The startup, social enterprise and impact investing world operates on a lot of lingo. This guide will give you a better context to understand our language and know what some of these commonly used terms refer to so that you can use them correctly.
A startup company is a company in the early stages of operations. Startups are usually seeking to solve a problem of fill a need, not just to build stuff. A company in the start-up phase exists to learn how to build a sustainable business by testing each assumption to come up with a validated revenue model and proof of concept.
Social enterprises are sustainable for profit ventures that have the blended purpose of generating income and achieving social, cultural, and/or environmental aims.
A social entrepreneur is a committed person with a vision and determination to persist in the face of daunting odds to identify and solve large-scale social problems. Ultimately, social entrepreneurs are driven to produce measurable impact by opening up new pathways for the marginalized and disadvantaged, and unlocking society’s full potential to effect social change.
The act of a startup quickly changing direction with its business strategy.
A company is bootstrapped when it is funded by an entrepreneur’s personal resources or the company’s own revenue. Self funded founders and start-ups are often referred to be bootstrapping.
Also known as disruptive innovation. An innovation or technology is disruptive when it “disrupts” an existing market by doing things such as: challenging the prices in the market, displacing an old technology, or changing the market audience.
An organization that helps develop early stage companies, usually in exchange for equity in the company.
Entrepreneur in residence (EIR)
A seasoned entrepreneur who is employed by a Venture Capital Firm to help the firm vet potential investments and mentor the firm’s portfolio companies. We have experienced and successful EIR’s at GrowthAfrica from our alumni network that help a new batch of entrepreneurs with key issues and trouble shoot problems, share network etc.
B2B: Business to business
This describes a business that is targeting another business with its product or services. B2B technology is also sometimes referred to as enterprise technology. This is different from B2C which stands for business to consumer, and involves selling products or services directly to individual customers.
The process by which a startup company measures their current success. An investor measures a company’s growth by determining whether or not they have met certain benchmarks. For example, external funding comes with certain benchmarks, goals and timelines we monitor to tract progress and impact. Say you have a benchmark of reaching X number of customers and working with Y number of dealers or agents by end of 2015.
Board of directors
A group of influential individuals, elected by stockholders, chosen to oversee the affairs of a company. A board typically includes investors and mentors. Not all start-ups have a board, but investors typically require a board seat in exchange for an investment in a company.
Monetary assets currently available for use. Entrepreneurs raise capital to start a company and continue raising capital to grow the company.
This is when a company borrows money with the intent that the debt accrued will later be converted to equity in the company at a later valuation. This allows companies to delay valuation while raising funding in it’s early stages. This is typically done in the early stages of a company’s life, when a valuation is more difficult to complete and investing carries higher risk.
An analysis that we make of all the facts and figures of a potential investment . Can include an investigation of financial records and a measure of potential ROI – social and financial impact.
If you’re thinking of raising funding (Debt, Grant or Equity Financing) for your business in future, it’s wise to start keeping financial records the moment you start making revenue. Simple accounting records and statements/evidence will really come in handy when interested investors/ partners do their due diligence on your business operations.
A few entrepreneurs out here have viable businesses and need funds to expand but they do not have records. Why? The sole proprietor/ director/s run the entity from their wallets in cash. Nothing to show who paid for what and where the money went because over 75% of the money moves around in cash. Have some structures, systems and guidelines – because this will save you headaches in future, get you better valuation and thus more favourable deal/s.
The act of raising capital by selling off shares of a company. An IPO is technically a form of equity financing.
An individual who provides a small amount of capital to a startup for a stake in the company. Typically precedes a Seed Round and usually happens when the startup is in its infancy.
The process by which a company’s worth or value is determined. An analyst will look at capital structure, management team, and revenue or potential revenue, among other things.
Money provided by venture capital firms to small, high-risk, startup companies with major growth potential.
Impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.
An individual investor, working for a venture capital firm, that chooses to invest in specific companies. Venture capitalists typically have a focused market or sector that they know well and invest in. Focused purely on financial returns.
Pre-money vs. Post-money Valuation
When looking for venture or angel financing, your valuation is, frankly, whatever you can convince investors to agree on.
Pre-money refers to your company’s value before receiving funding. Let’s say a venture firm agrees to a pre-money valuation of $1 million for your company. If they decide to invest $2 million, that makes your company’s post-money valuation $3 million.
Post-money valuation = pre-money valuation + new funding
This is how startup founders get rich. It’s the method by which an investor and/or entrepreneur intends to “exit” their investment in a company. Entrepreneurs and VCs often develop an “exit strategy” while the company is still growing.
A VC firm or fund or individual investor that organizes a specific round of funding for a company. The lead investor usually invests the most capital in that round. Also known as “leading the round.”
Non-disclosure agreement. An agreement between two parties to protect sensitive or confidential information, such as trade secrets, from being shared with outside parties.
A company that a specific firm has invested in is considered a “portfolio company” of that firm. We have interests in over 22 companies – that’s our portfolio.
Proof of concept
A demonstration of the feasibility of a concept or idea that a startup is based on – often realized after a successful pilot. Investors require proof of concept if you wish to pitch to them. A proof of concept could be paying customers, revenue or demand for the product or service you’re introducing. You need to support your claims, validate assumptions to have a proof of concept.
Startups raise capital in individual rounds, depending on the stage of the company. The first round is usually a Seed round followed by Series A, B, and C rounds if necessary.
The seed round is the first official round of financing for a startup. At this point a company is usually raising funds for proof of concept and/or to build out a prototype and is referred to as a “seed stage” company.
Themarket that a startup companies product or service fits into. Examples include: consumer technology, cleantech, biotech, and enterprise technology. Venture Capitalists, Angels, Foundations and Impact Investors tend to have experience investing in specific related sectors and thus tend not to invest outside of their area of expertise.
Refers to the specific round of financing a company is raising. For example, company X is raising their Series A round.
The stage of development a startup company is in. There is no explicit rule for what defines each stage of a company, but startups tend to be categorized as seed stage, early stage, mid-stage, and late stage. Most firms only invest in companies in one or two stages. Some firms, however, manage multiple funds geared toward different stage companies.
A non-binding agreement that outlines the major aspects of an investment to be made in a company. A term sheet sets the groundwork for building out detailed legal documents.
When an employee of a company gains rights to stock options and contributions provided by the employer. The rights typically gain value (vest) over time until they reach their full value after a pre-determined amount of time.