So you’ve got dry powder for a series B but are not convinced by the IRR…
Confused? You need to learn how to speak VC!
Like most industries, the venture capital scene comes with a vocabulary all of its own. From repurposed sporting terms to bewildering acronyms, there’s a lot to take in. But getting a grip on the jargon before you leap into investing will help you navigate and negotiate more easily.
Here’s our quick guide to a few commonly used VC terms.
Angel investor: An individual, rather than a firm or large company, who personally provides capital for a startup. Also known as a business angel, private investor or seed investor.
Venture capital firm: Unlike angel investors, venture capitalists are usually firms, funds or companies who invest in startups on behalf of a group of individuals or institutions.
Deal flow: Refers to an investor’s funnel of investment opportunities. The larger the funnel, the more can come out at the end.
Seed stage: This is when the company’s founders are still getting their operations up and running, usually with funding from close friends, family or supporters. It’s when the founders take the first steps to turn their idea into a business. Think of investment at this stage as a literal ‘seed’ which is intended to grow the company.
Early stage: At this stage the venture is still finding its feet. The founders will typically begin to seek funding from angels and accelerators. This is often the hardest point in the journey to get funding, but programs like Wade Institute’s VC Catalyst are changing that with VC education and support.
Growth stage: Companies in this stage have typically been around for two to four years and need larger amounts of funding and support to take the business to the next level.
Series A, B and C: These refer to funding rounds where businesses seek different levels of investment.
At Series A, a company may still be relatively young, but will have a bit of a track record and crucially, can show it has the potential to succeed. Series A funding will generally allow it to develop its products and team and put its strategy for going to market into action. It’s at this point that VC firms usually start to get involved.
A Series B funding round generally happens when a company is past the initial startup phase and is looking to move to the next level.
By Series C, a business is already quite successful and is usually looking for additional investment to expand, develop or diversify into new markets.
IRR: Internal Rate of Return, which most investors consider to be the best way to evaluate a venture’s success. It means the rate at which the invested capital can be returned to the firm, and how quickly.
EV: Enterprise value, or how much a company is worth. It’s calculated by adding up the combined equity (shares/cash) and the net cash that the company retains.
Dry powder: Money to spend – the useable amounts of cash and assets that a VC has available. Having ‘dry powder’ offers an investor an advantage over someone with liquid assets.
Hitting power: A company’s ability to become more visible on the international startup scene, attract the best employees and grow fast.
Home run: When an investment returns more than 10 times its capital. Historically, VC performance would suggest that only 5-10% of investments generate more than 60% return.
Batting average: The number of investments a fund has that successfully returned at least their initial investment.
VC Catalyst is our immersive program for active investors to gain best practice tools and skills to make more successful venture capital investment decisions, delivered at Wade Institute of Entrepreneurship by world-leading venture capital experts and practitioners. Learn more or enquire now.