sassy startup slang that defines how much cash an investor has available in reserve. It’s often used by VC investors or private equity companies that want to get the most, well, bang for their buck.
Low Hanging Fruit: A term often used across multiple industries, low hanging fruit refers to the simplest and easiest route to investment success for your business. It means you pick the partners and financing solutions that are achievable and that help you meet your business objectives as fast as possible.
MVP: MVP is short for minimum viable product and describes the earliest stage that your product or service can be sold to customers. Originally defined in the book Lean Startup by Eric Reis, the term has caught on and is used by many startups to get, well, started.
Private Equity (PE): A PE company is focused on investment into the private equity of startups using a variety of different strategies. These can include VC, growth capital and leveraged buyout. The company profits from the fees they charge their investors in the fund, and they hold onto this profit by making sure that they consistently create profit for investors by increasing the value of the companies they buy so they can sell them at a profit.
Special Purpose Vehicle (SPV): An SPV is a company formed as a subsidiary with the sole goal of taking on a particular business strategy, goal or activity. These are often seen in finance as a way of separating the parent company from the risk, while allowing for the company to still potentially benefit from its investment.
Term Sheet: Includes all the information an investor needs to know, and really understand, about making an investment with a specific company or investor. It will outline the details of the investment and should cover essential details such as the initial purchase price, assets, company valuations, investment amounts, stake percentages, voting rights, liquidation requirements and more. An investor will want to fully understand the term sheet before they sign.
Venture Capital (VC): A type of private equity and financing offered to startups that have proven, or expected, long-term potential. The funds come from investment banks, financial institutions or investors.
A final thought
These are some of the most common terms used in the startup world, but they only really scratch the surface. For any entrepreneur setting out on the journey across the finance ocean, it’s worth spending time unpacking the terms that best fit strategy and investment planning so that terminology doesn’t build a barrier between your startup and sustainable success.