Venture Capital Terminology

I decided to construct a list of common terms that are used throughout the venture capital industry. As I write future articles, I realize that this will make it easier for readers to utilize instead of trying to search for the terms online. Over the course of time, I will update it and add more terms if necessary. I’ve attached it as a pdf file that has the definitions hyperlinked, which is available here here.

Two of the sources I used that helped me out were http://www.investopedia.com/ and http://vcexperts.com/. I would recommend going to these two sites if you want to look up additional terminology that is not in this list.


Definitions

Alphabet rounds
The early rounds of funding for a startup company, which get their name because the first is known as Series A financing, followed by Series B financing, and so on. Alphabet rounds of financing are provided by early investors and venture capital (VC) firms, which are willing to invest in companies with limited operational histories on the hope of larger future gains. These investors will typically wait until the startup has shown some basic signs of maturity and has exhausted its initial seed capital.


Angel investor
An investor who provides financial backing for small startups or entrepreneurs. Angel investors are usually found among an entrepreneur’s family and friends. The capital they provide can be a one-time injection of seed money or ongoing support to carry the company through difficult times.


Bootstrapping
A situation in which an entrepreneur starts a company with little capital. An individual is said to be bootstrapping when he or she attempts to found and build a company from personal finances or from the operating revenues of the new company.


Business plan
A written document that describes in detail how a new business is going to achieve its goals. A business plan will lay out a written plan from a marketing, financial and operational viewpoint. Sometimes a business plan is prepared for an established business that is moving in a new direction.


Deal flow
The measure of the number of potential investments that a fund reviews in any given period.


Dilution
A lessening of real value (as of equity) by a decrease in relative worth; specifically, a decrease of per share value of common stock by an increase in the total number of shares.


Due diligence
Research and analysis of a company or organization done in preparation for a business transaction.


EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization. An indicator of a company’s financial performance; it can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.


Elevator Pitch
A term used to describe a brief speech that outlines an idea for a product, service or project which can be delivered in a short time (60 seconds or less).


Exit Strategy
The method by which a venture capitalist or business owner intends to get out of an investment that he or she has made in the past. Most often it will be an IPO or a sale to a larger company.


Free cash flow
A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value.


General Partner
The partner in a limited partnership responsible for all management decisions of the partnership. The GP has a fiduciary responsibility to act for the benefit of the limited partners (LPs), and is fully liable for its actions.


Hurdle rate
The minimum amount of return that a person requires before they will make an investment in something.


Incubator firm
A firm engaged in the business of fostering early-stage companies through the developmental phases until such time as the company has sufficient financial, human and physical resources to function on its own.


Initial public offering (IPO)
The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded.


Internal Rate of Return (IRR)
The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.


Investment bank
A financial intermediary that performs a variety of services. This includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients.


Limited Partner
An investor in a limited partnership who has no voice in the management of the partnership. LP's have limited liability and usually have priority over GP's upon liquidation of the partnership.


Liquidity event
An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an exit strategy for an illiquid investment. Liquidity events are typically used in conjunction with venture capital/angel investors or private equity firms, which will aim to reach one within a reasonable amount of time after initially making an investment.


Management fee
Compensation for the management of a venture fund's activities, paid from the fund to the general partner or investment advisor. This compensation generally includes an annual management fee.


Non-Disclosure Agreement (NDA)
A legal contract between two or more parties that signifies a confidential relationship exists between the parties involved. The confidential relationship often will refer to information that is to be shared between the parties but should not be made available to the general public.


Post money valuation
The value of a company after external financing alternatives are added to its balance sheet.


Pre-money valuation
A phrase that refers to the value of a company's stock before it goes public.


Prospectus
A formal written offer to sell securities that provides an investor with the necessary information to make an informed decision. A prospectus explains a proposed or existing business enterprise and must disclose any material risks and information according to the securities laws. A prospectus must be filed with the SEC and be given to all potential investors. Companies offering securities, mutual funds, and offerings of other investment companies including Business Development Companies are required to issue prospectuses describing their history, investment philosophy or objectives, risk factors and financial statements. Investors should carefully read them prior to investing.


Recapitalization
Restructuring a company's debt and equity mixture, most often with the aim of making a company's capital structure more stable. Essentially, the process involves the exchange of one form of financing for another, such as removing preferred shares from the company's capital structure and replacing them with bonds.


Return
To bring in (as profit).


Risk
The chance that an investment will lose value.


Stock options
A privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific date.


Sweat equity
The equity that is created in a company or some other asset as a direct result of hard work by the owner(s).


Term sheet
A non-binding agreement setting forth the basic terms and conditions under which an investment will be made.


Venture capital
Seed capital or growth capital that is invested in early stage companies that have high growth potential, and have the potential to generate high returns for investors.


Venture capitalist
An investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to public funding.