Getting confused when people start talking about angels, dragons and unicorns? This brief guide to start-up lingo contains the most commonly used start-up terminology, which is often rather cryptical and not very intuitive.
A lot of words and terms are floating around in the start-up universe, and not all of them are straightforward and easy to understand. You might have heard of a unicorn, but what is a decacorn? And what exactly is a cap table – or a runway? The list goes on …
However, when you’ve been through this tiny start-up encyclopedia with the most popular start-up lingo, we guarantee you will feel a lot smarter.
An accelerator, also known as start-up accelerator, is an organisation that helps selected start-up companies with potential for growth. They help accelerate this growth by mentoring, educating, providing network resources and in some cases also investing in the start-up business. Some accelerators take a small equity stake in exchange for their help and may also provide pre-seed funding to help get the start-up off the ground.
Start-up incubators help start-up entrepreneurs refine their business ideas and build their company from a very early stage.
Start-up accelerators are targeted towards more mature start-ups who already have a viable product and potential for growth.
Angel investors are wealthy individuals who invest in start-ups. They are typically experienced entrepreneurs and businesspeople with financial resources. Angel investors usually get involved in start-ups in other ways than merely providing funding, such as providing mentorship and network.
Bootstrapping – in a start-up context – is when you start and run a business from the ground up with limited resources. The term refers to the old saying “to pull oneself up by the bootstraps”, which means you succeed in achieving something with no help from other people. In a start-up context it means that you launch your business without funding from investors – typically using your personal savings, credit cards and help from friends and family.
Burn rate is the rate at which your business spends money! Whether that be your own money or your investors’ money. Burn rate typically includes all expenses, including salaries, rent and other operating costs. Knowing your burn rate helps you understand how much money you need to raise (or make) to not go bankrupt.
A cap table is a spreadsheet that basically helps you as a founder of a business to keep track of who owns equity in the company and how much.
The cap table contains all of your company’s equity information. It should include a list of the shareholders, their shares, the company’s overall equity and any other relevant information.
Churn rate is the rate at which your customers or subscribers leave your business. In other words, churn rate measures how disloyal your customers are. Churn rate is the opposite of retention rate.
You don’t want a high churn rate!
How is churn rate measured?
Churn rate is measured in percentages, i.e. how many percent of your subscribers abandoned you in March? That would be the churn rate for March.
A decacorn is a private company that is valued at 10 billion US dollars or more – so no, not really a start-up any more …
You might be familiar with the popular reality television show “Dragons’ Den” where hopeful entrepreneurs pitch for investments to a bunch of somewhat sceptical, seasoned business angels called “the dragons”. But what exactly is a dragon in a start-up context?
A dragon is an investor who provides significant capital to a start-up. Dragons can be angel investors, venture capitalists or wealthy individuals who invest in start-ups. As seen in the television show, they are usually very experienced entrepreneurs or businesspeople with the ability to provide valuable knowledge and resources to the start-ups they invest in.
In a start-up context, an ecosystem is a network of relationships between different companies, customers, partners and other stakeholders. Start-ups often need to build such a network in order to be successful, for instance to scale up or gain access to new markets.
An elevator pitch is a short, persuasive talk that is typically used to quickly explain a product or idea to a potential investor. A good elevator pitch should be so short and clear that you can deliver it convincingly in an elevator on its way up or down! And it should capture the listener’s attention immediately.
Equity crowdfunding is a method of raising capital where you sell small parts of your business to a large group of investors. This type of financing is becoming popular among start-ups, because it allows you to quickly raise capital from a large base of investors in a relatively short period of time.
No – the difference is that when you use equity crowdfunding, investors buy a small part of your company. When you use Kickstarter, the people who support your product do not buy a small part of your company.
An exit strategy is a plan for how the owners of a start-up will leave the market and realise value from their investments, time and hard work. Exit strategies typically involve selling your business or even taking it public – in other words going on the stock exchange. Thinking about an exit strategy of a start-up helps you as a founder to plan ahead.
A business incubator might help you keep your business baby alive and nurture it until it gets more mature.
In other words, an incubator is an organisation that helps your start-up from the very tiny start by nurturing it through mentorship, workspace and other resources. The goal is to help you refine your business idea and get your start-up off the ground.
Incubators might take a small equity stake in exchange for their services and may also provide pre-seed funding. They are often run by experienced entrepreneurs, venture capitalists and business professionals.
Start-up incubators help start-up entrepreneurs refine their business ideas and build their company from a very early stage. Start-up accelerators are targeted towards more mature start-ups who already have a viable product and potential for growth.
You want to make your company public? Then you need to do an Initial Public Offering (IPO). An IPO is the process of a private company becoming publicly listed on a stock exchange. It’s a lengthy and expensive process, which is only suitable for well-established companies with a track record of success. It is, however, an effective way to raise capital.
A joint venture is a business arrangement in which two or more companies share resources and expertise in order to achieve a common goal, for instance to develop a new product or service. Joint ventures are often used to gain access to new markets or technologies. They can also help start-ups gain access to capital they wouldn’t be able to raise on their own.
A lean start-up is a method where you quickly launch and test a product or a service to see how it is received and what can and should be changed about it by using data and customer feedback. The method is based on the concepts of lean manufacturing and agile development.
This iterative approach helps you to identify customer needs and develop solutions to meet them.
Pre-seed funding is the very earliest stage of funding for a start-up. It’s used to fund the earliest product development. The money might come from business angel investors, venture capitalists or maybe even your family and friends.
A pitch is a short, persuasive presentation that is usually used to quickly explain a product or idea to an investor or a board of investors. An effective pitch should explain the value of the product or idea and why it’s worth investing in. It doesn’t have to be as short as an elevator pitch.
Your pitch should include:
A pitch deck is the visual presentation in PowerPoint or similar that you use when you do a business pitch. (see above). A good pitch deck should be concise, visually appealing and easy to understand.
The word pivot means to rotate, spin or whirl. In a start-up context, a pivot is when you make a major change or adjustment in your start-up’s business strategy or product. In other words, you change direction! A pivot is typically used when your start-up is not achieving the desired results and needs to make a major shift in order to succeed. Pivoting can involve changing the target market, the business model or even the product itself in order to make the necessary change and succeed.
Pre-money and post-money valuation are terms used to describe the value of a start-up before and after an investment:
This can help investors determine how much equity they should expect in return for their investment.
Return on Investment (ROI) is a measure of how much profit or value your will get from investing in something. It’s typically expressed as a percentage. A high ROI means that you’re able to generate a lot of value from a relatively small investment, while a low ROI means the opposite.
In the start-up world, a runway is the period of time that a start-up has before it runs out of money and needs to either secure more funding or shut down.
It’s typically measured in months and determined by the amount of capital the start-up has and how quickly it is burning through it, see burn rate. Knowing the runway of a start-up can help founders and investors plan ahead and make sure they have enough capital.
Seed funding is an early stage of venture capital funding. The wording itself derives from a seed – the business is the seed and the funding is what makes the seed grow. Seed funding typically involves a small financial injection from angel investors or venture capitalists, who then monitor the progress of the company and decide if they want to invest more.
The main difference between pre-seed and seed funding is the stage at which each is used:
Series A, B, and C are rounds of venture capital financing which usually come after seed funding.
Sweat equity is the value that is created when a start-up’s founders or employees invest time and effort in the business. Building a business can required blood, sweat and tears!
Sweat equity is often seen as a way for founders and employees to get a share of the company: While an investor provides a small proportion of the capital needed to start a business, the other founders and employees contribute sweat equity in the form of time, effort and resources. In return, they are often given equity in the company.
Sweat equity can also be a way to pay employees or even vendors if you’re short of cash or want to offer them a further incentive: instead of giving them cash payments, you give them equity stakes in your business or pay them through a combination of the two.
A term sheet is a document used in venture capital financing that outlines the terms of an investment. You use it as the basis for further negotiation and as a guide for drafting the final investment agreement.
A term sheet typically includes important details such as
A value proposition is a statement that briefly describes the value that a start-up offers to its customers – preferably you should write it in one sentence. It typically describes the benefits a customer can expect from the start-up’s product or service. A strong value proposition can help your start-up stand out from its competitors.
Venture capital is money from investors. (A venture capital company is an investment firm.)
You take in venture capital to provide funding so you can develop, grow and expand your business. However, taking on venture capital also carries some downsides. When you give up some of the ownership, you also give up some control and autonomy as well as some of the profits.
Moreover, venture capitalists are known to be quite demanding – they are invested in your success, so they might require frequent reports and updates on your progress and expect you to work very hard.
In a start-up context, a unicorn is the name of a start-up with a valuation of more than 1 billion US dollars. Unicorns have typically created products or services that have a large and rapidly growing customer base. They’re seen as some of the most successful start-ups in the world and often receive a lot of attention from investors and the media.