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Starting A Company? The Key Terms You Should Know | Startup School
- Minimum Viable Product (MVP): Must be "viable," meaning it is useful to customers rather than simply a non-functional or simple prototype.
- Venture Capital (VC): Investors provide capital for equity in high-risk startups, accepting that most portfolio companies will fail while relying on a few massive successes (e.g., Google, Apple) to cover losses and generate returns.
- Historically originated in the whaling industry, where investors funded multiple expeditions hoping one successful catch would cover failed voyages.
- Angel Investors: Individuals investing personal funds (typically $20k–$50k checks) rather than capital from a VC fund.
- They are often early-stage investors operating as a side project or hobby, with no formal qualification requirements other than having capital.
- Profitability: Defined as generating more revenue than expenses, with a specific focus on how profit margins evolve as the company scales.
- Successful startups may initially lack profitability but are expected to show increasing or stable margins at scale (e.g., Google's high-margin online advertising model).
- Burn Rate: The net amount of cash a company loses per month (e.g., a drop from $1M to $900k results in a $100k burn rate).
- Monitoring burn is critical for startup survival, even if top-line revenue exists, as unchecked cash depletion can lead to insolvency.
- Seed Round: The first significant fundraising event for a new startup, though the term lacks a strict technical definition and varies widely in size and structure.
- Unlike later rounds, seed rounds often lack a formal lead investor and can consist of many small checks.
- Series A, B, C (and beyond): Fundraising rounds that typically follow the seed stage and are characterized by the presence of a lead investor who often secures a board seat and significant ownership (e.g., ~20% in Series A).
- Rounds are numbered sequentially (Series D, E, etc.) as companies continue to raise capital, with valuations varying independently of the round letter.
- Product-Market Fit (PMF): The state where a product is used and liked by customers, shifting the primary challenge from "finding a market" to "scaling the business."
- Pre-PMF startups prioritize validation and feature design; Post-PMF startups prioritize growth, scaling, and retention.
- Bootstrapping: Building a company using personal funds or revenue rather than external venture capital.
- Offers founders full control and is best suited for businesses targeting $5M–$10M in revenue that do not require hyper-growth or venture-scale expansion.
- Convertible Notes: Debt-like financial instruments where an investor lends money with terms for repayment or conversion to equity, including interest obligations.
- SAFE (Simple Agreement for Future Equity): A financial instrument created by Y Combinator (specifically Carolyn Levy) to replace convertible notes in seed rounds.
- Features fewer terms and fewer rights than notes, facilitating faster capital closure before a priced Series A round.
- Equity vs. Stock Options: Equity represents direct ownership percentage in a company, whereas stock options grant the future right to purchase equity.
- Stakeholders must carefully review fine print to distinguish between direct equity, options, or investment instruments like SAFEs and notes.
- Total Addressable Market (TAM): A theoretical calculation of revenue potential if 100% of the potential market purchased the product.
- TAM figures can be underestimated if market conditions shift or if the product itself expands the addressable market (e.g., Tesla expanding EV adoption, Uber creating ride-sharing demand).
- Valuation: An estimate of a company's worth based on the most recent investment price (e.g., $2M investment at a $20M post-money valuation).
- Unlike public stock prices, private startup valuations are not liquid market prices and do not guarantee a sale value or indicate immediate success.
- Initial Public Offering (IPO): The process where a private company issues shares to the public market (e.g., NASDAQ, NYSE), allowing founders, employees, and investors to liquidate holdings.
- An IPO signals financial maturity, growth, and the creation of enduring value.
- Annual Recurring Revenue (ARR): Revenue from contracts or subscriptions that renew annually, calculated by multiplying recurring contract value by the number of renewals (e.g., 10 clients × $100k/year = $1M ARR).
- Billing cycles dictate the reporting metric: Monthly contracts are reported as Monthly Recurring Revenue (MRR), while annual contracts are reported as ARR.