With the growing startup culture across the world, unnecessarily complicated startup terms and jargon have started popping up. This is a turn-off for most people. Not everyone understands most of these words.
C’mon! Our older generations have done and managed better businesses than our generation. But you will never find them saying that they run a startup. It was a small business for them but not a startup.
Everyone understands the basic business. Business is all about solving a problem by charging some amount for it. That’s it.
I personally feel that we have unnecessarily hyped up things by adding some fancy terms to the existing system.
Don’t fall for all these heavy startup terms and jargon because fundamentals are always the same. In this blog, I will simplify for everyone in my way.
I Have Personally Simplified Important Startup Terms
- I Have Personally Simplified Important Startup Terms
- Funding Rounds & Series
- Angel Investor
- Seed Investor
- Venture Capitalist (VC)
- Minimum Viable Product (MVP)
- Going Public or Initial Public Offering (IPO)
- Special Purpose Acquisition Company (SPAC)
- Burn Rate
- Employee Stock Ownership Plans (ESOP)
- Exit Strategy
Although you can jump to the individual topics directly, I would recommend you to go serially as I wrote. It will be more convenient if you are a beginner and looking for clarity.
The valuation of a startup is its present value. If the owner tries to sell the whole company in the future, how much amount will he/she get? That will be the valuation of that particular startup. No doubt this is one of the most popular startup terms in the industry.
How is valuation calculated? There is no fixed model but these things are taken into consideration –
- Market & industry
- Growth projections
- Properties & assets
- Competitive advantage
And many other things.
Bootstrapping means growing a startup by reinvesting the profits and using the existing savings. No funding is taken from loans or investors.
Example – Zoho and Zerodha are very good examples of bootstrapped startups.
Startups need money for growing their businesses. There are two ways to raise funds – (A) Loans (B) Selling a share of their company to investors.
Banks or lenders don’t generally provide loans to startups because they are risky. On top of that, even startups don’t prefer to take loans because they need to repay them back.
Funding from investors is not to be paid back. They get their share from the company.
If the company grows, investors will sell their shares and earn money. If the company shuts down, it’s still fine.
Example – You might have always seen in my Whatsapp Tech Startup News, “XYZ raised $$$ Million”.
That means those startups have raised some funding from investors on that particular day.
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Funding Rounds & Series
You might have heard about funding rounds of series A, B, C, D, and so on.
These are the number of funding rounds for a startup. Series A comes first, then Series B, and so on.
In every funding round, the equity is diluted for founders and existing investors. There is no limit to the funding rounds.
Types of Funding Rounds –
- Series (A-Z)
- Venture Series – Unknown
- Private Equity
- Debt Financing
- Convertible Note
- Corporate Round
- Equity Crowdfunding
- Product Crowdfunding
- Secondary Market
- Post-IPO Equity
- Post-IPO Debt
- Non Equity Assistance
- Initial Coin Offering (ICO)
Didn’t understand? It’s okay. We don’t really need to deal with the financials of companies. But you get an overview of so many types of funding!
A rich individual who is capable of taking risks and providing financial support to early-stage startups or entrepreneurs. In return, that angel investor takes a share from that particular startup.
Example – CRED founder Kunal Shah is an angel investor who is very actively investing in several early-stage startups. Here are some of his major investments – Inc42, Razorpay, Unacademy, Innov8 Coworking, ShaadiSaga, Pianta, Cookifi, Bharat Bazaar, etc.
Seed funding acts as a ‘seed’ for an early-stage startup. It is the first amount raised by the company to expand its ideas or business. Seed investors can be individual angel investors or enterprise investors.
Venture Capitalist (VC)
A large and established investment company that provides funds to larger startups.
VCs generally don’t invest in early-stage startups. They need a concrete growth rate and revenue generation model. However, most of the VCs don’t expect returns from all their investments.
Example – Sequoia Capital is one of the leading VCs in India that invests in sectors like FinTech, HealthTech, SaaS, and other Tech Startups. Some of the major investments include Zomato, Byju’s, CRED, OYO, Ola Cabs, etc.
Startups need mentorship and guidance. Incubators are organizations or individuals who provide that early-stage guidance.
They help out with networking, marketing, resources, strategies, co-working spaces, and even funding. No doubt, incubators take some equity in exchange for their expertise.
Example – Seed Fund is a famous incubator that helped startups like Sportskeeda, Redbus, Carwale, Voonik, and many others.
Just like incubators, accelerators are also organizations that help out with networking, marketing, resources, strategies, co-working spaces, and even funding. However, there is a difference.
While incubators are focused on building a business from an innovative idea, accelerators are focused on scaling an existing business rapidly.
Again, accelerators take some equity in exchange for their expertise.
Example – Y Combinator is a famous accelerator that helped startups like Meesho, Groww, RazorPay, Khatabook, ClearTax, and hundreds of other startups.
Minimum Viable Product (MVP)
Minimum Viable Product (MVP) is the most basic version of a product to gather market data and response.
Before building a product or startup, it is important to understand the demand for your product. Building a complete product takes resources, time, and money.
And what if your product fails just because there was no customer for it? All investments wasted?
For that, companies launch MVPs to test and check the interest of potential customers. It’s a demo version with sufficient features.
A company that crosses the valuation of $1 billion.
Example – Paytm, Byju’s, OYO, Ola, and many others are unicorns in India.
A company that raised more than $1 Billion in a single funding round.
Going Public or Initial Public Offering (IPO)
When a private company becomes a public company, it offers its shares to the public in a new stock issuance. Finally, it gets listed on the stock exchanges like National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
And here, the company no longer remains a startup! It has grown into a multi-million dollar public company. 🙂
Example – Nazara Technologies was a gaming startup backed by Indian Big Bull Rakesh Jhunjhunwala and it filed for IPO in March 2021.
Special Purpose Acquisition Company (SPAC)
You might have seen some news updates on my Whatsapp group that talk about startups getting listed as SPAC. What are SPACs?
A Special Purpose Acquisition Company (SPAC) has only one reason for its existence – to raise money from IPO. It has no products or services.
Then this SPAC acquires or merges with other companies by using the IPO money.
Example – Startups such as Flipkart and Grofers are said to be considering a public listing through SPAC.
The speed by which the startups spend their money.
Most of the tech startups have very high burn rates because of the customer acquisition strategies in the initial period.
The percentage of ownership in a particular startup or company. Investors often take equity in return for the investment amount.
In short, startups sell a part of themselves to get funding from investors.
Employee Stock Ownership Plans (ESOP)
A small percentage of equity (ownership) is given to the employees working in a specific startup.
Unlike a fixed salary, it keeps on growing with time as the company grows. Employees tend to take more interest in their work and the growth of the company if they are made a part of the company.
This is the most important thing from the point of view of employees. Before applying to a startup, it’s always good to know the option of ESOPs. Every company has different plans. Some don’t have it.
Investors make money when they pull out their invested money. So how and when will they exit?
Nobody wants to accept but having an exit strategy is a good thing for startup founders as well as investors.
- Get acquired
- Get merged
- Go public
- Liquidate the whole company
Depending on the competition and market, investors are well-aware of the exit strategies.
This is the whole reason why tech startups are running for valuation games. Once the valuation gets high, investors and founders can do anything with the company – sell it or just make it public.
When a larger company buys a smaller company, it is an acquisition. In such deals, a larger company either gets the majority of the equity or 100% of the equity in the smaller one.
Example – Myntra acquired Jabong. Then Flipkart acquired Myntra. Finally, Walmart acquired Flipkart. These are 3 separate acquisitions but its fun to see this pattern.
When the business model or strategy doesn’t work, companies pivot it.
Pivoting a business means to change the strategy or products or team or the whole way it operates. It can be anything depending on the company and its plannings.
However, the concept of pivoting means to change some strategies when things don’t work as expected.
These were some startup terms that you should be aware of!
What else can we add to this list? Kindly let me know so that we can add and improve this list. It is important for me to educate more people in the easiest way possible.
Don’t fall for all these heavy startup terms and jargon because fundamentals are always the same.
I hope you will be able to flaunt some cool startup terms and jargons in front of your peers and friends now. 😉