| Term | Definition | What This Means to You |
| pre-Startup | An idea-stage company—just an idea on paper (no product or service yet) | Usually never funded by an external funding source, except for “friends and family” and certain grants |
| Startup | A founder or team who have identified a technology, market, and business and are in the process of developing a product or service, or in the process of commercializing one | The term varies from a very early-stage product or team, to one that is operating and releasing products. Usually a startup is still trying to find a sustainable business model, for a relatively new market, and expecting significant growth. |
| Small Business | An operating business that already has customers and a product/service. Usually it is selling a proven product or service to an existing market. | Small businesses already have a proven business model but differ from startups in that they are already operating, and are not structured for rapid growth. |
| Early Stage Venture | Often synonymous with “startup”—but usually implies a startup that has made progress with developing a product and attracting customers. | |
| Growth Company | A company, that for the moment, is more concerned with attracting a large customer base (market share) than with profitability | Many modern tech companies—particularly in brand-new markets, or new technologies—focus on growth first. This way they can grow fast and dominate the market (and eliminate competition), then they can focus on profitability. |
| Social Entrepreneurship / Social Venture |
A company whose primary concern, primary service or product is focused on advocating or advancing a “social cause” or some other kind of advocacy (eg. saving journalism, improving trust in media)—rather than profits | The ultimate measure of these companies is not in revenues or profits—but in some other kind of success metric. This usually places these ventures outside the interest of typical funding sources (who need to see a return on their investment). |
| Investment | Money given to a company, in return for a percentage ownership (shares of stock) | Investors are part owners, and have some say in the strategy and decision making of the company, and (ultimately) share in the profits. |
| Institutional Funding | Funding from venture capitalists (can also refer to bank loans and investments from large corporations) | Generally, institutional funding means that the investment decisions are made by professional money managers—as opposed to the “owner” of the money. |
| Angel Capital / Angel Investor | Investments made by (relatively) wealthy individuals—usually they are investing in startups as part of their overall investment portfolio. | Angels are “accredited” investors (who meet certain SEC criteria for net worth and income). Angels usually have little personal relationship with the founders. |
| Venture Capital / Venture Capitalist |
A VC is a professional fund manager. They aggregate investment funding from large institutions then make investments in high-growth companies for potential high returns. | VCs need their funds to make an extraordinary return on investment. |
| Debt | Loans—usually from banks—who seek low risk | Debt funding almost always must be “secured” by collateral (or assets). If a company owns a building or has equipment, then they might qualify for a bank loan. Most startups lack the collateral to qualify for a loan unless the founders personally guarantee the loan. |
| ROI | Return on investment—usually stated in financial terms (i.e., percentages) | Most investors in the startup ecosystem are looking to make back huge returns—many times their original investment—in order to offset the risk. Some investors, however may be looking for other forms of ROI—such as gaining access to new technology or new markets. |
| Exit/Exit Strategy | An “event” (or transaction) when shareholders are first able to sell their shares for cash (a.k.a. “liquidity”). Usually this means either the company is sold to a larger company, or the shareholders are allowed to sell shares on the stock market (IPO). | Investors usually need an exit in order to see a return on their investment (i.e., someone needs to buy their shares of stock at a much higher price than what they originally paid). Investors want some sense of the company’s “exit strategy’ before investing. |
| Due Diligence | The background checking that investors will do before investing: technical, marketing, financial, legal, and personal (about the entrepreneurs) | |
| Corporation (S, C) | Only corporations can issues shares of stock. Corporations also provide some levels of legal protection to the managers and founders. Corporations have tax liabilities (and other similar ramifications). | Almost all investors need to invest in a corporation, not other forms of a company. |
| LLC (Partnership) | A form of a company that is very easy and inexpensive to establish. LLC = limited liability corporation | LLCs are in, in effect, partnerships. There are no “shares of stock” and it is difficult to include investors or incentivize employees or even confounders. |
| Sole Proprietorship | “The owner is the business.” Often consulting businesses and freelancers are sole proprietorships. | For tax and legal liability, the owner is the same as the company. Sole proprietorships rarely have outside investors. |
| Board of Directors | A group of individuals elected by the shareholders of a corporation to oversee the management of the company, and to make major decisions for the corporation, on behalf of the shareholders | |
| Scale / Scalable Growth | To grow fast (in market share, and/or revenues)—particularly the ability to grow exponentially, while only using incremental resources | Venture investors usually look for businesses with the potential to scale. E.g., with $1M investment, can the company grow to $200M in 5 years? |
| (Market) Traction | Evidence that customers are buying and using your product or service—enough such that investors believe that this customer adoption can continue and grow | |
| Market Validation/Customer Validation | Evidence from customers that your product/service will gain wide acceptance. Market validation is different than traction in that this evidence doesn’t have to come from customers. Partnering with a large or credible company could constitute validation (e.g., a partnership with Google or Facebook). | Market validation (and traction) are important pieces of evidence that investors look for when deciding to invest. Most startups lack a solid track record of revenues and profits, thus investors look for other evidence of future success: traction and market validation. |
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