The Ultimate Venture Capital Glossary

Annual Recurring Revenue measures predictable yearly revenue from subscriptions. It is a core metric for SaaS valuation and growth assessment.

An acquisition occurs when a company is purchased by another firm. Acquisitions are the most common exit path for VC-backed startups.

An angel investor is an individual who invests personal capital into early-stage startups. Angels often invest before VCs and may provide mentorship and networks.

B2B SaaS companies sell software subscriptions to businesses. Revenue is typically recurring and driven by long-term customer relationships.

The board of directors oversees strategic decisions and management performance. VC investors often require board representation.

Bootstrapping means building a company without external funding. Founders rely on revenue and personal resources to grow the business.

A bridge round provides short-term financing between major funding rounds. It is often used to extend runway while preparing for a larger raise.

Burn multiple measures how efficiently a company turns capital into revenue. It is calculated as net burn divided by net new ARR; lower multiples indicate better capital efficiency.

Burn rate is the rate at which a company spends cash each month. It is a critical metric for managing runway and fundraising timing.

A business angel network is a group of angel investors that co-invest in startups. These networks pool capital and expertise to reduce individual risk.

Customer Acquisition Cost represents the total cost of acquiring a new customer. It includes sales, marketing, and onboarding expenses.

CAC payback period is the time it takes to recoup customer acquisition costs from revenue earned. Shorter payback periods reflect more efficient growth.

A capitalization table shows the ownership structure of a company. It lists shareholders, equity percentages, options, and dilution over time.

A capital call is a request by the GP for committed capital from LPs to fund investments or expenses. It ensures funds are deployed when needed.

Carried interest is the share of profits that GPs receive from a successful fund. It rewards performance and aligns incentives between GPs and LPs.

Churn measures customer or revenue loss over a given period. High churn indicates issues with product-market fit or customer satisfaction.

A cliff is the initial period in a vesting schedule during which no equity vests. If a founder or employee leaves before the cliff ends, they typically forfeit all unvested shares.

Cohort analysis examines user behavior over time by segmenting customers into groups. It reveals retention trends and the impact of retention initiatives.

A convertible note is a loan that converts into equity at a later funding round. It is commonly used in early-stage fundraising to delay valuation discussions.

A data room is a centralized repository containing documents required for due diligence. It typically includes financials, legal documents, contracts, and product information.

Dilution occurs when new shares are issued, reducing the ownership percentage of existing shareholders. While dilution reduces percentage ownership, it can increase absolute value.

A discount gives early investors the right to convert their investment into equity at a reduced price. It compensates them for investing before a formal valuation is set.

A down round occurs when a company raises capital at a lower valuation than the previous round. It often signals performance or market challenges.

Drag-along rights allow majority shareholders to force minority shareholders to participate in a company sale. This prevents small shareholders from blocking an exit.

Due diligence is the process of evaluating a startup before investment. It includes financial, legal, technical, and market reviews to assess risk.

Enterprise sales involve selling to large organizations with long sales cycles. Deals are typically higher value but require complex stakeholder management.

An exit is the event where investors realize returns, typically through an acquisition or IPO. Exit potential is a key driver of VC investment decisions.

Expansion revenue is revenue growth from existing customers through upsells or cross-sells. Strong expansion revenue drives better retention and higher company valuation.

A follow-on investment is additional capital invested by existing investors in later rounds. It signals continued confidence in the company.

Founder vesting ensures founders earn their equity over time. It aligns incentives and protects the company if a founder leaves early.

Freemium is a pricing model where basic features are offered for free, with paid upgrades available. It is commonly used to drive user adoption.

Gross Merchandise Value represents the total transaction value processed through a platform. It is commonly used in marketplaces and payment-driven business models.

A general partner manages and invests a venture fund’s capital. GPs make investment decisions, interact with portfolio companies, and earn carried interest.

A go-to-market strategy defines how a company acquires customers and generates revenue. It includes pricing, sales motion, and distribution channels.

Gross margin represents revenue minus cost of goods sold. High gross margins are a defining characteristic of scalable SaaS companies.

An Initial Public Offering allows a company to list its shares on a public exchange. IPOs provide liquidity but require significant scale and compliance.

KPIs are measurable values that indicate the performance of key business activities. They help founders and investors monitor growth and operational health.

Lifetime Value estimates the total revenue generated by a customer over their relationship with the company. LTV is often compared to CAC to assess scalability.

The LTV/CAC ratio compares customer lifetime value to acquisition cost. Healthy SaaS businesses typically target a ratio of 3x or higher.

The lead investor sets the terms of a funding round and often negotiates the term sheet. They typically invest the largest amount and take a board seat.

A limited partner is an investor in a venture fund who provides capital but does not manage investments. LPs typically include institutions, family offices, and high-net-worth individuals.

Liquidation preference defines how proceeds are distributed in an exit. It determines whether investors get their money back before common shareholders.

Monthly Recurring Revenue tracks subscription revenue on a monthly basis. It is used to monitor short-term growth and retention trends.

An MVP is the simplest version of a product that can be used to validate market demand. It balances speed of learning with minimal development cost.

A management fee is an annual fee paid by LPs to the GP to cover operating expenses. It is typically a percentage of committed capital.

A moat is a sustainable competitive advantage that protects a company from competitors. Strong moats include network effects, switching costs, and proprietary technology.

Net Promoter Score measures customer satisfaction and loyalty based on likelihood to recommend a product. It is often used as an indicator of product quality and retention potential.

NRR measures revenue growth from existing customers after churn and expansion. High NRR indicates strong product value and upsell potential.

An option pool is a reserved percentage of equity for future employees. It is often created before a funding round and impacts founder dilution.

Post-money valuation is the company’s value after new investment capital is added. It equals pre-money valuation plus the investment amount.

Pre-money valuation is the value of a company before new capital is invested. It is used to calculate ownership percentages post-investment.

Pre-seed funding supports founders at the idea or prototype stage. Capital is usually used for early validation, MVP development, and initial customer discovery.

Pro rata rights give investors the right to maintain their ownership percentage in future funding rounds. They allow early investors to continue participating as the company grows.

Product-market fit occurs when a product satisfies a strong market demand. It is a prerequisite for scalable growth and institutional investment.

Runway refers to the amount of time a startup can operate before running out of cash. It is calculated based on current cash reserves and monthly burn rate.

A SAFE (Simple Agreement for Future Equity) is an investment instrument that converts into equity upon a future financing. It is founder-friendly and widely used in seed rounds.

Scaling refers to growing a business efficiently with a consistent repeatable model. It focuses on expanding revenue faster than costs.

A secondary sale involves the sale of existing shares rather than issuing new ones. It provides liquidity to founders or early investors without raising new capital.

A seed round is the first institutional funding round raised by a startup. It is typically used to validate product-market fit, build an initial team, and prepare for a Series A.

Series A financing is raised once a startup shows early traction and a repeatable business model. The focus shifts to scaling the product and go-to-market efforts.

Series B is aimed at scaling a proven business model. Funding is typically used to grow teams, enter new markets, and increase revenue predictability.

SAM is the portion of the TAM that a company can realistically serve. It refines opportunity based on product fit and geography.

SOM is the share of the SAM that a company can capture early on. It helps set near-term sales and marketing goals.

Sweat equity refers to ownership earned through work rather than cash investment. It is commonly used by founders and early contributors.

A syndicate is a group of investors who collectively invest in a startup. Syndicates allow risk sharing and bring complementary expertise to a company.

Tag-along rights protect minority shareholders by allowing them to join a sale on the same terms as majority shareholders. They ensure equal treatment in exit scenarios.

Take rate is the percentage of GMV that a platform retains as revenue. It indicates monetization efficiency in marketplace and platform businesses.

The technology adoption curve describes how different groups accept new technology over time. It helps founders plan marketing and adoption strategies.

A term sheet outlines the key terms of an investment before legal documents are finalized. It typically includes valuation, ownership, control rights, and liquidation preferences.

TAM estimates the full revenue opportunity for a product or service. It helps investors and founders understand the ceiling for growth.

A unicorn is a privately held startup valued at over one billion dollars. The term reflects rarity rather than business quality.

Unit economics analyze the profitability of a single customer or transaction. Strong unit economics are essential for scalable SaaS businesses.

An up round is a financing round at a higher valuation than the previous one. It reflects growth, traction, or improved market conditions.

Valuation represents the economic value assigned to a company during a funding round. It determines how much equity investors receive for their investment.

A valuation cap sets the maximum valuation at which a convertible instrument converts into equity. It rewards early investors for taking higher risk.

Venture Capital refers to equity financing provided to high-growth startups with significant upside potential. VC investors typically invest in exchange for ownership and play an active role in governance, strategy, and fundraising.