You’ve decided to become an entrepreneur. Congrats! Now get ready to learn learn a whole new business lingo. As you’ll soon discover, there are countless important -- and, sometimes, confusing -- terms that pop up in the startup and financing phase of your new venture. This post will help you translate and understand some of the most common concepts.
Burn rate: A slang term for the amount of venture capital a company’s founders can spend (i.e., burn through) during the startup phase before they will run out of money. A high burn rate tells the investor that they may have to wait a longer time to see a Return on Investment (ROI).
Due diligence: A vetting and research process done by potential investors or funders of your business to assess its current or potential viability. Due diligence helps folks determine whether or not to invest in your company.
Exit strategy: A investor’s plan for getting out of a business investment once certain profit criteria have been met or if the business is not generating profits. When is an exit strategy used? Could be due to an owner’s retirement or divorce, lawsuits, a catastrophic event or a underperforming business. On the positive side, an investor might use an exit strategy if the business has met or exceeded its profit goals.
Minimum viable product (MVP): In the early stages of product development, the MVP is a simple, economical product that can be distributed or sold quickly to generate feedback for the development of a more complex product in the future. An MVP helps a company avoid costly engineering and manufacturing expenses associated with a final product that hasn’t been fully tested.
Proof of concept: Will your idea work in the real world? Proof of concept is an early prototype of your product or idea that you can share with or demonstrate for potential investors and can test with the intended market in the early development stages.
Return on investment (ROI): ROI is a helpful metric to measure the percentage of return an investor receives on her investment. The percentage is measured by using the formula (Gains/proceeds from investment - original investment / cost of the investment).
Total addressable market (TAM): The TAM is the big picture market for a product or industry. It’s the comprehensive market for a product, and it’s the first data point entrepreneurs should determine when measuring the potential success of their idea. Once assessed, you can narrow the field to the served available market (SAM) and then focus in even more on your target market.
Served available market (SAM): The SAM is how many customers you could realistically reach, taking into account your sales channels and the competition. It’s a narrower share of the total addressable market (TAM), the entire market for a type of product.
Target market: The specific customers for whom you are developing your product or service.
Valuation: The process of determining what your business is worth. The valuation may vary based on the parties involved -- for example, shareholders vs. buyers vs. investors. You’ll need to figure out your business valuation to determine annual shares, the sale price of a company or the liquidation value if bankruptcy is declared.
Venture capitalist vs. angel investor: When you receive venture capital funding, it’s very much like working with a brokerage firm where the funds of many investors or institutions are pooled and invested into a business. The VC firm representing the investors may have minimal say or direct contact with the company they are investing in. An angel investor, on the other hand, is much more hands-on. Angel investors expect an equity share in the company in return for their investment, and they will likely want to participate in the company’s decision-making process.
QB Community members, what examples for these terms can you offer from your own experience?
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Special thanks to @cruberti for the idea for this article. Hope it helps!
This is an AWESOME article and really helped explain some key concepts! thank you for including examples - so helpful! Thank you!!