Startup Terms

Startups are, in our opinion, the future of entrepreneurship. However, not everyone is familiar with all the terms associated with them. From MVP to Exit, there is a lot of jargon to understand. In this blog post, we will take a closer look at some of the most common terms, explain what they mean, and how they are used in the startup world. This can certainly help you if you come across a startup on our Athlete Capital platform that interests you and you want to have initial conversations with the founders.

Startups

Let's dive into the world of startups together!

Pre-Seed

A startup is in the pre-seed phase when it is still in the process of developing the idea and the minimum viable product (MVP) or prototype. It usually hasn't generated any revenues yet, and often, a company hasn't been formed yet. When you're reading this article, you're essentially in the pre-seed phase of a business angel ;)

Seed

In the seed phase, the business model of a startup is already solidified in a business plan. Additionally, the prototype is in its final stages and is nearing market launch. The seed round is usually focused on the first round of financing. This phase is particularly important for business angels because it is often too early for venture capital firms to invest.

Venture Capital

Venture capital, or "Wagniskapital" in German, refers to investments that involve higher risk compared to stocks or bonds. However, in the case of startup investments, taking on this risk can be worthwhile because the potential returns can be significantly higher than average.

But be cautious! A rule of thumb suggests that only about 10% of startup investments generate exceptionally high returns.

Venture capital firms specialize in managing this risk and invest in a variety of startups through a fund. Due to the pooled capital from numerous investors, they typically become active starting from the Series A phase. This phase occurs when a startup is already in the market and generating substantial revenues, making it easier to assess the risk. The Series A financing round is often used to scale the product with the capital raised. This highlights the importance of business angels since venture capital firms become involved only from the Series A stage. Business angels, who believe in startups from the pre-seed or seed phase and provide their capital, expertise, and network, are crucial. When a Series A funding round occurs, the business angel's involvement is often rewarded through an exit.

If you are interested in becoming a business angel, feel free to visit the startups on our platform. Registration is free and non-binding.

Startups

Minimum Viable Product (MVP)

A Minimum Viable Product (MVP) is a method in which a product with essential features is developed to quickly test it in the market. The goal is to gather feedback from customers in order to improve the product accordingly. An MVP is essentially a "minimum version" of the final product and is designed to determine quickly whether the product has any chance of success in the market.

Term Sheet

A term sheet is a document that outlines the important terms and conditions of an investment or partnership between an investor and a startup. It typically includes details such as the amount of investment, type of equity, rights and obligations of both parties involved. The term sheet serves as a preliminary agreement before the final contract is signed, ensuring that both parties have the same expectations and understanding of the proposed deal.

Due Diligence

Due diligence is the process of conducting a comprehensive examination of a company or investment opportunity before making a decision. It aims to minimize risk by thoroughly assessing the company's financial, legal, operational, and other relevant aspects. Due diligence is an important process to ensure that the investment is promising and aligns with the investor's objectives. It involves conducting research, reviewing documentation, analyzing financial statements, assessing market conditions, and possibly seeking expert opinions to gain a clear understanding of the potential risks and rewards associated with the investment.

Letter of Intent

A letter of intent (LOI), also known as a statement of intent, is a document issued by an investor or company to express their interest in investing in or partnering with a startup. It is a non-binding declaration that outlines the general terms and intentions under which an investment or partnership could take place. The letter of intent serves primarily to signal the parties' initial intent and establish a basis for further negotiations, but it is not a legally binding agreement, and there may still be changes before a final agreement is signed. The LOI typically includes key terms such as the proposed investment amount, equity or ownership structure, key milestones, and other relevant conditions for the potential transaction. It provides a framework for discussions and due diligence to be conducted before finalizing the agreement.

Exit

An exit refers to the sale or transfer of an investor's shares in a startup company to realize their investment and recoup their funds. It involves exiting the investment and typically involves selling the shares to another company, conducting an initial public offering (IPO), or the company buying back the shares from the investor. The specific exit strategy chosen depends on various factors, such as the company's growth, market conditions, and investor preferences. The process of achieving an exit can take several years and is influenced by the success and growth of the startup. A successful exit can generate significant returns for the investor, while an unsuccessful exit may result in a loss of investment.

Quellen: fuer-gruender.de, startupguide.com