VC 101: Key VC Terminology for Savvy Investors
Learning the lingo of venture capital can give you an edge on your investment journey
What does “Run Rate” even mean? And what in the world is a SPAC? Whether you’re brand-new to investing or have a few deals under your belt, you may be puzzled by certain terms commonly used to describe venture companies and deals. To help, we’ve compiled this handy guide.
Some Key Venture Capital Terms as Explained by AV Experts
For our VC Glossary, we asked members of our Alumni Ventures team to provide definitions to terms that are needs-to-know in their jobs as investing experts.
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A
Accredited Investor
An individual with a high net worth or income who is allowed to invest in private securities.
Acqui-hire
Acquisition of a company primarily for its talent, rather than its products or services.
Allocation
The portion of an investment round that is reserved for a specific investor or investment.
Alternative Investments
Non-traditional investments, such as venture capital and private equity, commodities, collectibles, hedge funds, or real estate.
Angel Investor
A high-net-worth individual who invests capital directly in early-stage startups in exchange for equity; these are often the first outside (i.e., non-founder) investors into a company.
B-C
Burn Rate
The rate at which a company is spending its cash reserves is often expressed as dollars spent (or “burned”) per month, with direct implications on “Runway” (see definition below).
Cap Table
A record of a company’s shareholders, ownership percentages, and other equity-related details.
Carry
The percentage of profits earned by a venture capital fund manager on successful investments.
D
Death Valley Curve
A period of time, typically early in the company lifecycle, when a startup struggles to gain traction and is at the greatest risk of running out of cash.
Decacorn
A privately held startup company valued at $10 billion or more.
Dilution
Reduction in the ownership percentage of existing shareholders due to the issuance of new shares by a company.
Diversification
Spreading investments across multiple companies, industries, asset classes, etc., to reduce risk at the portfolio level.
Down Round
A funding round in which a company’s valuation is lower than its previous funding round, which is typically accompanied by several negative connotations and consequences.
Dry Powder
Cash reserves that a venture capital firm or fund has available to invest.
Due Diligence
Investigation and analysis of a company’s financial, legal, and operational performance by an investor or investing fund before committing to participate in a round of financing.
E-K
Exits
Events that allow venture capitalists to realize the return on their investments, such as IPOs or acquisitions.
GP
Short for “General Partner,” the venture capitalist or investment firm responsible for managing a venture capital fund and making investment decisions (compare with “LP,” or “Limited Partner,” below).
IPO
Short for “Initial Public Offering,” the first sale of a company’s stock to the public.
K-1
A tax document that reports the income, losses, and dividends of a partnership or LLC to its partners, investors, or members.
L-M
Lead Investor
The primary investor in a funding round who negotiates terms, typically invests the largest sum, and often takes a board seat.
Liquidation
The process of selling off a company’s assets to pay off its debts, often resulting in the closure of the company.
Lock-up period
A predetermined period after an IPO during which insiders are restricted from selling their shares.
LP
Short for “Limited Partner,” an investor in a venture capital fund who provides capital but is not involved in the fund’s management (compare with “GP,” or “General Partner” above).
Mergers & Acquisitions
Transactions in which companies merge into a single consolidated entity or one company acquires another.
MOIC (Multiple on Invested Capital)
A metric calculated by adding the cash proceeds from liquidated positions and the current valuation of non-liquidated positions and dividing by the initial investment amount.
MVP (Minimal Viable Product)
A basic, functional version of a product used to test market demand and gather feedback.
P
Pivot
A change in a company’s business model or strategy in response to market feedback or changing circumstances.
Post-Money Valuation
The valuation of a company after a funding round has been completed and new capital has been added to the “Pre-Money Valuation” (see below).
Portfolio Company
A company in which a venture capital firm has invested. (Also known as a ”portco.“)
Pre-Money Valuation
The valuation of a company before a funding round (compare with “Post-Money Valuation” above).
Private Equity
Equity investments in private companies in the form of non-transferable stock certificates or “certificated” LLC interests.
Product–Market Fit
When a company’s product or service has definitively demonstrated that it satisfies the needs and wants of its target market.
Pro-Rata Rights
The right of an investor to maintain their ownership percentage in a company by investing in future funding rounds, thereby minimizing or eliminating the effects of dilution from the additional share issuance.
R
ROI (Return on Investment)
A measure of the profitability of an investment that is calculated as the ratio of net profit to the initial investment.
Roadshow
A series of fundraising meetings between a company’s management team and potential investors in order to generate interest in an investment round or an upcoming IPO.
Run Rate
The projected revenue of a company based on its current performance.
Runway
The length of time a company can continue operating with its current cash reserves before running out of money.
S
SAFE
Short for “Simple Agreement for Future Equity,” a type of convertible instrument where the valuation is not determined until the next funding round (though there may be a “valuation cap” and/or “discount” to compensate the investor for the additional risk borne). Most often used with earlier stage funding rounds (especially Seed stage, see definition below).
Scalability
The ability of a business to grow and increase revenue without a significant increase in costs, thereby increasing operating margins and becoming more profitable as the business grows in size — a key success metric VCs look for when investing in startups.
Seed Series
Often the first stage of institutional venture capital funding for a startup (though so-called “Pre-Seed” funds are becoming increasingly more common), typically used to fund initial product development and market research.
Series A
The second institutional stage of venture capital funding for a startup typically used to fund expansion and growth.
Series B
The third institutional stage of venture capital funding for a startup typically used to scale the business and establish market dominance.
SPAC
Special Purpose Acquisition Company, a publicly traded shell company that raises capital to acquire a private company and take it public through a “reverse merger.”
T-W
Term Sheet
A non-binding agreement, offered by a VC firm to a prospective startup into which it hopes to invest, outlining the amount, valuation, terms and conditions of a potential investment.
Unicorn
A privately held startup company valued at $1 billion or more.
Up Round
A funding round in which a company’s valuation is higher than its previous funding round.
Valuation
The estimated worth of a company or asset, often determined via several different methods (e.g., comparable company analysis, revenue multiples, discounted cash flows, etc.), and often incorporating both objective and subjective measures, including prevailing competitive dynamics around the particular company or investment round.
Write-Off
The process of removing a nonperforming asset or investment from a company’s balance sheet and ascribing a value of zero. For VCs, a total write-off means the company they invested in has returned nothing.
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