Glossary

Business Incubator

Business Incubators are programs that provide mentorship, office space, and access to investors and resources to help start-up companies grow. They can last anywhere from a few months to a couple of years.

Business Accelerator

Whereas business incubators support start-ups, accelerators help new or established companies grow by providing mentorship, office space, and access to investors and resources. They usually only last three to four months.

Seed Funding

This type of funding is the money that is initially used to start a business. It can often come from friends and family or angel investors.

Angel Investor

An angel investor is a rich individual who invests his or her personal funds in a company in its early stages. Angel investors are usually involved in the business in terms of providing assistance or advice, but they might own a smaller stake in the company than a venture capital firm would.

Venture Capitalist (VC)

Angel investors invest their own money in companies of their choice, but venture capitalists invest using funds provided by third-party investors. They invest later than angel investors and their investments are also much larger. After investing in a company they provide strategies and assist with business development. Venture capitalists seek companies with the potential for high growth.

Burn Rate

Burn rate is the rate at which a new company uses up its capital before breaking even and making a profit. It is measured by how much money is used each month for overhead costs such as property taxes, insurance and marketing budgets.

Equity

Equity is the ownership investors have in a business. Investors share ownership of the business, which means the original business owner doesn’t own 100 per cent of the company.

Pre-Money Valuation

Pre-money valuation is determining how much a company is worth before investing.

Post-Money Valuation

This is a combination of the pre-money valuation and the amount of the money that was actually invested.

Business to Business (B2B)

This term refers to businesses that offer products or services to other businesses, rather than the public. This type of transaction is typical in supply chains, which manufacture products using materials purchased from other companies.

Business to Consumer (B2C)

This type of transaction involves businesses selling their products or services directly to consumers. This includes anything from retailers to restaurants and pay-per-view services.

Value Proposition

A company’s value proposition is a statement it makes about the reasons consumers should choose the company and its products or services over similar companies. A value proposition includes descriptions of what the company offers, the value or benefit of choosing it, how that value is created, and why it’s different from competitors.

Disruption

Disruption refers to major changes in an industry, which are usually caused by new, innovative products or services that create a market that previously did not exist.

Minimum Viable Product (MVP)

Companies might develop a product with the minimum set of features needed for early customers to provide feedback on the product. Creating a minimum viable product is a good way to minimize the cost of development while using feedback to identify any key problems with the core features of a product and making improvements for future customers.

Return On Investment (ROI)

A return on investment is the comparison of a company’s profits to the amount of money it invested to generate them.

Exit Strategy

An exit strategy is the plan a business owner follows to achieve liquidity and gain a return on investment. It mainly involves the owner or investor selling some or all of their ownership of the company. There are a few different exit strategies a business might use. For instance, a common exit strategy is to sell the business. A company might also choose to merge with another one or have another business buy it out entirely. Some companies might just choose to shut down operations and sell, or “liquidate” all of their assets. Another option is to make an initial public offering (IPO), which involves selling the company on the stock market.

Key Performance Indicator (KPI)

Key performance indicators help determine how well businesses are performing in terms of achieving certain strategic objectives. According to the Advanced Performance Institute, KPIs don’t measure every kind of performance data that can be measured or counted, but rather focus on areas that are key to the proper functioning of a business.

Bottom Line:

Net earnings and net income both fall under the “bottom line” description. You may hear people talk about “affecting the bottom line” of the company and this is simply any action that may increase or decrease the company’s net earnings, or overall profit. The term “bottom” is in reference to the typical location of the number on a company’s income statement, below both revenues (top line) and expenses. Needless to say, this is an important term to know.

Gross Margin:

Gross margin is expressed as a percentage and represents the percent of total sales revenue that a company keeps after subtracting the cost of producing its goods or services. The higher the percentage, the more the company keeps on each dollar of sales (that will eventually go toward paying its other costs and obligations). In simple terms, if a company’s gross margins are 25 percent, for every dollar of revenue that is generated, the company will retain $0.25 before paying its overhead, which includes salaries, rent, and more.

Fixed versus Variable Costs:

A fixed cost is exactly what is sounds like, a cost that does not change with increases or decreases in the volume of goods or services that are produced by your company. These costs are obviously the easiest to predict and plan for. Rent, salaries, and utilities all usually fall into this category.
Variable costs are just the opposite. They can vary depending on a what a company is producing (such as Amazon Web Services usage), and as a result are much harder to forecast.

Equity versus Debt:

The “equity versus debt” comparison may seem silly to some, but you would be surprised at how many people I have come across who have no idea what either really means. Equity is simply money obtained from investors in exchange for ownership of a company, while debt comes in the form of loans from banks that must be repaid over time. Both are necessary for growth, with their own pros and cons. Equity versus debt is a critical decision for any entrepreneur and it is important to know the difference as the future of your business may depend on it.

Leverage:

Leverage can be interpreted a couple different ways. In the financial world, leverage is most commonly known as the amount of debt that can be used to finance your business’ assets. In simple terms, the amount of money you borrowed to run your business. The balance you want to strike as an entrepreneur is that of your debt and equity. If you have way more debt than equity, you will be considered “highly leveraged” aka “very risky” to potential investors.

Capital Expenditures (CapEx):

Capital expenditures are any items purchased by your business that create future benefits. Basically, if something you bought is going to be useful to your business beyond the taxable year in which you purchased it, capitalize the item(s) as assets in your accounting. Examples include computers, property, or acquisitions.

Concentration:

Concentration is simply the measure (usually a percentage) of how much business you are doing with a specific client or partner. Relying on one or a couple of clients and partners to do business is a prime example of over-concentration. This is a losing strategy for any business because if something goes wrong with those limited relationships your business will be in serious trouble. Focus on keeping low concentrations for your accounts and investors will be impressed.

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