Every sector has its basic terminology, which comes up repeatedly. The vocabulary is so crucial that it is used to clarify other advanced concepts. Fundraising terms for startups are no different. This post can serve as a mini-vocabulary that will be handy to any startup involved in fundraising.
Angel investor refers to the wealthy people or groups who fund startups, normally in equity financing. Those deep-pocketed investors could help finance the founding of a new organization, or they can help accelerate the growth of a previously founded business. Individual Angels may come together and form Angel Groups in order to pool their resources and leverage each other's expertise. Most importantly, angel investors are likely to support early-stage startups when the risks are high and most investors would back away.
It refers to a business entity or individual permitted to trade securities, which may not be certified by financial authorities. Commonly, they have a net worth of more than $1 million or an annual income of more than $200,000.
Burn rate is the measurement of how fast a startup is spending its initial capital before starting to make money. Therefore, it is a critical metric for organizations, usually expressed in cash spent per month.
Cap table or capitalization table refers to a table showing the equity capitalization for a startup. In other words, it provides a breakdown of the ownership structure and equity value. It often involves the startup's ownership capital like convertible equity, warrants, preferred equity shares, and common equity shares.
It measures the difference between the cash that is available at the beginning and the end of a time period. It is a way to demonstrate the financial health of a company, i.e., if it has positive cash flow (making money) or negative cash flow (losing money).
A related fundraising term is a cash flow statement. It includes the breakdown of operating cash flow, investment cash flow, and financing cash flow. These statements inform investors on how the company is operating, where the money is coming from, and how it is spent.
A convertible note (or convertible bond) refers to short-term debt that its holder can convert into equity at a preset valuation. The conversion usually happens during a future financing round. Essentially it is like taking a loan. However, instead of paying back principal plus interest, the startup is compensating the investor in equity.
It is the practice of funding a venture or a project through raising a small amount of money from a pool of individuals, normally through the internet. These days, online platforms such as Crowdfunder, Indiegogo, and Kickstarter make this process simpler by serving as virtual matchmakers.
It is a practice where potential investors will evaluate a startup's strengths and weaknesses. Startups wanting to raise funds from venture capitalists have a long road ahead and should organize certain information regarding their company. Specifically, investors may want to see financial reports, past performance, competitor analysis, risk analysis, market research, management and ownership structure, and valuations.
It refers to a short and concise description of a business idea. Elevator pitches are notoriously short, almost like teasers. Typical length can vary from thirty to ninety seconds, making succinctness a vital consideration.
Key performance indicators are analytical tools that track the performance of specific metrics. Basically, KPIs measure the success of a company or a specific activity. Startups use KPIs and metrics to demonstrate traction and growth, both very important when looking to convince investors!
A non-disclosure agreement refers to the legal contract in which an individual agrees not to show or talk about certain information. The subjects may differ on a case by case basis and may involve proprietary information, financial details, and confidential data.
A pitch deck is a short presentation used to provide potential investors with information about a company. A pitch is supposed to cover all important parts of the business in a way that demonstrates this is a worthy opportunity.
This is the earliest stage of funding. The amount raised is usually low, and its main goal is to help the startup get off the ground. Usually, this involves creating a first version of the product, getting to market, and identifying a plan to generate revenue. Funds often come from the startup's founders and any supporters, family members, and close friends.
A collection of rules imposed by the US Securities and Exchange Commission to control private security offerings (also referred to as private placements). The startup will inform the SEC regarding the proceeding, but it won't need its approval to complete the placement. Simply put, it allows you to raise funds faster and easier through selling equity or debt securities.
ROI is the net revenues produced from fundraising, divided by the overall investment cost. It is a measure of how successful an investment is. Therefore, the potential ROI is something all investors will consider when deciding on an investment.
Runway refers to the amount of time a startup has before it runs out of money at its current burn rate. So, it is usually calculated in months. For example, if you have $90,000 and your burn rate is $9,000 per month, your runway is 10 months. Startups can extend their runway by raising more capital or by lowering their burn rate.
It refers to a deal between a startup and an investor, which offers the investor rights for future equity in the startup. Essentially, it is similar to a warrant. However, the specific price per share is not defined at the time of investment.
It refers to investment made before the company has gotten off the ground. Usually, it is between Series A and your family and friends round. In rare scenarios, it can include your family or friends round.
Seed investment round averages $250,000 to $5 million depending on the sector. Seed investments might be pre-revenue although in most cases the company already has some revenue.
For example, seed funding can cover market research, product development, and employing a team.
Series A refers to the first venture capital (VC) funding round of a startup. It usually involves a startup that is past its preliminary stage and is seeking investment to scale its marketing, operations, and sales. Typically, series A funding raises $2 million to $15 million, though amounts may vary.
These series refer to the second and subsequent rounds of venture capital (VC) investment. Typically, each round is for a higher amount of capital compared to the previous one. Consequently, these fundraising terms are related to company growth, scaling, and preparation for an IPO (Initial Public Offering).
It refers to the document that lays out the terms of the collateral and investment. It outlines the things your startup is giving and what you are receiving in return. Term sheets are usually non-binding and are a basis for defining a final agreement.
It is the procedure of quantifying how much a startup is worth. An investor pours in funds in a startup in return for a portion of the company's equity. The amount of equity they will receive is based on the company's valuation. Absolute valuation aims to determine the true value of the company. On the other hand, relative valuation compares the company to other similar companies to estimate its worth.
It refers to an institutional investor offering capital investment to small businesses or startups with a high-growth outlook. In return, they expect a percentage of ownership or equity of the company.
In fundraising terms, a warrant is a security allowing a holder to purchase a stock at a certain price until an expiration date.
There you have it! Make sure you keep all these fundraising terms for your startup! We wish you the best of luck on your journey!
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