Venture capital is a high-risk, high-reward type of investment that provides crucial financing to start-ups and early-stage companies. It helps businesses grow, creates jobs, drives innovation, and has become an essential component of the technology and start-up ecosystem.
The early-stage denomination refers to the first steps of a company’s growth. An early-stage start-up is usually a few months or years old, has a first offer that still needs to be developed, It usually isn’t profitable yet or is in need of external investors to fund its deployment. In the venture capital industry, we use the term early-stage to describe start-up companies in their pre-seed, seed, or Series A rounds.
The growth stage refers to a period of significant expansion and rapid growth, characterized by increased revenue, expanding operations, and a focus on scaling the business. During this stage, the company has typically established its product offering, has a solid customer base, and is now looking to further grow its market share and reach. The growth stage is often marked by increased investment and hiring, and a focus on expanding product offerings and geographic reach. The goal of the growth stage is, in most cases, to position the company for a later exit, such as an IPO or acquisition.
Late-stage companies are those that have established a market with positive results. The scaling of their operations has started, and they are usually navigating the beginning of internationalization. In the venture capital industry, the late-stage denomination is reserved for companies and start-ups in Series B and beyond. The late stage is usually the moment when the first early-stage investors exit to let new ones join the board.
Business angels are wealthy individuals who provide capital to early-stage or start-up companies in exchange for equity or ownership at a lower rate than venture capital funds. They bring expertise, mentorship, and connections to the companies they invest in, and they play a critical role in financing the growth and development of new businesses.
An investment thesis is a document describing a fund investment strategy, underlying focus of its investors, and deal preference. An investment thesis may include an analysis of macroeconomic trends, industry conditions, and specific company characteristics, such as financial metrics, competitive position, and management quality. The investment thesis is used to evaluate potential investments and monitor performance over time to ensure that it remains consistent with investor goals and expectations.
A privately-held company with a valuation of over $1 billion is considered to be a unicorn. Unicorns are technology-driven companies that have proven to grow rapidly and have attracted significant investment from venture capital firms and other investors.
A company that reaches an annual recurring revenue (ARR) of $100 million or more is commonly referred to as a “centaur.” The term was proposed to serve as a more grounded evaluation benchmark for start-ups than the term “unicorns.” Centaurs typically have lower risk for investments than unicorns do, as they have a proven track record.
A family office is a private wealth management advisory firm that serves high-net-worth individuals (HNWI). Family offices are different from traditional wealth management shops in that they offer a comprehensive solution to managing the financial and investment needs of an affluent individual or family.
This term refers to organizations founded for a professional, educational, or social purpose. They usually invest part of their financial resources in firms like venture funds as a way to invest indirectly in innovation through dedicated professionals. They have the position of Limited Partners, and funds report directly to them with their portfolio performance.
This term refers to any exchange of money or financial instruments between two parties. Financial transactions can range from simple exchanges of cash to complex securities transactions. Transitions can take place between individuals, businesses, or financial institutions.
Debt financing occurs when a firm raises money for working capital or capital expenditures by selling debt instruments to individuals and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid.
Equity refers to the ownership of a company and gives owners a claim to the company's assets and profits. Equity can take several forms, including common stock, preferred stock, and restricted stock. Its value is influenced by factors such as the performance of the company, the economy, and the stock market.
Private equity is a form of investment that involves acquiring and improving privately-held companies, usually in late-stage development. These companies are able to show their business model is strong and well integrated in their markets. Private equity firms provide capital but also expertise to help companies grow.
ESG stands for “Environmental, Social, and Governance, and refers to a set of standards used to evaluate a company's impact on society and the environment, as well as its corporate governance policies. ESG criteria are used by investors to assess the sustainability and long-term financial performance of companies, with the aim of considering not only financial factors, but also the non-financial factors that can impact the value of their investment.
An Analyst is in charge of evaluating financial and investment information in order to prepare all the material for the due diligence, and then, the investment decision. He or she may also be tasked with identifying new investment opportunities or helping manage current dealflow.
An Associate has a hunter position within a fund. He or she spends time chasing the best deals and prepares presentations to help guide the investment decision. On the sourcing end, they may be responsible for networking with founders and screening leads. Senior Associates may focus more on deal execution, which can involve doing due diligence on potential investments.
A Principal has a picker position. He or she works closely with the Partner as well as the Associates by helping source and execute deals for the firm. The Principal might review the work done before negotiating terms.
Being a Partner is a senior position dedicated to investments only. He or she works closely with Principals, Associates, and Analysts to close the most interesting deals they have hunted. Each Partner has his or her own investment portfolio and supports them on a day-to-day basis through board meetings, introductions, etc. Depending on the funds, a Partner can be assimilated to a General Partner making no distinction between the two.
A General Partner (GP) is an investment professional that raises and manages a venture capital fund, makes investment decisions, and is responsible for overseeing the operations and performance of the fund. GPs often receive a share of the profits generated by the fund and are typically experienced investors with a deep understanding of the start-ups and early-stage companies they invest in. A number of funds do not use this term as a title and will prefer sticking to Partner.
A Managing Partner is the highest position in a venture capital company. He or she has an ownership interest, is in charge of the strategic vision of the fund, and manages its day-to-day business activities. He or she can be also in charge of raising new vehicles for the fund as well as investing in new portfolio companies.
Dealflow refers to the number and quality of investment opportunities that are available to investors. A strong dealflow can provide investors with more opportunities to find good investments in a specific market or area. A weak dealflow can limit investment opportunities and negatively impact economic growth and innovation of a fund.
Due diligence refers to the comprehensive appraisal of a business undertaken by a prospective buyer, the goal of which is to establish its assets and liabilities, and evaluate its commercial potential. A due diligence allows the investor to highlight all the potential breach to the deal sealing.
An Investment Committee is a group of individuals who are responsible for the management of an organization’s investments. The Investment Committee typically meets on a regular basis to review the investments and make recommendations about how to best grow and protect the organization's portfolio.
letter of intent (loi)
A letter of intent is a preliminary, non-binding agreement between a potential investor and a company that outlines the terms and conditions of a future investment. The LOI serves as a starting point for negotiations and outlines the key terms of an investment, such as the amount of funding, equity ownership, and the rights and obligations of each party.
A term sheet is a more detailed, sometimes binding agreement that outlines the specific terms and conditions of an investment between a venture capital firm (VC) and a start-up. The Term sheet is the final step in the investment negotiation process and sets forth the agreed-upon terms of the investment, such as the amount of funding, the equity ownership structure, the valuation of the company, the rights and obligations of each party, and the key terms of the investment agreement. The Term sheet is a key document that provides a clear understanding of the terms of the investment and serves as the basis for the legal documentation that will be finalized at a later stage.
The fundraising round refers to the process of seeking capital to build or scale a business. Selling shares in a business to investors is one form of fundraising, as are loans and initial coin offerings. In the context of a start-up, the fundraising will usually be used to develop the company internationally, to hire more people, or to create a new product. From a venture capital fund perspective, a fundraising round will usually be used to raise a new vehicle of investment and grow its investment portfolio.
This term refers to the investments made by friends and family of an entrepreneur into their start-up. Love money is usually the first investment made in a company and is typically provided at a relatively low valuation.
Pre-seed refers to the earliest stage of funding for a start-up, typically before it has completed any substantial product development or market validation. Pre-seed funding is usually used to pay for the costs associated with getting the start-up off the ground and preparing for a seed round of funding.
Seed or seed money refers to a type of financing used in the formation of a start-up. Funding is provided by private investors (usually in exchange for an equity stake in the company or a share in the profits of a product). Much of the seed capital a company raises may come from sources close to its founders including family, friends, and other acquaintances.
Series A financing refers to an investment in a privately-held start-up company after it has shown progress in building its business model and demonstrates the potential to grow and generate revenue. It often refers to the first round of venture money a firm raises after seed and angel investors.
Series B financing is the next stage of funding after the company has had time to generate revenue from sales. At this point, investors have had the chance to see how the management team has performed and whether the investment is worth it or not. As a result, Series B financing tends to have less risk associated with it compared to Series A financing.
Strictly speaking, companies that aim to obtain Series C funding are no longer start-ups, more scale-ups. They are usually established, successful companies in their late stages of development, with solid revenues and profits. Their core products or services generate strong demand in the marketplace, attracting a substantial customer base. Companies seek Series C financing for further expansion to reinforce their existing success.
Series D and subsequent fundraising rounds are the least common but also the largest overall. Start-ups use this round of funding to fuel further expansion and prepare for acquisition or an IPO. At this stage, start-ups need capital to operate and grow, as well as the type of expertise that investment banks and private equity firms can provide.
Type of financing round usually provided by venture capital firms, private equity firms, or other institutional investors already involved in the company’s cap table that helps companies temporarily address immediate liquidity needs. It’s then a short-term solution to gain some time before securing additional and more consequent long-term funds.
Minority investment refers to an investment in a company where the investor does not have a controlling stake. This means that the investor owns less than 50% of the company's shares and therefore has limited influence over the company's operations and decision-making.
Majority investment refers to an investment in a company where the investor owns more than 50% of the company's shares and has control over the company's operations and decision-making. A majority investor may have a significant impact on the company's direction and strategy, and they may play an active role in running the company.
An exit occurs in the event of a new fundraising round or financial operation. It refers to the process of selling or transferring the ownership of a company, investment, or asset to another party. The purpose of an exit is to provide a return on the investment of an earlier investor and allow owners or shareholders to prove the value they have created in their development process. It can take several forms, including the sale of a company, an IPO, or the sale of equity to a private equity firm or another investor. In the venture capital industry, it usually happens when the start-up goes from early to late-stage or at the end of the growth stage (IPO).
An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance for the first time. An IPO allows a company to raise equity capital from public investors.
A trade sale is a type of exit in which a company is sold to another company rather than going public or being acquired. This type of exit allows founders and early employees to receive a lump-sum payment for their stake in the company.
Companies such as investment firms, private equity firms, and venture capital firms hold a diverse range of investments in multiple companies, which make up their portfolios. Each individual business in the portfolio is referred to as a portfolio company. The investing company provides financial and operational support to its portfolio companies with the aim of growing and developing them, eventually leading to a successful exit.
An investment fund is a type of financial product that pools money from multiple investors to purchase a diverse portfolio of assets. Investors can buy shares in the fund and benefit from the returns generated by the underlying assets. These investment funds, which are also called “vehicles,” are managed by a professional fund manager who decides which assets to buy/sell.
Capital flows into venture capital funds from institutions, corporates, university endowments, foundations, or high-net-worth individuals. Such investors in venture funds are called Limited Partners (LPs). The word "limited" asserts their passive role in a fund's operational activities.
A management company is a company that provides professional management services to other organizations or individuals. These services can include administrative and operational support, financial management, and strategic planning. They are designed to help organizations grow and become more efficient and profitable.
Carried interest refers to the share of profits earned by an investment fund manager or advisor. It is usually calculated as a percentage of the profits that a fund generates, and it is designed to incentivize fund managers to generate strong returns for the investors.
A board member is an individual who serves on the board of directors of an organization/company. Board members are responsible for overseeing the management of the organization and making key decisions related to its strategy, finances, and operations. Board members are typically elected to their positions and serve in a volunteer capacity, although they may receive compensation in some cases.
A board observer is a person who is appointed to attend meetings of a company's board of directors but does not have the right to vote on board decisions. Observers typically represent an interested party, such as a venture capital firm, private equity firm, or investment fund that has invested in the company. As an observer, they are entitled to attend board meetings and receive confidential information about the company, but they do not have the power to influence decisions made by the board.