Accelerator: An organization offering startups a system to accelerate the growth of their business, often in return for equity in the participating company.
Adviser: An individual able to provide founders with business advice, access to networks, and other forms of support.
Alpha: A measure of an investment’s performance in relation to a benchmark such as an index.
Angel: A wealthy individual who makes direct investments in early-stage businesses. Some angel investors are professional investors in seed-stage companies, whereas others engage in this type of investing on a part-time basis.
Asset class: A group of assets that exhibit similar characteristics in markets (e.g., equities, bonds, cash equivalents).
Balance sheet: A financial statement that identifies the assets, liabilities, and shareholders’ equity of a business.
Barrier to entry: See Moat.
Board of directors: A group of individuals who represent stockholders with regard to significant company decisions.
Bootstrap: To finance a company using personal funds and reinvesting the profits of the business itself (derives from the phrase “to pull oneself up by one’s bootstraps”).
Business model: The way that a business converts innovation into economic value.
Burn rate: A metric reflecting how quickly a business spends its capital, typically calculated over monthly or annual periods.
Capitalization table: A spreadsheet or table depicting ownership held by each investor.
Chicken and egg: A situation in which two or more factors can produce the desired result only when all are present.
Circle of competence: The perimeter of the area within which a person has knowledge and expertise which is superior to an average investor.
Complex adaptive system: Consists of three characteristics. The first is that the system consists of a number of heterogeneous agents, each of whom makes decisions about how to behave. The most important aspect of this element is that the decisions evolve over time. The second characteristic is that the agents interact with one another. That interaction leads to the third characteristic, something that scientists call emergence: the whole becomes greater than the sum of the parts. The key issue is that one cannot understand the whole system by simply looking at its individual parts.
Contrarian investing: Investing in businesses in ways that are contrary to the views of most other investors (i.e., not following the crowd).
Convexity: In the context of venture capital, significant asymmetry between potential for gains (large) and the losses (small or harmless).
Correlation: How asset prices move in relation to each other.
Crowdfunding: A process of funding a startup by raising relatively small amounts of capital (typically via the internet) from a larger number of people (the crowd) than is typical in raising capital from professional venture investors.
Cumulative advantage: When something happens to be slightly more popular than its competitors at just the right point, it tends to become still more popular. See also Matthew effect.
Customer Development Process: A systematic approach to discovering a repeatable and scalable business model.
Deal flow: A combination of the quality of and the rate at which investment proposals are generated by a venture capitalist.
Dilution: A reduction in an investor’s ownership associated with a new financial investment.
Discounted cash flow (DCF): Discounting the net cash flows from an investment at an appropriate interest rate.
Distribution: Returning capital to partners following a liquidity event.
Down round: A financing round in which the valuation of a business is lower than in the previous round.
Due diligence: The process of investigating, analyzing, and assessing individuals and institutions prior to engaging in a transaction.
Early stage: investing in a startup well before it is fully formed; can include seed stage but also additional financing round.
Elevator pitch: A presentation by a founder to a potential investor to promote his or her business that lasts only a few minutes (about as long as an elevator ride).
Equity: Ownership of shares in a company.
Exit: The sale of a portfolio investment in either whole or in part, including corporate acquisitions, secondary buyouts, and initial public offerings. Also called a liquidity event.
Extrapolation: Making predictions about the future based on past trends and present data.
Founder: A person who initiates and fosters the creation of a new business.
Free cash flow: Cash available after expenses, debt service, capital expenditures, and dividends are taken into account.
Fund: A collection of capital commitments from investors that form a pool for making investments.
General partner: A person or entity in a limited partnership who manages a fund. The general partner earns a management fee and receives a percentage of the carried interest if the fund is successful.
Grand slam: In venture capital, a term that refers to an investment that produces a distributed spendable (liquid) return of one or more times the size of an entire venture capital fund.
Gross margin: The amount of revenue remaining after subtracting cost of goods sold.
Growth hypothesis: How new customers will discover and purchase a product or service.
Hedge: The purchase of an asset intended to deliver an inverse return to another asset to offset the impact of price changes.
Heuristic: A mental shortcut that enables a person to solve problems and make judgments quickly; a mental rules of thumb. These shortcuts can sometimes cause bias and result in mistakes.
Income statement: A document identifying the profit or loss of a business.
Incubator: An organization established to support the development of startups, typically by providing office and lab space and access to advisers; an incubator is more focused on generating ideas than an accelerator.
Initial public offering (IPO): The initial offering of publicly available shares of stock by a private company.
Internal rate of return: The discount rate at which the present value of all future cash flows are equal to the initial investment.
Investment thesis: The fundamental idea that is the basis for a plan to create new value.
Intrinsic value: The present value of future cash flows.
Investment: The purchase of an asset to generate a return.
Investment bank: A financial institution that provides services such as serving as an agent or underwriter when new securities are issued.
Investor: An individual or organization that commits money to investment products with the expectation of financial return and that is trying to assess the value of an asset rather than the behavior of other people (i.e., an investor is not a speculator).
Key performance indicators: Metrics used to determine the performance and state of a business.
Late stage: A period of venture capital investment that occurs later in the lifetime of a business.
Lead investor: The primary financier of the financing round; this investor performs certain functions like setting the price per share of the financing round.
Lean Startup: a scientific approach to creating and managing startups designed to get a desired product to customers’ hands faster.
Limited partner: An investor who invests capital in a limited partnership.
Limited partnership: An organization in which a general partner and its various limited partners conduct business and the liability of the limited partner is bounded by a limit.
Liquidation: The process of selling assets in order to pay creditors and/or shareholders.
Liquidation preference: The right of an investor to priority in receiving proceeds from the liquidation of a business.
Liquidity: A measure of how easy it is to sell an asset for cash or a cash equivalent.
Liquidity event: Selling an asset such as equity or liquid assets such as cash or stock enabling a return of capital to investors. Also called an exit.
Lollapalooza: A term coined by Charlie Munger describing a phenomenon driven by feedback that creates an outcome that can be either positive or negative and is more than the sum of its parts.
Long: To buy something based on a prediction that its price will go up.
Macroeconomics: The study of the aggregate behavior of an economy.
Management fee: A fee charged by a venture capital fund for its management services, often 2 percent of the assets under management.
Margin of safety: In finance, the difference between the intrinsic value and the market price of the asset.
Matthew effect: A phenomenon in which “the rich get richer and the poor get poorer.” See also Cumulative advantage.
Mental model: A working cognitive representation of phenomena with which people interact.
Micro VC: A professional venture capitalist who invests at early stages in the life of a startup, primary at seed stage or a follow-on to a series A investment.
Microeconomics: The study of the individual elements that make up an economy.
Minimum viable product (MVP): A product offering that has just enough features to allow the product to be deployed.
Moat: A barrier to market entry by competitors that enables a business’s sustainable value creation. A company with a moat must sustainably be able to generate returns in excess of its cost of capital and earn an economic return higher than the average of its competitors. Factors that can create a moat against competitors include brand, regulation, supply-side economies of scale, network effects, and intellectual property.
Mr. Market: A metaphor to describe the unpredictable nature of markets in the short term.
Net present value: The present value of the cash flows from an investment less the cost of the investment.
Network effects: Demand-side economies of scale that exist when the value of a format or system depends on the number of users. These effects can be positive (e.g., a telephone network) or negative (e.g., traffic congestion). They can also be direct (e.g., increases in usage leading to direct increases in value to users, as with the telephone) or indirect (e.g., usage increasing the production of complementary goods, as with cases for mobile phones).
Nonlinear: When the aggregate behavior of a system is much more complex than would be predicted by summing the inputs into the system; output is not proportional to input.
Opportunity cost: The value of a foregone alternative.
Option: The right of a holder of a contract to purchase a specified amount of a security or other assets at a specified price at some defined point in the future.
Optionality: The potential for options. In finance, a situation where the investor has alternative opportunities in addition to the one that he or she is presently pursuing.
Path dependence: Occurs whenever there is an element of persistence or durability in a decision.
Pitch deck: A presentation created by founders to promote a potential investment.
Pivot: Occurs when a startup pursues a new direction by leveraging what it has learned from previous experience; pivots are not complete restarts.
Platform: A market with multiple sides that creates value by enabling direct interactions between two or more customer groups.
Portfolio company: A business that has received an equity investment from a venture capital firm or other investor.
Power law: A functional relationship between two quantities in which a relative change in one quantity results in a proportional relative change in the other quantity, independent of the initial size of those quantities; one quantity varies as a power of another.
Preferred stock: Shares that include terms that ensure preference over common stock with respect to factors such as dividends or payments.
Product–market fit (PMF): The state of having a product that satisfies market demand.
Present value: the current worth of a future sum of money or stream of cash flows (or payments) that will be received in the future.
Scalability: The ease with which a new business can increase a factor like growth.
Security: A debt or equity instrument issued by a private firm or government.
Seed stage: The earliest stage of venture capital investing; a period when relatively small investments are typically made in startups that typically consist of little more than the founders, an idea, some early employees, and a bit of progress toward establishing product–market fit.
Series: Financing rounds that typically occur around certain milestones that are categorized by means of a letter depending on how many rounds have occurred beyond seed stage in the past (e.g., series A, B, C, and D rounds).
Series A: A company’s first post–seed stage round of venture capital funding.
Speculator: A person trying to guess the future price of an asset by guessing what the behavior of others will be in the future.
Stock: A share of ownership in a company.
Term sheet: An outline of the structure of an investment or other transaction agreed upon before the final binding agreement.
Tipping point: The moment that critical mass is achieved in some aspect of a business.
Unicorn: A startup that has been valued at $1 billion or more through either private or public investment, in many cases before terms such as liquidation preferences are considered.
Value hypothesis: whether a product or service really delivers value to customers once they are using it.
Venture capital: A type of private equity that focuses on investments in businesses with high-growth potential over the long term.
Venture capital fund: A committed pool of capital raised periodically by venture capitalists, usually in the form of a limited partnership. The fund typically has a fixed life measured in years (although extensions of several years are often possible to obtain from investors).
Venture partner: an individual engaged by a venture capital firm to source and manage investments but one who is not a general partner.
Virality: A measure of how often existing customers generate more customers via referrals.
Volatility: The fluctuation of a variable such as a market price over time.