Important startup terms to know (Part III)

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Sep 30, 2022
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This series's first and second articles explained specific terminologies often used in the startup environment. The last part of the series will delve into more words that are often used in this space; 

1. Family and friends round

This is known as the first round of external funding a company raises, given to them by their family or friends in their network. The money received is usually between $10, 000 - $150, 00 given for the purpose of kickstarting business operations. It is sometimes called pre-seed investment and is usually given at the earliest stage of company growth. 

2. Growth hacking

Coined by the CEO of Growth Hacker, Sean Ellis in 2010, growth hacking defines strategies solely focused on growth, and is used by early-stage startups who need a large volume of growth within a limited time and on a lean budget. It is a data-driven, experiment-based process. The goal of growth hacking is user acquisition with minimal spending. Growth hacking strategies include content marketing, product marketing and advertising. 

3. Open source

This refers to anything people can modify, improve, redistribute and share because it has been created to be accessible by the public, with some principles like exchange, collaborative participation, prototyping, and community-oriented development, among others. This is often used in software development

4. Private Equity

Private equity refers to investment funds, typically organized as limited partnerships that either invest in or acquire companies that are not publicly traded on a stock exchange. Private equity funds also partake in the buyout of companies through debt financing. 

Private equity investments are mostly made by private equity or venture capital firms, and angel investors for the purpose of providing funding to businesses for operations, management or product development. 

5. Traction

For startups, traction refers to the progress of a business and the growth it achieves over time. This can be in form of acquired users, revenue and product adoption. Naval Ravikant defines it as ‘ quantitative evidence of market demand’. It is proof that you have a valid business model, a good product/ service adoption rate and a market. There is no standard metric for measuring traction, however, some investors measure traction based on some of the following- sales, sign-up and page-view rates, active users, transaction size, revenue, partnerships, etc. Traction helps startups to measure growth rate, achieve proof of concept and is key when fundraising. 

In summary, traction can be looped into these stages- Proof of concept (people’s acceptance of the problem you are solving), Proof of principle (getting your first early adopters who are buying your solution), market validation (increased awareness of your offering) and, market adoption (competitors spring up, people are paying for your solution and you are making sales). 

6. Unicorn

First popularized by Aileen Lee, this term is used to refer to privately held companies that reach a $1 billion valuation. Exit options for these kinds of companies include- remaining private, going public or appealing to a buyer. 

7. Validation

For startups, validation is the process of subjecting a business to various tests to determine whether the idea, product or service is sustainable and needed by the market. This can be done through research, getting customer interviews/ feedback, testing your prototype, etc. 

8. White label

This occurs when a company sells a product or service under their own branding, whereas the product itself is manufactured by another company or a third party. It occurs when a manufacturer uses the branding of another company instead of its own, with the end product appearing as though it has been produced by the purchasing party. White labelling enables companies to save cost and time in terms of production and marketing costs. Businesses that use white label products are retailers, multinational companies, electronics companies, etc. 

9. Runway

In simple terms, runway refers to the number of months a business can stay in operation before it runs out of money. It is an important tool in forecasting, budgeting and planning. It helps businesses understand the rate at which they incur expenses, gives them a timeline for fundraising and offers insight into the existing business model; showing if an adjustment is needed. Calculating your current cash balance divided by your burn rate will help you know your runway. For seed-stage and Series A startups, an 18- 21 month runway between rounds is recommended. 

10. Revenue model

A revenue model refers to the framework a company adopts to generate or make financial income and the resources needed for each revenue stream. A revenue model identifies the product or service to be offered for income generation, the pricing for the offering, and the value the product or service will provide to users. Some common revenue models are- The ad-based revenue model, subscription model, channel sales, retail model, freemium model, etc. 

Keep in mind that a revenue model differs from a revenue stream model in that a revenue stream refers to a single source of generating income for a business. 

11. Lifetime value 

Customer lifetime value defines the total income a business is expected to generate from a customer as long as the customer’s account remains active. This provides insight into the way customers interact with your business and if your marketing efforts are going as expected. It also aids decision-making; helping companies know how much to spend on customer acquisition and retention. 

The formula for calculating a customer’s lifetime value is as follows- CLV = average value of a purchase X number of times the customer will buy each year X average length of the customer relationship (in years). 

12. Pitch deck

A pitch deck is a document that provides an overview of your business plan, product or service used to pitch your business idea to an audience, which may include investors for the purpose of fundraising or a business review. Some elements included in a pitch deck are- your team, financials, an introduction, the problem and solution you are providing, and your target market, among others. 

13. Pre-seed round

This is known as the earliest stage of funding a company acquires to kick-start business operations. It is sometimes called the ‘family and friends round’. Here, the focus for raising funding is to identify a clear market opportunity, make some key hires and manage business expenditure. Pre-seed rounds are typically within $50-$250k with a $1M - $3M valuation and a 3-9 month runway, depending on the industry. 

14. Scalable startup

A scalable startup is one in its early stages that has the tendency to become a high-growth, profitable company.  Businesses of this kind require external capital in order to drive demand and expansion. Scalable businesses have the ability to handle growth and increase production, handling a large volume of clients where necessary. They often possess the following characteristics- a deep and broad vision, the use of agile development to search for scalable and repeatable business models, a strong team, etc. 

15. KPIs

KPIs mean Key Performance Indicators It is a metric used to measure performance over a given time for a specific objective. It helps determine a company’s financial, operational and business achievements compared to its competitors. It may include some objectives like increasing month-on-month revenue, attracting new customers and hires, reducing churn rate significantly, etc.