30 Venture Capital Terms You Should Know

Venture capital is an essential part of the startup landscape, fueling innovation and growth. If you're a first-time founder or investor, understanding VC jargon is crucial. Let's break down some key funding terms to help you navigate your entrepreneurial journey with ease.

Venture capital is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential.

Example: A notable VC success story is that of Google, which received a $25 million investment from Sequoia Capital and Kleiner Perkins in 1999. The investment helped Google to scale quickly, leading to its successful Initial Public Offering (IPO) in 2004.

The initial capital used to start a business. It's often sourced from founders' personal assets, friends or family, or angel investors.

Example: Oculus VR, the maker of the Oculus Rift, initially raised $2.4 million in seed funding via a Kickstarter campaign in 2012. This early validation helped them attract $75 million in VC funding in 2013 before being acquired by Facebook for $2 billion in 2014.

The different stages of funding in the VC world. Series A is generally a company's first significant round of venture capital financing. Series B and C rounds are additional rounds of funding for companies that are meeting certain milestones and need extra capital for continued growth.

Example: After a $200,000 seed round in 2009, Uber raised $1.25 million in its Series A in 2010, followed by increasingly larger rounds to fuel its global expansion, including a massive $1.2 billion Series E in 2014.

Ownership in a company, usually in the form of stocks. Investors provide capital in return for a percentage of the company's equity.

Example: When Twitter went public in 2013, its early venture capital investors, who owned equity in the company, saw significant returns on their investments. For instance, Union Square Ventures' initial $3.14 million investment was worth nearly $1 billion at the IPO price.

Valuation is the process of determining the economic value of a company. This is often a point of negotiation between entrepreneurs and investors.

Example: In 2004, Facebook raised $500,000 at a $5 million valuation in its seed round. By 2012, its IPO valuation was a staggering $104 billion, demonstrating how rapidly a company's valuation can grow.

An exit strategy is a plan for a founder to sell their stake in a company or for an investor to realize a return on their investment. This is typically achieved through an acquisition, an initial public offering (IPO), or a buyback of shares.

Example: WhatsApp's $19 billion acquisition by Facebook in 2014 was a successful exit strategy for Sequoia Capital, which had invested $60 million in the company over several rounds, starting in 2009.

A unicorn is a private company valued at over $1 billion. The term was coined in 2013 by venture capitalist Aileen Lee.

Example: Airbnb reached unicorn status in 2011, just three years after its founding, following a $112 million Series B funding round that valued the company at $1.3 billion.

The rate at which a company is spending its capital to finance overhead before generating positive cash flow from operations.

Example: In the late 1990s, many dot-com startups had high burn rates, spending vast sums on marketing and infrastructure before generating any revenue, leading to the dot-com crash when they ran out of capital and couldn't secure additional funding.

Occurs when a company issues additional shares, reducing the percentage of the company owned by existing shareholders.

Example: When Facebook raised $12.7 billion in its IPO, existing shares were diluted, but the influx of capital was used to fuel growth, ultimately leading to an increase in the company's total value.

A term sheet is a non-binding agreement setting forth the basic terms and conditions under which an investment will be made by a VC.

Example: In 2005, Reddit signed a term sheet with Y Combinator for $12,000 in seed funding in return for 6% equity.

A convertible note is a form of short-term debt that converts into equity, typically in conjunction with a future financing round.

Example: When Buffer raised its seed round in 2011, it used convertible notes to secure $120,000, which was later converted into equity during the Series A round.

Vesting is a legal term that means to give or earn a right to a present or future payment, asset, or benefit.

Example: When Google went public, many employees became millionaires due to their vested shares, but only those who had been with the company long enough to fully vest their shares received the full benefit.

Due diligence is the process of investigation and verification that a potential investor performs before entering into an agreement or transaction with a potential investee.

Example: Before investing in Snapchat's Series A round in 2012, Lightspeed Venture Partners conducted extensive due diligence, talking to high school students about their app usage and confirming Snapchat's rapid user growth.

The process of raising capital through the sale of shares in an enterprise.

Example: When Spotify was looking to expand into the US market in 2011, it raised $100 million in equity financing from a group of investors that included Kleiner Perkins and Accel Partners.

An IPO is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity in an IPO.

Example: In December 2020, Airbnb launched a highly successful IPO, with shares priced at $68 but opening at $146, raising $3.5 billion and reaching a valuation of over $100 billion.

A pitch deck is a brief presentation, often created using PowerPoint, Keynote, or Prezi, used to provide your audience with a quick overview of your business plan.

Example: When raising its $1.25 million Series A round in 2004, LinkedIn's pitch deck outlined its vision of a professional social network, including growth strategies and revenue streams, which convinced investors of its potential.

ROI is a measure used to evaluate the efficiency or profitability of an investment. It's expressed as a percentage and calculated by dividing the net profit by the cost of investment.

Example: Peter Thiel's $500,000 investment in Facebook in 2004 returned over $1 billion at the time of Facebook's IPO in 2012, representing an extraordinarily high ROI.

A VDR is an online repository where companies can store and share confidential information, typically used during financial transactions, like due diligence.

Example: During its $67 billion merger with EMC Corporation in 2016, Dell Technologies used a VDR to safely share due diligence materials with various stakeholders.

The GP is the person who manages the funds, makes the investment decisions, and takes an active role in managing the investments. GPs have a fiduciary duty to the limited partners and can be held personally liable for the debts of the partnership.

Example: Marc Andreessen and Ben Horowitz, the founders of the venture capital firm Andreessen Horowitz, serve as general partners. They take an active role in decision-making and overseeing the firm's investments, playing a significant part in its reputation for successfully investing in high-growth tech companies like Facebook, Twitter, and Airbnb.

LPs are investors in a venture capital fund. They provide the capital but have limited liability and are not involved in the day-to-day operations or decisions of the fund. LPs are typically institutional investors, such as pension funds, university endowments, and insurance firms, but can also be high-net-worth individuals.

Example: Yale University's endowment has been a limited partner in many venture capital funds. Their early investment in Andreessen Horowitz, a leading venture capital firm, has delivered substantial returns, demonstrating the potential benefits for limited partners in successful venture capital investments.

ESG stands for Environmental, Social, and Governance. It's a set of standards for a company’s operations that socially conscious investors use to screen potential investments.

Example: Generation Investment Management, co-founded by Al Gore, uses ESG criteria to choose investments and has seen strong returns from its sustainability-focused portfolio.

Debt financing occurs when a firm raises money for working capital or capital expenditures by selling debt instruments to individuals or institutional investors.

Example: In 2020, amidst the COVID-19 pandemic, Airbnb raised $2 billion in debt financing to bolster its cash reserves, illustrating the use of debt financing in response to operational challenges.

Also known as a capitalization table, a cap table is a spreadsheet or document that shows the equity ownership capitalization for a company. It includes all the company's securities, such as common shares, preferred shares, and who owns them.

Example: In 2004, when Peter Thiel invested $500,000 in Facebook as part of its seed round, he received 10.2% of the company’s shares. This investment and ownership stake would have been reflected in Facebook's cap table at the time, highlighting Thiel's significant stake in the company.

Liquidation is the process of bringing a business to an end and distributing its assets to claimants, which occurs when a company becomes insolvent.

Example: In 2017, the famous toy retailer Toys "R" Us filed for bankruptcy and began the process of liquidation, marking the end of a once-dominant player in the toy industry.

A share of ownership in a company. Common stockholders often have voting rights in the company, but they are the last to receive any remaining assets if the company goes bankrupt and has to sell off everything it owns (liquidates).

Example: When Facebook started selling shares to the public in 2012 via IPO, these were common stock. However, the common stock had less voting power than the shares held by Facebook's founder, Mark Zuckerberg. This setup allowed Zuckerberg to keep control over the company even after selling parts of it to the public.

A type of stock that has a higher claim on the assets and earnings than common stock. Preferred shareholders receive dividends before common shareholders and have a higher claim on assets if the company is liquidated. However, preferred stock usually doesn't come with voting rights.

Example: In 2005, Google issued preferred stock to raise capital without diluting the voting power of their existing common shareholders. These preferred shareholders got a priority claim on Google's profits (in the form of dividends) and assets, but they didn't get voting rights like common shareholders.

Private equity is a type of finance made up of funds and investors that directly invest in private companies or that engage in buyouts of public companies.

Example: In 2007, TXU, a Texas utility company, was taken private in a $45 billion deal led by private equity firms KKR and TPG Capital, marking the largest leveraged buyout in history.

The individual or organization that leads a financing round in a startup. This investor generally invests the most capital in the round.

Example: In Uber's Series B funding round, Menlo Ventures served as the lead investor, contributing a significant portion of the $37 million total investment.

The total market value of the investments that a person or entity manages on behalf of clients.

Example: BlackRock, one of the world's largest asset managers, had a staggering $7.4 trillion in AUM as of 2019.

The collection of investments made by a venture capital firm. This typically includes a diverse range of companies from various sectors in which the firm has invested. The aim of building a portfolio is to spread the risk across different investments while also maximizing the potential for high returns.

Example: Andreessen Horowitz's portfolio is a prime example of diversification, including companies from various sectors such as technology, healthcare, and finance like Lyft, Coinbase, and OpenDoor. This wide range of investments reduces the risk of significant loss if any particular sector or company underperforms, thus showcasing the importance of a well-diversified portfolio.

Understanding common VC terms is crucial for entrepreneurs seeking funding and investors looking to get involved in high-growth startups. However, this is by no means an exhaustive list, and the world of venture capital has its own extensive vocabulary that expands beyond these terms. 

Nonetheless, this guide should serve as a solid foundation and starting point. As you venture deeper into this exciting field, you'll become more familiar with its language. 

Always remember that it's advisable to seek professional legal and financial advice when making significant business decisions. Good luck on your VC journey!