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Talking of startups, you must have listened to many complicated terms from different investors or social media influencers. Apart from being a fancy term, a startup is an initiative by a single person or a group of individuals who wish to solve a common problem, leading to higher efficiency and reduced human effort. Often, start-ups are associated with complexity as we encounter different associated terms.
Moreover, reality shows such as Shark Tank India have sparked the interest of individuals and the younger generation to start working on their respective ideas to solve daily life problems.
In this article, look at the top 21 startup terms you should know about, which will help you build your start-up and allow you to understand start-up-based reality shows.
1. Startup Idea
Every start-up begins by easing a particular process, saving human effort in a task or making a process efficient in different aspects. The idea stage only refers to an initial thought and does not involve any product buildup.
For instance, you may have a start-up idea of starting an ed-tech company that provides preschool education; at this stage, you do not have any product or customers but have a mental image of the company’s revenue source and the value it adds to its user’s well-being. The next stage is the prototype stage, as discussed below.
Building a prototype in a start-up is the stage before developing an actual product. Through a prototype, you analyse the market’s needs through user feedback and surveys. Let’s assume your start-up wants to build a product as per an idea. Without investing significant capital, you advertise your product to a small section of your target audience to monitor their feedback and if it made their task efficient or saved their effort.
After you analyse the public sentiment toward your product, you build your first product to be used in the market, called as a Minimum Viable Product or MVP, just as follows.
3. First product: Minimum Viable Product (MVP)
Minimum Viable Product (MVP) sounds complicated but refers to the “first usable product by a start-up”. As you analyse the market need and the initial feedback to your product, you develop your first product, which the general public can use for its purpose.
It plays an essential role in determining the overall success of the product. After this product is launched for the target audience, further products are made only after collecting feedback and reviewing the MVP, thus making its success critical for a startup. Also, investors consider MVP’s success an edge over essential financial information.
4. Investor Pitch
A start-up pitch refers to presenting a start-up idea, its vision and mission, its revenue model and its financial information to a set of individuals or venture capital companies that provide funds in exchange for a fixed percentage of equity in the start-up.
It requires the core founding team of the start-up to present its financials and profitability-related information and convince the investors to put in their capital for the start-up’s growth.
5. Business Model
The business model in a start-up refers to the way of earning money. It involves figuring out the source of earnings through selling products or providing services.
For example, video streaming platforms like Netflix make money through a subscription-fee-based model in exchange for their content.
6. Business Plan
Business plan refers to the projected growth of the business. For example, a new start-up in the e-commerce industry expects less than a hundred clients in the first month but aims to serve ten thousand clients in its first two years.
7. Bootstrapped Startups
Bootstrapping refers to running a start-up without external funding in exchange for company equity.
It involves personal savings to grow and manage all a company’s operations, including rent, equipment and machinery.
8. Incubators and Accelerators
Incubators and accelerators are the organisations that provide initial support in developing a product at a start-up. Different colleges nationwide have incubators, which grant small funding to aspiring entrepreneurs to help them build their first product, which can be scaled to new audiences with time.
Start-ups raise funding in different rounds. Starting from the seed round, the company can keep raising money for its expansion in exchange for equity, as discussed below.
9. Equity Dilution
Equity Dilution refers to reducing the ownership percentage in the company’s shareholding pattern.
Suppose a company XYZ has two co-founders and 1000 shares in total, where each co-founder has 500 shares each, and the company decides to onboard a new investor in exchange for 20% of the company’s equity. In that case, the current holdings of both co-founders will not be affected.
Instead, the company issues more shares, i.e. 200 more to the new investor. Thus, the total number of shares of the company becomes 1200 in number, making the cofounders hold 500 shares each, and the new investor now owns 200 shares.
Thus, previously, both the co-founders had 50% of the ownership when the company had 1000 shares; after the new investor joined the company, the number of shares became 1200; thus, the latest shareholding pattern became 41.66% for both co-founders separately, and 16.66% for the investor.
10. Seed Round
As the name suggests, the Seed Round is any startup’s first investment round. Mainly, small companies and high-networth individuals participate in this round. As the company size is small, it usually involves less capital investment.
11. Series A, B and C Rounds in fundraising
As the company progresses, the managing team decides to raise further funding rounds, namely Series A, Series B, etc.
For example, you must have heard names of different start-ups along with their series of funding, such as “XYZ company raised $1 million in Series A Funding”. The naming convention of letters denotes the number of funding rounds raised, i.e. Series A refers to the first round after the seed round, and so on.
12. Pre-Series Rounds in Startup Fundraising
Pre-series rounds are the funding rounds before an actual series round. This round is conducted when the company decides not to go for a significant equity dilution. These rounds are conducted between two rounds. For example, “ABC Company raises $500K in Pre Series A for 1% Equity” is a familiar statement.
In various cases, a start-up working towards a global or environmental cause decides to raise funding from the crowd through different platforms such as Kickstarter.
Here, a group of people choose to donate their money to help the company work towards improving the environment or finding sustainable alternatives for a better future.
14. Startup’s Valuation
The valuation of any company or startup is not calculated by any means but lies in the negotiation skills of the cofounders to convince investors about investing in a company at a particular value. Rightly said, Valuation is an art, not an actual figure and is not fixed.
For Example, if you convince an investor to invest in your company where he gets 10% equity of your company in exchange for $1 Million, the valuation of your company becomes $10 Million.
Once the company starts making cash flow, estimating its valuation is much more sensible and feasible.
15. Convertible Notes
This method of investing is majorly prominent while investing in an early-stage startup when the company’s valuation cannot be determined.
Thus, the investor offers funds to the company for the time until another investor agrees on an exact valuation figure, and the company can value the previous investment at a fixed percentage of discount.
16. Burn Rate
When a start-up cannot maintain profitability and loses more money than earnings, the capital loss rate is called the burn rate. You can relate this to the strike rate observed in cricket matches. The bond rate is the measure of money being lost in managing operations and the inefficiency of the processes.
17. Customer Acquisition Cost (CAC)
Customer Acquisition Cost, or CAC, is acquiring one customer. The value of customer acquisition cost is the amount of money spent on marketing the product or service divided by the number of new customers created.
The high Value of CAC denotes the company’s inefficiency in gaining new customers, thus increasing the burn rate and reducing profitability.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It means the earnings generated by the company without any of its expenses in taxation, interest paid on loans and similar expenses.
It is a new term used to cover the losses generated and helps present the theoretical profitability to investors.
19. How is Gross Profit Determined?
Gross profit is the amount calculated excluding all the company’s operational expenses. The following mathematical expression gives an in-depth idea about calculating gross profit on the product.
GROSS PROFIT = SALE PRICE OF THE PRODUCT – ITS PRODUCTION COST
20. Net Profit
This volume denotes the final in-hand profit of a company after all of its expenses after paying all the necessary operational expenses such as office rent and electricity, employee salaries, taxes and other miscellaneous costs.
We can evaluate the net profit of a start-up using the following equation:
NET PROFIT = GROSS PROFIT – OPERATIONAL EXPENSES INCLUDING TAXES
21. DAU and MAU
You must have listened to these two terms on Shark Tank, especially for online platforms. DAU refers to Daily Active Users, and MAU for Monthly Active Users.
As per their name, the terms are self-explanatory, denoting the total active users on the platform daily and monthly, determining any platform’s user retention and engagement of any platform.
Ensuring profitability in a startup is a skill and requires a deep understanding of the industry. Moreover, a startup is more than just raising funding after you encounter an idea. It involved managing a team, product building as well as analysis.
All the 21 Startup Terms discussed above include valuable parameters for measuring a company’s progress. Most of these are used by investors to ensure the capital is invested in the right direction.
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Have a Query or feedback to share? Make sure to drop your comments below.
Frequently Asked Questions (FAQs):
Q1: What is Equity?
Answer: Equity stands for ownership. For Example, if A owns 15% of a company XYZ, it is said to have 15% Equity in the company XYZ. This equity is sold at a price to new investors who wish to invest in it.
Q2: What is a Startup Pitch? Is it different from what we see on Shark Tank India?
Answer: A pitch refers to presenting the financial data and the products manufactured to Venture Capital firms, High Net Worth individuals or other potential investors who understand the company’s business model and can invest in the company in exchange for equity.
Q3: Why do we use EBITDA?
Answer: EBITDA allows you to analyse the theoretical profitability. Even if the company loses money, it may have a positive EBITDA value. Thus, it is used to convince investors to invest in a startup.
Q4: How is Gross Profit different from Net Profit?
Answer: Gross Profit does not include the necessary expenses apart from production cost. As per its formula, Net Profit is the final profit after excluding all the operational costs, after which a startup is considered profitable.
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