Terminologies for venture capital firms Flashcards
(27 cards)
Define equity
Ownership in a company, represented by shares
Define debt
Money borrowed by a company that must be repaid with interest
Define valuation
The process of determining the worth of a company.
Define liquidity
the ease with which an asset can be converted into cash
Define ROI (Return on Investment)
A measure of profitability, calculated as (Gain-cost)/cost
Define diversification.
Spreading investments across various assets to reduce risk.
Define capital gains.
Profit made when selling an asset for more than its purchase price.
Define angel investor.
An individual providing early-stage funding in exchange for equity
Define seed funding.
The first round of funding used to start a business or project, to develop the initial concept, create a prototype, or launch the product/service.
Typical size: $10,000 to $2 million
Define series A.
Purpose: to refine the business model, scale operations, and achieve product-market fit.
investors: Venture capital firms.
Typical size: $2 million to $15 million.
Focus: revenue growth and proving the scalability of the business.
Define series B
Purpose: to expand the team, marketing and reach in established markets.
Investors: larger VC firms or growth equity funds.
Typical size: $15 million to $50 million.
Focus: Accelerating growth and scaling operations further.
Define series c
Purpose: to enter new markets, develop new products, or prepare for an IPO/ acquisition.
Investors: Hedge funds, private equity firms, and late-stage venture funds.
Typical size: $50 million to $100 million +
Focus: Mature growth and maximising valuation.
Define later rounds (series D,E, etc)
Sometimes referred to as “ pre-IPO” rounds.
For further expansion, acquiring competitors, or stabilising finances before a major exit.
Define Term sheet.
A non-binding agreement outlining the key terms and conditions of an investment.
It’s like a blueprint for the final agreement. Key elements include:
- Valuation:
Pre-money valuation: The company’s valuation before the investment
Post-money valuation: The valuation after the investment
Investment amount:
The total amount of capital being offered.
Equity stake:
How much ownership the investor will receive in return.
Liquidation preference:
The order and priority for investors to be paid back in the event of a liquidation or sale.
Board composition:
specifies who gets a seat on the company’s board of directors
Founder commitments:
Details any obligations the founders must agree to, like staying with the company for a specified period.
Define burn rate.
The rate at which a startup spends its cash reserves to cover operating expenses. It is a critical metric for startups to monitor their financial health.
Calculation:
Monthly burn rate = Cash spent per month
Example:
If a company spends $100,000 monthly and has $1 million in the bank, its runway(time until funds are depleted) is 10 months.
Types of Burn rate:
Gross burn: Total expenses per month
Net burn: Monthly expenses minus monthly revenue.
Define runway.
The amount of time a company has before running out of cash.
Define exit strategy.
Plans for investors and founders to “exit” their investment by realising financial returns.
Common types include:
- Initial public offering (IPO)
The company goes public by listing on a stock exchange.
Example: Uber. Airbnb
- Acquisition
The company is bought by a larger corporation.
Example: Instagram being acquired by Facebook/
-Meger:
The company merges with another to create a stronger entity.
-management buyout (MBO)
The existing management team buys out investors.
Define cap table.
A table showing ownership stakes, equity dilution, and value.
To be more detailed:
A capitalisation table (cap table) is a spreadsheet or document that shows the ownership structure of a company. It is crucial for tracking equity and understanding dilution.
-Key elements:
Equity holders: Founders, investors, employees, etc.
Shares outstanding: total number of shares issued.
Ownership percentage: The percentage of the company each shareholder owns.
Example:
Founders: 40% equity
Angel investors: 20% equity
Employee stock option pool (ESOP): 10%
VCs: 30% after a funding round.
Uses: Helps in decision-making for fundraising and understanding potential dilution from new rounds of investment.
Define unicorn.
A privately held startup valued at $1 billion or more.
Define EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization. A measure of a company’s profitability and operating performance, excluding non-operational costs. (overall financial performance).
Formula:
EBITDA = Net income + Interest + Taxes + Depreciation + Amortization
Purpose:
provides a clear picture of a company’s operational profitability by removing the effects of financing, accounting policies, and tax structure.
Example:
A company reports:
- Net income: $200,000
- Interest: $50,000
- Taxes: $30,000
- Depreciation: $20,000
- Amortization: $10,000
EBITDA = $200,000 + $50,000 + $30,000 + $20,000 + $10,000 = $310,000
Why it matters:
Frequently used to compare profitability between companies in the same industry, especially those with different capital structures.
Define market share.
The percentage of an industry’s total sales that a particular company controls.
Define scalability.
A business’s ability to grow revenue without proportional increases in costs.
Define due diligence
Comprehensive research conducted before making an investment.
Define CAC
Customer Acquisition Cost
The cost of acquiring a single customer.
