Agile development process—a flexible, iterative product creation method that encourages input from customers throughout the project.
Affiliate model—when a business pays commission to another similar organization to market and/or sell its product for it, normally through the web traffic it produces. Commissions may range from 10 percent to as much as 50 percent or even more. Some commissions are also a set amount for each sale made.
Annual revenue run rate—what your future annual revenue would be if you were to extrapolate how much revenue you earn over one year. For example, if during one quarter you earned $250,000 in revenue, your annual revenue run rate would be $1 million ($250,000 × 4 quarters in a year). If during one month you earned $50,000 in revenue, your annual revenue run rate would be $600,000 ($50,000 × 12 months in a year).
Angel group—a group of angel investors that pools their resources and develops portfolios of companies they’ve invested in. You can find a listing of them online from Angel Capital Association (ACA), a trade association of angel groups.
Angel investor—an accredited individual investor who must have a net worth of at least $1 million and make at least $200,000 a year (or $300,000 a year jointly with a spouse).
Business-to-Business (B2B) model—when a business sells its product or service to businesses.
B2B lead generation sales model—a marketing method of attracting business customers through programs that offer some type of free, educational giveaway in exchange for contact information, which becomes “leads.” The sales team later follows up with the leads to engage in a conversation to gain a new customer.
B2C model—when a business sells its product or service to consumers.
Blade years—the stage of a start-up when founders have launched their products and have fully committed to making the business work. During this stage, revenue and growth rates are low. This stage may last two to three years or longer.
Bootstrapping—the hands-on, low-budget method of starting a business that minimizes the amount of financial capital required. Bootstrapping entrepreneurs use creative methods for completing projects, such as bartering or completing tasks themselves that are often completed by professionals.
Brand identity—a customer’s perception of your company and product. Brand identity is much more than a logo; it involves the customer’s overall experience when dealing with your company, such as the buying process, customer service, and your employees’ personalities.
Business model canvas—a visual map of nine essential elements—or, as they call them, building blocks—of making every business (customer segments, value proposition, channels, customer relationships, revenue streams, key resources, key activities, key partnerships, and cost structure). Placing all these elements next to one another on one page helps you keep them all in mind as you search for solutions to some of the most common problems as you begin to launch your business.
Content marketing—a type of marketing that uses sharing of educational written material, graphics, and other media to obtain customers.
Crowdfunding—raising money in small amounts from a large group of people, often through such online intermediaries as Kickstarter, Indiegogo, or Crowdfunder.
Culture—your company’s style of doing business, such as its vision, personality, brand, beliefs, and habits.
Direct-sales model—when a business hires employees to sell directly to customers.
Discretionary costs—expenses that are not essential to a business’s operations.
Early adopters—the first customers that choose to purchase your product, often before all the product features are completed.
Efficiency wages—above-market wages or salaries that lead to significantly higher productivity and profits because the employees feel that they are being compensated and treated well.
Eighty-Twenty Rule (or the Pareto Principle)—based on the work of Italian economist Vilfredo Pareto, this concept is a great aide for efficient decision making that posits that 20 percent of inputs generally account for 80 percent of outputs and helps you focus on how to use your time and energy most effectively.
E-mail marketing—a type of marketing used to remain connected with customers and prospective customers via e-mail with newsletters, special promotions, and educational material. Many businesses professionalize the e-mail marketing process with software from such companies as iContact, VerticalResponse, MailChimp, or Constant Contact.
False-positive—when you land an important customer or partner, and assume similar firms will follow, but few do.
First-mover advantage—when you are the first company to the market with a product of your type, which can give a start-up a lead that competitors may never catch up to.
Fixed costs—costs that you have to commit to in advance and that you won’t be able to increase or decrease readily, if at all. Examples of fixed costs are rent, employee salaries, and insurance.
Flat organizational chart—a company with no, or few, middle managers so employees are empowered to take responsibility without being managed.
Free product integration partnership—a partnership where you license a portion of your product for free to other firms to enhance their offering, and in exchange, you receive brand awareness and marketing prospect leads. The goal is to enable your brand and product to reach a broader audience and attract interested buyers who become sales leads.
Freemium—a model that offers a version of your software or service for free, while simultaneously offering a paid premium version, similar to the models used by Dropbox and Skype.
General partners (GPs)—the managers of a venture capital fund responsible for raising money, investing it into promising companies, and organizing day-to-day operations of the fund. GPs are normally paid a salary in addition to a percentage of profits.
Growth-inflection point—a period of time—normally one to three years after product launch—when revenue turns sharply upward. During this time, you have made enough progress with your business model such that sales are coming in more easily.
Growth capital—money invested to help you expand your business after your product has matured and has established customers.
Holocracy—a nonhierarchical organizational management structure that does away with middle management and job titles.
Human capital—the founder’s skills, knowledge, and expertise, including his or her work, school, and managerial experience, industry knowledge, and experiences from outside his or her schooling or work life, such as hobbies.
Incubators—groups that provide mentoring support, funding, grants, investments, and physical locations to work for entrepreneurs.
Independent contractor—a person or firm that is not an employee that you pay to perform a particular service. Hiring independent contractors is common with start-ups because work functions are unpredictable, so founders are wise not to commit to hiring long-term employees.
Initial public offering (IPO)—a company’s first stock sale to the public. IPOs are used to raise capital for expansion and/or provide payments to other shareholders.
Intellectual property—an invention resulting from an individual’s creativity and work that has a patent, copyright, trademark, or some other type of legal or business protection.
Key performance indicators (KPIs)—measurements of important data that help you manage your company, such as revenue per employee, customer retention rates, lead to closed sales conversion rate, inventory shrinkage rate, etc.
Letter of intent (LOI)—a document that outlines the terms and conditions agreed upon in a merger between two firms before the final legal agreements are finalized and signed.
Limited partners (LPs)—investors in a venture capital fund who aren’t responsible for choosing investments, raising money, or managing and organizing the day-to-day operations of the fund. LPs’ liability is limited to the amount they invest in the fund.
Low-cost model—selling a product for a low price while spending small amounts of money to acquire a great number of customers.
Love money—capital invested in a start-up based on the relationship between the founder and the investors rather than analysis of the business idea and its associated risk.
Matchmaker model—a business model where you don’t have to hold any inventory or maintain an expensive product; you just connect two parties.
Mezzanine financing round—late-stage, high-interest-rate debt capital that is often a bridge loan between financing rounds. The debt may be converted into equity if not repaid.
Minimal viable product (MVP)—an inexpensive version of your product that includes only enough features to satisfy early adopter customers used to get on the market quickly and then learn from customers about improvements to make. The term MVP was popularized by authors Eric Ries and Steve Blank.
Nonbank lenders—firms that offer loans but do not have a banking license; they often charge higher interest rates than banks, and while some are reputable, others are not. It’s best to ask an attorney, banker, or CPA for a trusted nonbank lender referral.
Noncore business functions—overhead activities, such as writing checks, managing inventory records, and processing payroll, that do not define a company’s business model.
Nondisclosure agreement (NDA)—a legal agreement between two parties that protects confidential or proprietary information.
Online advertising sales model—an online sales model where your company charges customers for advertisements based upon the amount of traffic your Web site generates. This model relies upon entertaining, useful, or educational content to drive people to your site.
Opportunity costs—the amount of money or other kinds of payoff that you might have earned by doing something else with your time.
Parkinson’s Law of Triviality—an idea conceived in 1955 by C. Northcote Parkinson that recognizes the amount of work people will do on a project expands so as to fill the time available for its completion.
Partnerships—business relationships with companies that can help you grow by marketing to their customer base or vice versa. Examples include product integration paid partnerships, free product integration partnerships, and revenue-sharing sales and marketing partnerships.
Pay-in-advance model—a business model where customers pay you the full amount or a deposit for a product before you ship or build your product.
Pay-per-click advertising—a business model by which advertisers pay a Web site based on the amount of times their ad is clicked by Internet users.
Pitch book—a detailed information packet provided to potential acquirers about the financial performance, business model, and operating plan of a business.
Pitch-offs (or demo days)—events or conferences where you usually pitch for a short amount of time to several investors all at once. These are often held by universities and local entrepreneurial organizations. Winning a pitch-off results in a certain amount of prize money, which varies anywhere from the low five figures to seven figures.
Pivoting—changing direction or trying something new when some aspect of your business model isn’t working (i.e., market, price, sales method, product features). For example, if you are unsuccessfully selling your product to restaurants, you could “pivot” and begin trying to sell it to a different market, such as hotels or grocery stores.
Premature scaling—trying to grow operating expenses and overbuild product features before substantial customer growth has occurred.
Pretailing (or pre-commerce)—preselling products.
Principle of affordable loss—a calculation that founders should make to figure out how much they’re willing to lose to start a business. They should figure out the upper limit to what they’re willing to lose, calculate a worst-case scenario of losses, and then weigh that against how important it is to them to give the idea their best try.
Product integration paid partnership—a partnership with a company that will license your product, patent, or technology to other firms in exchange for a set license fee. Oftentimes, start-ups might license only parts of their intellectual property. For example, a start-up may embed its product into another company’s core product to make a more compelling offer.
Licensing—giving a partner legal permission to sell, promote, publish, or perform other activities with your product, brand, or business.
Ramen profitability—the point when a start-up is earning just enough income to pay its founder the bare minimum to live on—or enough to buy inexpensive ramen noodles.
Return on investment (ROI)—amount of profits or income received on an established amount of capital investment. For example, if your annual profit is $100,000 and your investment capital is $1 million, your ROI is 10 percent for that time period.
Revenue-based funding (RBF)—firms that offer a fixed amount of money but do not charge interest on a fixed schedule; rather, they take a percentage of the start-up’s revenue over the term of the deal, which is limited to a “cap” amount negotiated as part of the deal. Once the cap is reached, the deal is completed.
Revenue-sharing sales and marketing partnerships—partnerships with companies that promote your product within their existing sales channels. These partnerships enable you to sell and market to wider audiences than your own capabilities allow.
Scaling—the ability of a company to grow its operating margins (profits) as its revenue increases.
Scarcity model—a business model where the customer must make a purchase before you pay your vendors.
Search engine optimization (SEO)—how companies increase the visibility of their Web sites to customers through such practices as word choice, titles, images, and links to their own Web sites from other Web sites.
Seed capital—pre-revenue money used by a start-up company for operating expenses, research and development, and capital expenditures.
Service-to-product model—a business model where a service is provided to the customer and that service transforms into a product.
Social capital—seeking help from people you know in order to leverage their business skills, connections with other people, and resources they may have.
Software as a Service (SaaS)—a business model in which software is licensed to customers on a subscription basis. Unlike installed software that is purchased and installed on local servers or computers, SaaS software resides on an external, off-site service accessed via the Internet.
Soft product launch—the act of announcing a new product to a limited audience in order to gain feedback before releasing it to a wider audience.
Stakeholder—anyone who is vested in the success of your firm, such as employees, customers, shareholders, partners, and suppliers. A challenge for founders is balancing out all their different needs and wants.
Stock option plan—contract between your company and a person (i.e., employee, partner) that provides him or her the right (but not the obligation) to buy shares of stock at a predetermined price within a fixed period of time. Stock options incentivize those vested in your company to increase the value of your company.
Strategic corporate partner—a larger, more established company, which may be private or public, that has created investing arms.
Strategic merger—when a company purchases another with a plan to combine it with its own business to improve its products, services, and profits.
Subscription model—a business model where the product or service is delivered to a customer on an ongoing basis, and the customer pays an ongoing, periodic fee.
Super-angel investment groups—a hybrid between angel investors and venture capitalists, these groups pool together the investment money of a number of individuals, and the investment decisions are made by a management team. They typically offer funding between $250,000 and $500,000 and attach fewer strings to their offer than a venture capital firm.
Surging growth—the stage when a business’s revenue growth rates are very high—often 30 percent or much greater. During this stage, the complexity of managing the organization also increases.
Term sheet—a negotiable document provided by an investor (i.e., venture capitalist) that describes the terms and conditions by which an investment will be made into your company. A term sheet outlines the investment amount, ownership, and legal terms, such as issuing new shares of stock, raising additional money, selling the company, and appointing directors to the board.
Tinkering—the process during which founders are beginning to explore the viability of their ideas—normally before they quit their day jobs.
Value proposition—how your product will solve your customers’ problems and satisfy their needs.
Vaporware—a product that is announced to the public but is not yet manufactured into a finished product. Vaporware is often a demonstration of the product that is planned.
Variable costs—costs that rise and fall with your sales volume. Examples of variable costs include packaging, raw materials, shipping, and supplies.
Venture capital—professionally managed capital invested into high-growth-potential start-ups. The minimum investment into each company is normally $500,000, but the average investment is $3–$5 million.
Vesting schedule—an agreement that makes the award of shares or stock options of a company to an employee or partner contingent on work being completed.
Waterfall approach—a product design methodology wherein projects (i.e., writing requirements, designing, engineering, verifying, implementation) are completed sequentially. Each project phase isn’t started until the previous one is completed.