Startup – a term which has been doing the rounds for quite almost a decade now, but has now gained massive attention with the advent of Shark Tank India! But what is a Startup? In layman’s terms, a startup is the setting of a new business. With the popularity of Shark Tank India, every household now dreams of having its own startup! While the idea may seem lucrative, there are a few jargon one needs to be accustomed to before heading into the startup direction. This article lists 21 such important startup terms you need to know!
Startup inception terms
At the onset of the startup, three terminologies pop up. The important startup terms you need to know here are as follows:
The first step of creating a startup is an idea. Recognizing the lack of a product or service in the market and creating something to fulfil that lack. For example, one has an idea to create a website where anyone can upload an image of any image and have it instantly reduced to under 40kb with a click, to be used on other portals.
After the idea comes the prototype. A prototype is an early sample of model of the idea to test the concept out. For the above example, one can book a domain and add a Google analytics plugin to it, asking visitors if they are interested in a website that instantly reduces image file size for them. Visitors can respond with either Yes or No to this. This prototype need not be functional, it only needs to gather information that there is a need of such a product/service in the market.
Once prototype has established that this product or service has customers in the market, one can work on the MVP. MVP stands for Minimum Viable Product and is essentially the simplest form of the product. MVP is necessary to attract Beta users and to pitch for funding.
For the above example, one can set up a functional website which converts images of upto 2mb to under 4kb. However, this would just be the beta version of the product with the basic functionality. As funding and revenue is generated, the MVP can be scaled further into a better product.
Startup terms you need to know related to pitching
Once the inception stage is complete, one moves on to the funding stage. The important startup terms you need to know here are as follows:
A pitch is a brief presentation or a speech explaining the startup with the aim of attracting an interest from the audience. A pitch is conducted in front of potential investors for funding with the help of a pitch deck. The pitch deck is presentation that one takes the audience through slide by slide, explaining every concept of their startup business plan and business model.
A business model will basically state how one will earn revenue from their startup. It details the value the startup idea will offer to its customers. Additionally, it will layout the resources needed to create, market and deliver said value to the customers. As well as generate a profitable and sustainable revenue stream.
For the above example, the business model incurs that images upto 2mb are free. However, images above 2mb will cost user Rs 20 per image for conversion.
On the other hand, a business plan is a document which will details the startup’s goals, financial projections, industry standing, operations, industry standing, and marketing objectives. It will moreover be a guide of how the company would be run, detailing all its resources and revenues and serve as a tool to get investors onboard for funding.
Continuing the above example, the business plan is to get 10,000 users within the first year and generate a revenue of Rs 2 lakh. Subsequently, the following year has a target of 1 lakh users and revenue of Rs 20 lakh. Information of resources, expenses, team planning will also be included.
Startup terms you need to know related to funding
Once the pitch stage is complete, one moves on to the funding stage to scale up the business and keep it growing. The important startup terms you need to know here are as follows:
The process of creating a startup with investment coming from personal saving, loans or funds from friends and family as well as initial revenue generation is known as bootstrapping.
Incubators & Accelerators
These are organizations that provide full support to startups in terms of funding as well as mentoring. Moreover, they can lend a helping hand in – office space, connections, industrial connect, prototype development, etc. In return, the incubator or accelerator will acquire an equity stake in the startup. Incubators and accelerators are seen as the new business schools of the tech world and are highly popular and competitive.
Some global examples being – Y Combinator, Techstars, 500 Startups, Venture Catalysts, StartupBottCamp, Ignite, Startup Reykjavik, Metavallon. Indian examples being – 500 Startups, TLabs, Cisco Accelerator, Microsoft Accelerator, Indian Angel Network, iCreate, Google Launchpad.
This is the first round of funding for a startup after boostrapping. In this round, HNI (high-net-worth individuals), VCs (venture capitalists) and FFF (friends, family and fools) participate. Angel investors typically invest less than VCs. VCs are professionals who invest in startups in exchange for equity. VCs usually focus on startups who are at the later stage of development and not very nascent and usually invest greater amounts of money. As the startup is still in its early stages here, the investment is considered risky.
The first round of venture capital funding for a business venture. This is for the development stage, just past the angel round, and can be up to $1 million of capital. Subsequent rounds are referred to in terms of Series (Series A, B, C, D, E) or stages (startup stage, formative stage, mezzanine stage).
Series A, B, C
Following the seed round is Series A/B/C rounds and so on. These come in much later stages of the startups and include massive funding amounts which are invested by venture capital funds and private equity funds.
Any pre-series round is the funding round prior to the series mentioned. Example, pre-series comes before series A, pre-series B comes before series B and so on.
Crowdfunding is essentially asking the normal layman in the society to give their funds for the startup. A large numbers of investors can come together through crowdfunding to generate funds by launching fund-raising campaigns through platforms such as Kickstarter and Indiegogo. This campaign needs to be accompanied with advertising and run for a specific time period.
What is Valuation of startup?
Startup valuation is the process of quantifying what is the worth of the company. While it may sound simple, there is no one step formula to determine the startup valuation. Moreover, valuation occurs at every round or stage of funding. There is pre-money valuation which evaluates how much the startup is worth before any funding. There is also post-money valuation which evaluates the value of the startup after funding. This may sound simple again, but how the startup is valuated compared to the investment size can quickly dilute the shares of the founder.
For example, in the above startup there are two partners – A and B. Both hold 50% equity of the company. Company has total 1000 shares, with A and B holding 500 shares each. The company’s pre-money valuation is determined at Rs 1 crore and per share price Rs 10,000.
Now a third party, C, agrees to invest Rs 20 lakh in the startup. To enable this, the company will issue new shares worth Rs 20 lakh, i.e., 200 shares, bringing its total shares to 1200. These 200 shares will be given to C. C will now hold (200/1200=)16.67% of the company equity. On the other hand, A and B will now hold (500/1200=)41.6% stake each. Since A and B got their company stake reduced, this is known as dilution.
For post-money valuation, company now hold 1200 shares at Rs 10,000 per share, which comes to total value of Rs 1.2 crore. Alternatively, post-money valuation can be seen as the sum of pre-money valuation and the new investment.
Another method of raising funds for startup without the need for valuation is called convertible note. A convertible note is worth a percentage of equity ownership in the startup. Some owners use convertible notes to attract angel investors without having to put a valuation on the company. The note turns into equity as soon as another investor comes in. Convertible note is an instrument issued by a startup acknowledging receipt of money initially as debt, repayable at the option of the holder, or which is convertible into such number of equity shares of that company, within a period not exceeding five years from the date of issue of the convertible note.
This is a non-binding contract that details the terms and conditions for the investor that could be angle or VC for their investment. It includes the terms of funding and collaterals. Term sheet however does not guarantee funding. Funding is guaranteed once the Share Holding Agreement (SHA) is signed by both parties involved. SHA is a legal government document and includes the company cap table, detailing who hold how much equity share in the company.
Startup terms you need to know related to finances
To make their balance sheets look attractive, startups often come up with varying terms as follows:
Customer Acquisition Cost
Customer Acquisition Cost (CAC) is a measure of how much an organization is spending to acquire new customers. In other words, CAC is the total cost incurring for sales, marketing, property, equipment, and labour that goes into converting one customer to buy the startup product/service.
For the above example, if total spend on Google Paid Ads was Rs 1 lakh which brought around 10,000 paid customers, then CAC is Rs 10.
Since startups usually have a higher CAC in comparison to their revenue, they run at a loss for quite sometime. This measure of negative cash flow is quantified by Burn Rate. Burn rate is the rate at which startups spend its capital to finance overhead, before they start generating any profits.
Gross Profit Vs Net Profit
Gross profit is the amount of money that remains after one deducts the cost of goods sold from the revenue. While, net profit is the amount of money that remains after one has paid all the allowable business expenses. Moreover, one must calculate the gross profit to figure the net profit.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is essentially a measure of a startup’s overall financial performance, so the higher EBITDA value, the better it is. Furthermore, from the point of view of an investor, a good EBITDA value is one that will give some additional perspective of the startup’s performance. Additionally, EBITDA does not include cash outlays for interest and taxes, and the cost for replacing tangible assets.
Gross Merchandise Value (GMV)
Gross Merchandise Volume or GMV is a metric to measure the total value of sales over a certain duration of time. This is most commonly used in the eCommerce industry.
Lifetime Value (LTV)
Lifetime Value or LTV is a measure of the average revenue that a customer will generate throughout their lifespan as a customer for the startup. This ‘worth’ of a customer can help determine many economic decisions for a company including marketing budget, resources, profitability and forecasting.
Annual Run Rate
Annual Run Rate or APP is the yearly version of MRR or Monthly Recurring Revenue. ARR helps project the future revenue for the year, based on the startup’s current monthly revenue. However, ARR assumes that there would be no changes in the year ahead – no churn, no new customers and no expansion.
Daily/Monthly Active Users (DAU/MAU)
The Daily Active Users (DAU) to Monthly Active Users (MAU) ratio is a measure of the stickiness of the startup’s product or service. In other words, how often are customers likely to engage with the product or service. DAU is the number of unique customers who engage with the product/service in a one day window. Furthermore, a good DAU/MAU benchmark varies based on the type of app. Generally, startups focus more on how the DAU/MAU is trending over time rather than the actual number. Usually apps with 20% ratio are said to be good, while apps with over 50% reach are excellent.
A startup pivot occurs when the company shifts its business strategy to accommodate changes in its industry, customer preferences, or any other factor that impacts its bottom line. It is a new approach to the business which consists of significant changes in its operations.
Learn more on the startup terms you need to know in the videos below.
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