The Founder’s Dictionary 2014: Updated Startup Trends and Terminology
If you have spent any time reading sites like TechCrunch, Hacker News, or just about any startup blog or small business website, you’ve probably noticed that the tech startup field has more jargon and industry-specific terminology than most.
At times it seems like its own separate language, and it can be tough for even an experienced entrepreneur to keep up. On top of all this, the startup landscape is shifting all the time, with new business models and funding opportunities emerging regularly.
In an effort to help the new founder keep up (and old founders brush up), here is a brief list of the most important trends, terminology and jargon:
- Accelerator. A three to four month program that takes a small amount of equity in an early-stage startup in exchange for access to mentors, classes and workshops, and small investments of capital. Often used interchangeably with incubator, accelerators are looking to fast track a small “class” of promising companies. Famous accelerators include YCombinator and TechStars.
- Accredited investor. An individual with either an annual income of $200,000, or a net worth of $1 million, excluding residential property (the exact definition is a bit more complicated, but the basic idea is to use wealth as a proxy for knowing what you’re doing when investing in startups).
- Angels. Individual investors who provide seed capital to early-stage businesses. The “angel” label comes from making small, altruistic investments (in the range of $25,000 to $500,000 or more) in companies and industries the investor is passionate about. An angel investor invests her own money (rather than a fund’s money) and is usually a seasoned veteran in the industry she likes to fund (i.e., mobile apps, biotech, SaaS, etc.). Angel investors typically supply the second round of capital (after savings and friends & family), but the best of them can also offer advice, mentorship, and connections to key contacts to help grow a business. Angel investors often work together to make investments.
- Bootstrap. To start a company with only personal resources and no outside funding.
- Co-working space. A company or non-profit that rents or provides work space to entrepreneurs and startups. Co-working spaces seek to foster a work environment that allows for spontaneous networking and the possibility of collaboration. Examples include Coloft in Los Angeles, Gangplank in Phoenix, and General Assembly in New York.
- Crowdfunding. Crowdfunding enables a company to attract capital from a large number of small investments (or donations). Some types of crowdfunding conducted through an online portal such as OneVest (formerly Rock the Post), enable startups to raise equity capital from accredited investors. Other types, such as Kickstarter, allow projects to seek contributions (but not direct equity investment) from supporters.
- Disruption. A buzzword for the act of creating a business opportunity in a market where it was thought none existed, by way of sustainable innovation. Famous examples include Kickstarter, Uber, and Airbnb. However, disruption is the exception, rather than the rule. I wrote about disruption in a previous blog post, What Not to Say to Investors, saying, “True market disruption is almost never the result of a startup and its first product. It’s fine to have a long-term vision for changing the world, but investors are more interested in concrete, achievable plans. That means having a marketable solution for an actual problem.”
- Early-stage startup. As with nearly all of the terms listed here, early-stage startup means something different to everyone. For a founder it might mean the time period between the initial idea and filing for an LLC, registering a domain name, and developing an actual business plan. An angel may view an early-stage startup as a company with a prototype or mockup of their product or service and a promising business plan to go with it. VC firms set the bar the highest, and often consider anything below $10 million in revenue to be early-stage.
- General solicitation. In September 2013, the SEC lifted the ban on general solicitation as mandated by the JOBS Act of 2012. General solicitation basically means advertising investment opportunities; it was prohibited in the past in an effort to cut down on investment fraud. With the new rules in place, startups can now advertise an investment round online and in the media, but funding is still limited to accredited investors only. Startups must take additional steps to vet investors’ accredited status should they choose to file under Rule 506(c). I wrote a primer on general solicitation back in September and Ryan Caldbeck, CEO of funding platform CircleUp, has some good tips for startups to consider as well. Funding regulations are nuanced, and you’ll want an attorney’s guidance before going too far down any path.
- Growth hacker. A term coined by Sean Ellis to refer to the job description of a startup’s online marketing guru. This person is responsible for setting strategy for SEO, SEM, content marketing, social media, referral marketing, and testing the efficacy of these campaigns. The goal of a growth hacker is to find out what kind of marketing grows the business fastest at the lowest possible cost. Please see this great post on Mark Suster’s blog (and this follow-up post) for an in-depth discussion about the value of growth hacking.
- Incubator. While the definitions are blurry, some people do make a distinction between an incubator and an accelerator. Depending on who you talk to, an incubator is a more long-term program that will take a bigger slice of the equity pie.
- Lean [method, startup]. First described by Eric Ries, the lean methodology was first proposed in 2011 as a way to quickly and cheaply develop efficient, revenue-generating businesses. Primarily used by entrepreneurs in the software and web development sectors (but applicable anywhere), companies operating under lean principles are continuously cycling between iterating product features and soliciting customer feedback to achieve “product/market fit.”
- Micro VCs. Traditional venture capital funds tend to focus on making relatively large investments into firms that already have some kind of track record. However, the seemingly overnight successes of opportunities like Instagram and Snapchat have sparked the proliferation of Micro VCs that search for deals that are still too small to gain the attention of traditional VCs. Micro VCs like 500 Startups and First Round Capital often provide seed capital to companies with no revenue or even a proof of concept.
- MVP. Minimum viable product. Lean and early-stage startups should focus on developing their MVP so they can test for product/market fit as soon as possible.
- Pivot. Part of the lean methodology, a pivot is a calculated change in a startup’s business plan that will test a new hypothesis about its product, market, or strategy in an attempt to find better product/market fit and [higher paying/more] customers.
- Runway. The amount of operating capital left in a startup, usually expressed in months. Sound financial projections are necessary to understand future resource requirements, and form the foundation of a capital formation strategy (i.e., how much capital to raise, when, and from whom).
- Seed round. Usually the first round of outside funding raised by a startup, before turning to Series A venture capital or debt financing. With the growth of angel investors and micro VCs, many companies found it relatively easy to raise a seed round, only to discover that a subsequent Series A venture round was much more difficult – this is the “Series A crunch” that many industry watchers have referred to. Whatever word you wish to attach to it—crunch, crisis, bust—it is important to remember that failure has always been the most likely outcome for startups, and follow-on rounds are never guaranteed.
- Super angels. Over the past decade, a small group of prodigious angel investors achieved superstar status and are often called “super angels.” From an entrepreneur’s point of view, there is little practical difference between super angels and micro VCs, and many people use the terms interchangeably.
- Syndicates. AngelList recently launched the AngelList Syndicates platform, enabling one angel investor (the “lead investor”) to pool money from other accredited investors (the “follow-on investors”) to make investments. The lead investor earns a “carry,” or a percentage of the fund’s total profit, before distributing the rest to the follow-on investors.
Did I miss anything? Tweet @CayenneBizPlan or leave a comment below.
For some sillier neologisms and jargon, be sure to check out this list.
|Author(s)||Akira Hirai (other articles by Akira Hirai)|
|Original Publication Date||March 10, 2014|
|Related categories||Nuts & Bolts|
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