75 Startup and VC Terms For Every Funding StageBusiness Advice & Research
To run a successful startup, you should learn the business lingo, you should know all the startup and VC terms. Secondly, you should protect your company from risks by getting the right startup coverage. As your business progresses through each of the different growth and funding stages, knowing these terms will help you strategize and plan accordingly.
To help you learn the startup language, we’ve defined 75 common startup and venture capital terms in this visual guide. We’ll use a startup example to explain the terms in a more digestible manner.
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75 Startup and VC Terms
Every business begins with a good idea, which is usually inspired by a particular need or problem in society that the business aims to address. In this first stage, you’ll need to refine your business idea, find your target market, and come up with products or services to serve your market. Here are common terms to know when conceptualizing your startup idea.
Ideation is the process of generating ideas and solutions through sessions such as brainstorming, prototyping, and sketching. The purpose is to come up with numerous ideas, which your team can then narrow down.
Define a problem that you’re aiming to solve, and determine how your product or service will solve that problem.
2. Target Market
A cornerstone of your business, the target market is the group of consumers which your product or service is aimed at. Much of your sales and marketing efforts will be focused on your target market, so it’s important to identify and define this.
Customers in your target market will share similar characteristics, such as demographics, geolocation, income, and lifestyles.
3. Startup Capital
Startup capital or capital is the money you need to start a new company, which is used to cover required expenses such as equipment, licenses, inventory, and product development.
Startup capital can come from various sources, including your own savings, friends and family, loans, or investments.
4. Venture Capitalist (VC)
A venture capitalist is an investor who provides venture capital funding to startups with growth potential in exchange for a stake in the company, known as equity. VCs invest in startups and nurture them in hopes that they’ll receive big returns as the company expands.
Due to the 90% startup failure rate, VCs tend to be picky about their investment choices since they’re making risky business investments that they may not get returns on.
5. Minimum Viable Product (MVP)
An MVP is a basic version of your product with the necessary features that can be used for testing to gauge customer interest in the product.
Entrepreneur Eric Ries said the purpose of an MVP is to “collect the maximum amount of validated learning about customers with the least effort.”
6. Lean Startup
Lean Startup is a business approach first coined by Eric Ries. It involves engaging in a build-measure-learn feedback loop by building an MVP to solve a problem, doing tests and analyses, and making adjustments or pivots based on data.
7. Key Performance Indicator (KPI)
A key performance indicator is a way to measure your progress when working toward a certain objective. Using KPIs involves setting targets — the desired level of performance — and tracking progress against that target, according to KPI.org.
By outlining a manageable number of key indicators, KPIs can also be used to facilitate decision-making. Common startup KPIs include customer conversion rates, organic traffic, and the number of active users.
8. Business Model
A business model is the plan for a company to make a profit. It describes the products or services offered to the target market, and the resources and costs required to create them.
A business model is an important asset for attracting investment, guiding business operations, and developing relationships with suppliers and customers.
9. Software as a Service (SaaS)
A business model where software is hosted on a cloud infrastructure and licensed to businesses on a subscription basis.
10. Profit Margin
Profit margin is a ratio or percentage that measures profitability relative to business costs and expenses — the higher the number, the more profitable the business.
The general formula for calculating profit margin is: ((Sales - Total Expenses) / Revenue) x 100
11. Business Plan
A business plan is essentially a roadmap for your startup, which describes your objectives and how you plan to achieve them. It addresses topics like your business’s finances, market strategies, and management plan. It’s also a good way to ensure your business is moving in the right direction in meeting your targets going forward.
A business plan is also used to attract investors during the early stages before your company has established a proven track record.
12. Churn Rate
This refers to customers lost after the acquisition stage in a subscription-based business model.
13. Proof of Concept (POC)
This is the process of determining the feasibility and viability of a business or design idea through experimentation or testing.
14. Product-Market Fit
Startup coach Marc Andreessen, who first coined the term, said it best: “Product/market fit means being in a good market with a product that can satisfy that market.”
This means creating a product or service that will provide enough value to customers that they’ll use it and spread the word about it.
An incubator is a non-profit or for-profit organization that helps startups develop their business idea into a self-sufficient business. Incubators often provide services such as office space, mentoring, and access to investors.
An incubator provides entrepreneurs opportunities to build and test prototypes to find the right product-market fit.
A buzzword in the business world, the term simply means to change course in your business based on findings in user testing and market analysis.
17. Cash Flow
Cash flow is the amount of money flowing in and out of your business at a given time. Being cash flow positive means there’s more cash inflow, or money going into your company, than coming out. Conversely, a negative cash flow is when the cash outflow, the amount of money going out of your business, exceeds how much you’re making.
Having negative cash flow doesn’t mean you’ll go out of business, but it could spell trouble if it becomes a recurring pattern.
18. Burn Rate
This refers to the rate at which your company spends money, typically expressed as dollars per month. There are two types of burn rate: gross burn rate refers to how much you spend each month, and net burn rate refers to the difference between cash inflow and cash outflow.
This is an essential KPI to keep an eye on to ensure that your startup doesn’t run out of capital. You can reduce your burn rate by cutting unnecessary expenses.
Here’s how to calculate your monthly gross burn rate: (original cash balance - remaining cash balance) / time period.
Here’s how to calculate your monthly net burn rate: cash balance - gross burn rate.
19. Alpha Test
Alpha testing is the initial phase of testing whether a product meets business requirements and functions as expected. Alpha tests are carried out by the internal team before moving on to beta testing.
20. Beta Test
This is the final phase of testing in which the product is tested by users in a production environment to validate the product’s functionality, usability, and compatibility.
Feedback from users helps with debugging and making final adjustments before shipping the product.
21. Sales Funnel
This is a representation of the sales process, which is funnel-shaped because it starts with a large number of potential customers at the top, but only a fraction of those people end up making a purchase. The general stages of a sales funnel from top to bottom are: awareness, interest, consideration, and purchase.
To help solidify your understanding of these terms, let’s make up a startup called “Fly Buy,” which does drone deliveries for customized care packages featuring locally sourced products.
Through initial market research, the startup founders identified Millennials and Gen Z’ers as potential target markets. After beta testing the MVP — an early version of the drone — and getting positive user feedback, they decided to move forward with drafting a business plan, which features their proof of concept and a list of KPIs, one of which is a monthly net burn rate of $16,000.
To secure more capital to advance product development and figure out their business model, the founders decided to do a pre-seed fundraising round.
Startup fundraising occurs in several rounds. The pre-seed stage occurs early on when the startup is just beginning to take off. Since there are little data and performance indicators to base investments on, the pre-seed stage is more about selling the idea to potential investors. Pre-seed funding also often involves investing your own money and receiving contributions from friends and family.
The average funding amount in the pre-seed round sits just above $500,000 in the U.S. and typically doesn’t exceed $2 million.
Here are the terms you need to know for this stage:
One way to fund your startup is through bootstrapping: this is when startup founders invest their own money or get friends and family to invest in the business.
Bootstrapping gives business owners more room to experiment with the business and product since there’s no pressure to meet the expectations of investors.
Equity refers to the percentage of ownership in a business. VCs typically make investments in exchange for equity, a percentage of the company’s shares.
A startup accelerator is a fixed-term program that provides early-stage startups with financing, education, mentorship, and resources to help them grow into self-sustaining businesses.
Accelerators typically accept startups with an established business model.
25. Limited Partnerships (LP)
A limited partnership is created when two types of partners — general and limited partners — go into business together. The general partners assume full liability for the business, and they’re the ones who actually manage the business.
Limited partners are only liable for a business’s debt up to the amount they invested in the startup. They have limited voting power and do not partake in the day-to-day operations of the company.
Scalability describes a business’s ability and capacity to grow and increase revenue. Scaling a startup requires you to have measures in place to be able to handle increased market demand, such as having the right infrastructure, staff, and technology.
27. Cash Position
Cash position points to the number of cash reserves that your company has at a specific moment in time. Cash position is a good indicator of how viable your business is — the healthier the cash flow, the more freedom you have to take business risks.
Crowdfunding is a financing method where a group of individuals invests in your business. To run a successful crowdfunding campaign, you need to showcase your project to a large audience to convince them to invest.
Depending on the type of crowdfunding, investors may receive shares, interest, or products or services for their investment, or they may not ask for anything in return.
Runway refers to how long your business can sustain itself before running out of money and is based on your income and expenses.
Here’s to calculate runway: initial cash balance / net burn rate
Through bootstrapping and crowdfunding, Fly Buy was able to raise $400,000 in capital. After figuring out their operation costs and burn rate, they estimated that they have a runway of around 18 months. To maintain positive cash flow while finalizing their drone product, the founders decided to go for a seed funding round.
Seed Funding Round
A seed funding round is the first official equity funding stage. Startups usually go through a seed funding round if they’re still ironing out the details of their business model and figuring out the product-market fit.
This so-called “seed” funding can be analogous to planting a seed — with financial support and a sound business strategy, the startup will grow and mature. Seed funding allows companies to secure funding towards processes such as product development and determining target markets.
Startups may raise anywhere between $10,000 and up to $2 million in this stage.
30. Angel Investors
An angel investor is a high-net-worth-individual who provides funds for early-stage startups, usually in exchange for equity. Angel investors tend to focus on supporting the growth of businesses rather than on the potential returns.
Valuation is the process of determining the current or projected worth of a company by looking at the market forces of the industry, level of customer demand, and the projected revenue.
Pre-money valuation is how much your company is worth prior to funding, and post-money valuation is the value of the company plus the funding.
32. Convertible note
A convertible note is a type of convertible debt instrument that’s used to fund early and seed-stage startups. The investor loans money to a startup, and the convertible note “converts” the loan (principal plus interest) into equity that is repaid at the maturity date.
A convertible note usually comes with a Cap, or a maximum valuation the convertible note investment can convert into equity. This means “convertible note investors usually pay a lower price per share compared to other investors in the equity round,” according to Ycombinator.
34. Equity Financing
Equity financing is the process of raising capital by selling shares. Angel investors, VCs, and crowdfunding are sources of equity financing.
35. Debt Financing
Opposite of equity financing, debt financing is where businesses raise capital by securing a loan from a financial institution.
There are two types of debt financing — short-term, which is commonly used when there are temporary cash flow issues, and long-term, which applies when a business is purchasing assets.
36. Growth Stage
This describes the stage at which startups are refining their products, business strategies, and teams. Startups may also start seeking funding from VCs.
37. Customer Acquisition Cost (CAC)
This refers to an estimate of the total cost of acquiring a new customer, taking into account things like advertising, marketing, and customer service costs.
Thanks to an investment from an angel investor, Fly Buy was able to finalize their drone product and fine-tune their subscription-based business model.
Another investor also purchased $100,000 of convertible notes at a $1 million cap. Let’s say by next year, Fly Buy raised a $5 million valuation, which is higher than the Cap. This means their investment converted as if Fly Buy was worth $1 million rather than $5 million, giving them 10% equity in the company instead of just 2%.
After seed funding, Fly Buy launched their drone delivery service and got thousands of subscribers within two months. They hope to fund their growth efforts in the Series funding rounds.
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Series A Funding
Series A is the first big funding round for startups that have a product and evidence of traction. The Series A round is typically funded by VCs who seek to obtain equity.
The funds raised are used to expand and optimize the business’s client base and products. By this stage, it’s important to have ideas for a business model that can generate long-term profit.
Seed A rounds raise between $2 million to $15 million depending on the valuation.
38. Micro Venture Capital
Micro VCs are smaller venture firms that invest in startups during the early seed stage. They typically invest between $25,000 and $500,000, less than traditional VC.
The process of bringing a business to an end through the selling of a company’s assets and inventory.
40. Liquidation Preferences
A liquidation preference is a contract clause that gives investors the right to get their money back first — ahead of other kinds of stockholders — in the event of a liquidation.
Liquidation preferences are expressed as a multiple of the initial investment — for example, 1x liquidation preference means they get their full amount back.
41. Preferred Stock
Preferred stock, also known as preferred shares, does not come with voting rights for shareholders, but it does give them special privileges to minimize their risk in case the value of their investment goes down.
For example, investors might get liquidation preferences or rights to redeem shares from the market after a period of time.
42. Common Stock
This is the most common type of stock that people invest in. Unlike preferred stock, common stock represents ownership and gives stockholders voting rights proportional to the number of shares owned.
Employees and founders usually receive common stock.
Forecasts in businesses are similar to that in weather — they’re projections of activity or performance for a specific period of time in the future. Forecasts can be applied to revenue, sales, or growth. Forecasts are more of an art than a science, but they take into account operating costs, cost of sales, and profit margins.
Forecasts help you manage your cash flow and are referenced in fundraising rounds to attract investors.
44. Market Penetration
Market penetration has two definitions depending on the context. The market penetration rate refers to a measure of the volume of products sold relative to the total estimated target market, expressed as a percentage.
A market penetration strategy is the process of increasing a product’s market share by tapping into existing products in existing markets.
45. Venture Debt
This is a type of debt financing used by early- and growth-stage venture capital-backed startups. Venture debt is generally structured as three- to four-year term loans.
Advantages of venture debt include preventing dilution, extending runway, and reducing operating costs.
46. Competitive Advantage
A competitive advantage is an attribute that allows your company to outperform others. Factors contributing to competitive advantage include price, branding, product quality, distribution, and customer service.
To identify your competitive advantage, you have to be familiar with your target market as well as your competitors.
47. Run Rate
Run rate refers to the projected financial performance of a company based on the current financial performance and the assumption that current conditions will remain constant.
48. Pitch Deck
Startups need to prepare a “pitch deck,” a 10- to 20-slide presentation, to showcase their company to prospective investors. The deck gives an overview of your product, business model, and team. A pitch deck should tell a compelling and visually interesting story to appeal to investors.
49. Due Diligence
Due diligence is an audit or review that investors conduct to analyze a business’s financial records and intellectual property prior to making an investment or acquisition.
Fly Buy appealed to a panel of VCs with their pitch deck and offers of preferred shares, and raised a post-money valuation of $10 million. After completing the due diligence process, they secured $7,000,000 in capital. At their current run rate with steadily increasing sales, the founders think that they have a shot at another series round.
Series B and Beyond
Funding rounds proceed alphabetically, so after Series A, startups can move on to Series B, Series C, and so on to as many rounds as they want. Although these investments are bigger than previous rounds, it also becomes increasingly harder to gain investors’ interests.
Here are additional terms you will encounter as you go through additional series rounds.
50. Series B Funding
Companies may go for Series B funding if they’ve already developed a solid product and user base and they want more capital to scale up. This round is harder than Series A funding since investors will be looking at your company’s growth rate and performance.
The average amount raised in Series B is $33 million.
51. Series C Funding
By the time a company hits Series C, they’ve already reached a certain level of success, and they’re looking to develop new products, expand to new markets, or even acquire other companies.
Series C brings new investors to the table, including private equity firms, hedge funds, and late-stage VCs. They’ll also provide more capital with the expectation of higher returns.
The average Series C round brings in $50 million capital at a valuation between $100 and $120 million.
52. Drag-along Rights
A drag-along right is a provision in an agreement that allows a majority shareholder to force a minority shareholder to join in the sale or merger of the company.
53. Term Sheet
A term sheet is a formal but non-binding document between startup founders and investors. A term sheet outlines the terms and conditions for investments and serves as the template for legally binding documents.
Dividends are regular payments made by a company to its shareholders from its profits or reserves.
Securities are tradable financial instruments that have monetary value and come in two categories — equities and debts. There are also hybrid securities that combine elements of both.
56. Cap Table
A cap table is a spreadsheet or table that lists your company’s securities (stocks, convertible notes, etc.) and who owns them.
Unlike the mythical creature, unicorns exist in the business world but are still uncommon. It refers to privately held startups valued at over $1 billion. Notable unicorns include Uber, Airbnb, and Robinhood.
Equity dilution occurs when the ownership percentage for existing shareholders goes down as the company issues new shares.
59. Hedge Funds
A hedge fund is a pooled investment set up by a hedge fund manager which is designed to make returns using different investment strategies. They’re limited to higher net-worth individuals and are often set up as limited partnerships.
60. Down Round
This is when a company raises a pre-money valuation that’s lower than the post-money valuation in the previous funding round.
61. Lead Investor
The lead investor usually organizes the funding round and invests the most capital in that round.
62. Stock Options
A stock option is a contract that gives the buyer the right, but not the obligation, to buy or sell a stock at a predetermined price and within a specific time period.
There are two stock options — calls and puts. A stock call option grants the buyer the right to buy stock, which increases in value with the stock price rises. A put option grants the buyer the right to sell a stock short, which increases in value when the stock price decreases.
63. Flat Round
This is when the valuation is the same as the previous round of funding.
64. Mezzanine Financing
Mezzanine financing is a financing method that mixes debt and equity financing, often taking the form of convertible debt or preferred stocks. Mezzanine loans typically have higher interest rates.
65. Bridge Financing
Bridge financing is a small funding round to tide over a startup until it reaches the next round of funding, with the expectation of repayment. Startups can raise bridge funding through debt or equity financing.
66. Pro-rata Rights
This is a right that can be given to an investor to allow them to maintain their level of percentage ownership in a company during subsequent funding rounds.
The founders of Fly Buy decided to proceed to Series B funding, which turned out to be a flat round, raising only $7 million. To secure more capital to expand their delivery zones, they decided to go for mezzanine financing. The bank provided them a $10 million loan with an 8% interest rate, which can be converted to equity stake if Fly Buy can’t repay the loan.
Over the next five years, Fly Buy advanced until Series D funding, expanded to five other cities, and saw substantial growth in their subscriber base. Eventually, they decided it was time to go public.
Going public refers to going from a private company to a public company by selling shares to the public. It’s up to the company when they want to go public — some may go public after being in business for less than five years, others may decide to wait longer.
67. Initial Public Offering (IPO)
An IPO is when a private company goes public by offering shares to the public, allowing them to raise capital from public investors.
Companies meet the requirements of the Securities and Exchange Commission (SEC) before holding an IPO.
68. Exit Strategy
This is a plan for business owners or VCs “to dispose of an investment in a business venture or financial asset” — in other words, “cashing out” an investment. An exit strategy allows business owners to make a profit if the company is successful or limit their losses if it’s not.
Common startup exit strategies include acquisitions, IPOs, and management buyouts.
69. Mergers & Acquisitions (M&A)
M&As occur when one company buys another company. (Mergers refer to two separate companies combining to form a joint company, but mergers of equals are rare compared to M&As.) M&As can be a strategic move for startup growth.
A combination of “acquisition” and “hiring,” this term describes a recruitment strategy in which one company buys another company to acquire its employees rather than its products or services.
“Vesting means to give or earn a right to present or future payment, asset, or benefit” such as employer-provided stock, according to Investopedia. Founder vesting is the process of granting initial stock packages to the startup founders.
A vesting schedule defines when and how the shares will be distributed over a period of time, which allows the company to buy shares back if the founder decides to leave the company early.
A buyout is a transaction where one company buys a controlling share of another company, similar to an acquisition.
The process of restructuring a company’s debt and equity mixture to stabilize its capital structure.
It involves exchanging one type of financing for another, such as issuing debt to buy back equity.
75. Disruptive Innovation
Coined by Clayton Christensen, this term refers to where an underrated product or service gains enough popularity to take over an industry or market. A startup is “disruptive” when its initial lower-cost products gradually become increasingly popular in the wider market, like Netflix, for example.
Fly Buy has reached the final stage of business development. The company’s exit strategy involves going public by hosting an IPO. They caught the interest of a bigger drone tech company that wanted to acquire the company for $15 million. The M&A deal went through successfully, and so begins a new chapter of growth for the company.
Your business journey continues even after you’ve gone public. Depending on your exit strategy, you could keep up efforts to expand your company, acquire another company, or maybe even begin a new startup venture.
Whatever you choose to do, you’ll now be equipped with the startup and VC terms that will help you advance your business development and funding strategies.
Unicorns are considered privately held startups valued at or over $1 billion. Learn lessons from this elite club of startups and different success factors.
Take a look at our comprehensive overview of what you can expect (and look out for) when fundraising from Series A to Series C venture capital.