Decoding Startup Lingo: Essential Terms Every New Founder Must Know
The world of startups is a realm of its own, distinct from traditional business ventures. Startups have unique goals and operate with their own set of terms and concepts that are crucial for every founder to understand. As the startup landscape continues to evolve, founders face increasing demands and expectations. At Ideact, I have been assisting clients in navigating the startup world, and now I want to share what I have learned in upcoming blog series. Before we embark on this journey, it is essential to establish a solid foundation by clarifying the fundamental terms we will be using throughout the series.
In this startup glossary, I have compiled key concepts that will empower you with a better understanding of the startup ecosystem. Whether you’re a seasoned entrepreneur or just embarking on your startup journey, mastering these terms will help you navigate the intricate landscape of startups and communicate effectively with investors, advisors, and industry peers.
So, let’s dive into the essential startup terminology that every new founder should know!
The Minimum Viable Product, or MVP, represents a scaled-down version of a product with the core features necessary for initial market testing. It serves the purpose of quickly validating the product’s viability and gathering feedback from potential customers. By focusing on essential functionality, an MVP allows startups to iteratively refine their offerings based on user insights.
Venture capital refers to investment funds specifically aimed at supporting high-risk, high-potential startups in exchange for equity ownership. Beyond providing financial backing, venture capital firms often bring valuable industry expertise, mentorship, and networking opportunities to help startups succeed and grow.
Angel investors are individual investors who provide early-stage funding to startups. These investors are typically seasoned entrepreneurs themselves and contribute not only financial resources but also their expertise, industry connections, and guidance to help startups navigate the challenges of scaling their business.
A pitch deck is a carefully crafted presentation that startups prepare to showcase their business to potential investors, such as angel investors or venture capital firms. It typically includes key information about the startup’s value proposition, target market, competitive advantage, financial projections, and growth strategy. A well-designed pitch deck aims to captivate investors’ attention, communicate the startup’s vision, and generate interest in funding the venture. I will be releasing guide to Pitch decks in an upcoming article.
Runway refers to the estimated period during which a startup can continue operating before depleting its available financial resources. It takes into account the startup’s projected expenses and revenue, serving as a crucial measure of financial sustainability and planning. A longer runway provides more time for startups to iterate, refine their business models, and secure additional funding.
Burn rate is the rate at which a company’s cash balance decreases over a specific period due to its operational expenses exceeding its revenue. It is often measured on a monthly basis and serves as a key metric to evaluate a startup’s financial health and efficiency in managing its resources. Monitoring burn rate helps founders make informed decisions to optimize spending, revenue generation, and capital allocation.
Bootstrapping refers to the approach taken by startups to grow and operate primarily using their own financial resources, such as personal savings, revenue generated by the business, or minimal external funding. Bootstrapping often requires founders to be resourceful, creative, and resilient, leveraging their limited resources to fuel the growth of their venture until external investment or profitability is achieved.
A unicorn refers to a startup that has reached a valuation of $1 billion or more. It is a term used to describe highly successful and high-growth startups that have achieved exceptional market success.
Accelerators are programs or organizations that provide support, mentorship, and resources to early-stage startups in exchange for equity. They typically offer a structured curriculum, networking opportunities, and access to investors to help startups accelerate their growth.
Incubators are similar to accelerators but often focus on nurturing very early-stage startups. They provide support, office space, mentorship, and other resources to help startups develop their ideas and business models.
If you are considering starting your own startup, it is important to have an overview of the different investment rounds. Below are the main investment milestones that a startup can achieve, presented chronologically.
With each subsequent round successfully closed, the investment risk for VC funds decreases. As a result, the equity obtained by the fund for its investment usually decreases, while the amounts requested by the startup gradually increase.
This is the earliest stage of investments, often involving Friends, Family, and Fools (the name speaks for itself) or angel investors. It is typically used for the development and launch of the MVP.
For many startups, this is the first formal round of investment. The funds raised in the Seed round are most commonly used for product completion and finding market fit. By the time of the seed round, the startup should already have an MVP or have otherwise validated interest in the product. It is also necessary to have a prepared business plan.
A bridge round is raised when a startup cannot reach the next investment stage without external capital. It most often occurs between the Seed and Series A stages.
Series A comes when a startup has validated its market fit and is ready to scale (usually into foreign markets). The goal of Series A is to secure sufficient capital for the startup’s rapid growth.
Series B, C, D, and beyond
These are investment rounds of the same type as Series A, aiming to enable faster growth for the startup.
Mezzanine or Late-stage
Mezzanine financing, also known as a late-stage round, may be pursued by startups that are close to an IPO or acquisition.
Initial Public Offering refers to the final stage of the whole process when a startup goes public on the stock market. Examples of such startups can be Uber or Slack.
It is important to note that most startups do not aim to reach an IPO. More commonly, startups are acquired by larger companies. A recent example of this is the acquisition of graphic software Figma by Adobe, reportedly for $20 billion.
Refers to achieving alignment between a product or service and the market’s needs. The product or service effectively addresses the target customers’ problems, resulting in strong demand and positive customer feedback.
The percentage of customers or users who stop using a product within a given time period.
The term used to describe a significant change in a startup’s product, business model, or target customers. A pivot usually occurs based on user feedback and allows the startup to succeed when the original plan doesn’t work out. For example, Twitter was initially a podcasting platform.