The term startup refers to a company in the first stages of operations. Startups are founded by one or more entrepreneurs who want to develop a product or service for which they believe there is demand. These companies generally start with high costs and limited revenue, which is why they look for capital from a variety of sources such as venture capitalists.
Here are start-up terms that every entrepreneur must know
While lean describes the business side of the build-measure-learn loop, agile development focuses on the development part of the loop and entails building incrementally and iteratively while testing quickly.
2. Angel investor:
An individual who invests his or her own money at an early stage in exchange for a share of the company. An angel can be a high-net-worth entrepreneur or friend or family member willing to invest in a great idea. Angel investors tend to invest fewer dollars than venture capitalists, although some form angel groups to invest in bigger business opportunities.
3. Burn rate:
The amount of cash you are spending each month in relation to your capital. Divide your capital amount by your burn rate to determine the lifespan of your company (at least until the next funding round).
4. Convertible note:
A note is worth a percentage of equity ownership in a company. Some business owners use convertible notes if they want to attract angel investors without having to put a valuation on the company. The note turns into equity as soon as another investor comes in.
Clayton Christensen’s term has since launched countless “disruptive” innovations.
“The selling of a cheaper, poorer-quality product that initially reaches less profitable customers but eventually takes over and devours an entire industry,” from 1997’s The Innovator’s Dilemma, by Clayton M. Christensen. Disruptive has since become a way to describe a product or technology that will change its marketplace.
6. Exit strategy:
The way you envision getting money out of your company. It’s another way of thinking about your future plans for the company. Either you want to sell it, get acquired (or acqui-hire), merge with another company, go public, or liquidate the business completely. Having this answer now will keep you a step ahead.
7. Going public:
A company’s IPO, or initial public offering. Think of it as just another way to raise funding. You are offering shares of your company for purchase to the public. It could make you rich but it could also cost a lot. IPO deals are structured by investment banks, and your company is valued by analysts. There are pros and cons to going public and only a small percentage of millions of U.S. companies actually do it. Investment in IPOs can be risky but can pay off big for some investors.
Startup incubators are groups that support chosen entrepreneurs and/or their businesses with mentorship and funding. In exchange, the incubator takes an equity stake in the company. Increasingly popular and competitive in the tech world, incubators have been touted as the new business schools.
9. Nondisclosure agreement (NDA):
A legal document that protects a startup’s secrets by holding employees responsible to pay damages for leaking them. NDAs can be used to protect things like proprietary code, formulas, or customer information. You can have a “one party” NDA where one side is receiving confidential information from the other, or a mutual NDA for both parties.
The term pivot was used a good deal in The Lean Startup by Eric Ries.
A course correction for startups based on findings in user testing and analysis.
11. Seed round or Seed stage
The first round of venture capital funding for a business venture. This is for the development stage, just past the angel round, and can be up to $1 million of capital. Subsequent rounds are referred to in terms of Series (Series A, B, C, D, E) or stages (startup stage, formative stage, mezzanine stage).
12. Valuation (pre-money valuation, post-money valuation)
How much your company is worth. But that’s putting it simply. There are several different formulas for determining the valuation of your company when you plan to sell shares. Pre-money valuation is how much a startup company is worth before funding; post-money valuation is the value for the company plus the funding. Again, sounds simple, but how you value your company compared to the size of the investment can quickly dilute your shares. Valuation happens at every round or stage of funding.
13. Venture capitalist (VC)
A professional individual who invests money in businesses in exchange for an equity share of the company. Because VCs and venture capital firms invest institutional dollars (for investors, funds, and pension plans, etc.), they usually focus on proven or later-stage startups and invest greater amounts of money (typically at least $2 million per round).
The schedule under which founders and employees must remain in the company before receiving their full share of the equity. For example, if you have a five-year vesting schedule you may get access to 0% in year one, 25% in year two, 50% in year three, 75% in year four, and 100% in year five. A vesting schedule helps to instill staff loyalty and keep the company together for a certain period of time. Cliff vesting is when someone becomes fully vested on a specified date.
Anyone can create a site and business cards then call themselves founders of a startup. A real founder is a doer. It doesn’t matter how much of an impact or progress you’re able to make as long as action has and is being taken. Founders execute.
In short, a wantrepreneur is an idea person. No matter whether they have a technical or non-technical background, they’re always planning to develop a startup app, they have many ideas but they haven’t started yet. Many wantrepreneurs stay wantrepreneurs. Don’t be a wantrepreneur!
When it comes to technology startups, founders are often classified into technical and non-technical. Technical founders are those with a programming background or have taught themselves code. Non-technical founders tend to be business or marketing people. Not that technical founders can’t sell!
There are many metrics that signal idea validation but at the end of the day, it’s about proving there is a need and demand for the product. One of the strongest validation signals is when people pay for the product, use it and recommend it to others with similar needs.
The goal of every startup is to build a scalable business model. Thanks to technology and automation, a startup product can serve hundreds of thousands of users without needing the same number of service providers. A startup is called scalable when it creates and validates a repeatable business model that addresses user needs around the clock.
If you’re launching a startup, accelerators can help you move your idea quickly by providing you with mentorship and fundraising opportunities during a few months program.
Unlike accelerators, incubators tend to offer longer term advisement programs that help you with mentorship, connections and resources like a coworking space. Accelerators are focused on speed and fundraising while incubators usually take earlier stage startups and help them overcome early stage challenges.
There are only a few startups that reach and exceed a billion dollar valuation. Those startups are called unicorns.
There’s an even smaller number of startups that raise over one billion dollars in one single round of funding. Those are called Dragons. Uber is one of those companies.
Over 90% of startups are self-funded. In fact, I would argue that close to 100% of startups start with their own funds especially nowadays that the funding bar is getting higher. Bootstrappers are entrepreneurs that combine human capital (knowledge, experience and skills) with savings to launch and grow a startup without raising capital. An entrepreneur can also bootstrap the early stages and then raise funds for growth. A path taken by most founders.
At the end of the day, an idea is just an educated guess. What are the odds that entrepreneurs will guess right all the time? When you realize you need to make a minor change to the product, the target buyer or any important aspect of the business model, you are iterating.
Sometimes we’re confident the plan is right but quickly realize it isn’t. When there’s a major change to the business model like the way you make money, ideal customer profile or the solution (product), you are pivoting. Entrepreneurs must be open to iterations and pivots even if they had spent a lot of resources getting the latest version right. For this reason, spending too much time and money testing ideas or versions of a product is not a wise execution strategy. Instead, build, test and adjust quickly.
If you ask what investors look for in a startup, it’s founders that aim to create products and business models that introduce an innovation that makes a significant difference in the market and the world. Take the example of Uber that completely changed how people commute.
To test ideas quickly without spending a lot of resources in building a product that may or may not work, entrepreneurs are encouraged to create a minimum viable product. It’s the first versions of the product that only include the core features that aim to test the riskiest assumptions before building the next versions with more advanced features.
Minimum viable products are part of the lean methodology which entails going through the build-measure-learn loop which essentially enforces the idea of building and testing quickly instead of building an advanced product hoping that customers will come.
Entrepreneurs build startups for many reasons. Many want to make a major impact in the world while others, in addition to the impact, they aim to exit their ventures either through an IPO or mergers and acquisitions.
Nowadays, one of the most common startup business models are software as a service. This is when you create a product with features that customers can use under a subscription. Exactly like paying a monthly fee for hosting or using an email marketing platform.
SaaS companies need a platform to build their software on. Instead of building one from scratch, a faster and cost-efficient way is to build it on top of an existing established platform. SaaS companies use platform as a service companies like Heroku.
33. Alpha release:
Since continuous testing is important to the success of software, teams run alpha tests internally early on before releasing the beta version of the product for public testing.
34. Beta release:
Having conducted internal alpha tests, beta tests involve customers or potential users who provide feedback and help the team make changes before launch.
35. Board of directors:
Mentorship, guidance and connections are key to the success of a startup. The board of directors tends to include members who can help the founders make wiser decisions while contributing to areas like hiring, business development and fundraising.
36. Business development:
At a high level, there are two key roles in a technology startup. The technical founder is responsible for building and improving the product. The non-technical founder takes the business role whether it’s partnership development or strategic planning and execution. Non-technical founders tend to be business developers.
37. Business model canvas:
Instead of a hundred-page business model, the business model canvas categorizes the key areas of launching a startup like customer segments, value proposition, key partners, revenue model and acquisition channels.
38. Hockey stick growth:
Every entrepreneur strives to grow their startup exponentially. In reality, such fast and predictable growth is rarely attainable. The common launch and growth path is characterized by numerous fluctuations and near-death experiences.
39. Pitch deck:
Before making an investment, most of the time, investors expect a quick presentation that highlights the key areas of a startup like team, product, market, traction and plan. Entrepreneurs create and use a pitch deck for investor presentations.
A common customer acquisition strategy for SaaS startups is offering a free plan that includes a few product features while enticing subscribers to upgrade to paid plans for more features and advantages.
41. Value proposition:
Business is about solving a problem for a customer by offering a solution that’s better or have unique benefits over the competition.
42. Consumer products:
This can also be defined by looking at it from a B2C and B2B stand point. Business to consumers companies create consumer products. Those are products purchased and used by individual buyers not companies. For instance, Apple sells the iPhone which is a consumer product. Furthermore, Uber offers a consumer product although, over the years, it expanded to also offer enterprise solutions.
43. Enterprise products:
Unlike consumer products, enterprise products are used by companies.
44. Competitive advantage:
It is how a startup is different from its competitors. Differentiation can be through innovation, intellectual property, exclusive rights and partnerships or other ways like niching down and capturing a small but growing market faster than anyone else.
Describes a talented programmer who always finds a way to get a project done no matter the obstacles.
46. Intellectual property:
A protected invention through patents, copyrights, trademarks or others.
47. Customer development:
Part of the lean methodology, customer development is the stage during which you discover and validate the customer mainly by interviewing them and testing hypotheses qualitatively and quantitatively.
48. Product/Market fit:
There are various definitions for p/m fit. Essentially, you reach p/m fit when your customer acquisition cost is lower than the life-time value of your customers and existing customers are referring buyers like them therefore lowering you acquisition cost and increasing your net promoter score. Debt
49. Demo day:
A public pitch event or “graduation” day for a group of startups in an accelerator or other program at which each company has 5–15 minutes to present its investment opportunity to potential investors in attendance.
When a company sells additional shares of stock, thereby decreasing the percentage ownership of existing shareholders. Note that if the valuation of the new sale is at a high enough level, the value of stock held by existing investors may increase, even though the percentage ownership may decrease.
Fintech refers to an industry composed of financial technology that describes the emerging financial service sector. This includes companies that include technology that enhances financial services through innovation.
52. Lean startup
This is a business development approach that is based on a method of manufacturing that values a business’ ability to change. It aims to shorten product development cycles by adopting experimentation methods that are based on tentative business ideas. The main idea behind this is based on how startups can invest their time into repeatedly building products or services to meet the needs of early customers.