Startups, like oxygen, have become an important part of our lives and human endeavor. Whatever sector or human endeavor we turn to today, we are sure to find a startup there. Startups are mostly known for using technology to create viable solutions that are easier to use and navigate, more cost-effective, and user-focused compared to their traditional counterparts.
The world of startups can not only be thrilling, it can also get confusing sometimes, especially with words that seem to just come and go. Separately and together, these words make up everything about startups – they help you learn about them and get to speak the startup language.
In this article, like teaching a new language we’ll be demystifying some of the basic startup-related words that’ll help you get to know about startups, how they work, and understand them better.
Ready? Then let’s go!
What other word to start with than the word “Startup” itself? You already might have an idea of what a startup is but let’s look closer at what it means…
A startup or a startup company is usually a specified business working with a small team with two major aims of meeting a specific challenge and growing fast. It can be owned by either an independent party or a group. These companies rely hugely on technology for their operations and service to their clients and/or customers. They are based on ideas that are aimed at making an impact on a community, society, or even the world at large. They are also usually built with an exit strategy in mind and are grounded in a medium-term perspective.
Startups are known to target overlooked challenges, areas, and sectors. In fact, these are what their businesses are built on – leveraging the opportunities overlooked by traditional systems.
Startups are usually capital intensive, led by creators otherwise referred to as founders, and are highly specified in terms of their business operations.
According to Investopedia, the term startup refers to a company in the first stages of operations. Startups are founded by one or more entrepreneurs who want to develop a product or service for which they believe there is demand. These companies generally start with high costs and limited revenue, which is why they look for capital from a variety of sources such as venture capitalists.
Startups exist in different forms across different sectors. In the financial space, they are referred to as fintech; in the health sector, they are known as health tech; in the world of insurance, they are known as insuretech; and so on and so forth.
Examples of startups include Africa’s most valued startup Flutterwave, Europe’s Klarna, Nigeria’s insurance startup Etap, etc.
Having explained what a startup is, let’s look at other relevant startup-related words.
In the world of startups, funding simply means raising money for the operation of the startup. It could also refer to the money raised for the operation of a startup. Startups, as earlier explained are capital intensive. Money is needed to launch a startup and to keep it running. This money in question and the process of acquiring it is known as funding. Funding can be done in several ways. It can be provided from the personal credit of founders or from investors who are looking to actively influence the outcome of their investment.
Startups usually have funding in stages depending on the size of funding they require to keep their business going or the goals they hope to achieve. The stages at which a fund is received from investors are known as funding or financing round. Stages of funding include pre-seed round, seed round, Series A, B, C, etc., rounds.
Sometimes, startups may not be ready to receive external funding from investors. They, however, still require money to run. This fund is usually provided by the startup’s founder(s) and operating revenue generated by the startup. This is referred to as bootstrapping. An individual is said to be bootstrapping when they attempt to found and build a company from personal finances or the operating revenues of the new company, Investopedia says.
Bootstrapping, therefore, refers to keeping a startup running from either personal resources or revenue generated within the startup without help from any external investor.
Bridge financing is a type of financing or funding round. Unlike other types of funding round, bridge financing is not a major form of funding. It is usually an “interim” type of funding that is done to raise more funds so as to help startups solidify their short-term position. They are usually received from venture capital firms and banks in form of a loan or an equity investment.
While funding rounds are done with specific targets in mind, bridge funding is done to keep a startup going. They are, however, usually not common.
Initial Public Offering (IPO)
You must have heard of the term “IPO” or the phrase “market debut” before but what do they really mean and how do they relate to startups? As the term implies, an initial public offering refers to the process of offering shares to the public which will let a startup debuting raise funds. It is also a transition from a private to a publicly-traded company. Before an IPO, a startup company holds the status of “private.”
An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance, according to Investopedia.
An investor provides the funding required by startups to run their businesses or attain certain goals. Investors look to make financial returns from committing capital to a startup. The reason for investing by investors is peculiar to investors but making financial returns is the crux of their investment. We have two types of investors – angel investors and venture capitalists. An angel investor is an individual investor while venture capitalists are entities or firms operating the business of providing funding with the aim of making returns.
A founder of a startup can decide to be an investor in their startup. This is not bootstrapping, they are providing funds to their startup as any other investor would and hope to make financial returns.
Venture capital (abbreviated to VC) is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential, according to Investopedia. They are provided by venture firms, investment banks, and other financial institutions.
Debt and Equity Financing
Startups can decide to raise money via either debt or equity but what does this mean? Debt financing means that a startup is borrowing money either from an investment bank or venture capital company to fuel its operations. Equity financing, on the other hand, means that the startup is selling a part of its equity to the provider of the funding it needs. Equity means the value that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debts were paid off, basically residual ownership of a startup.
The term “SPAC” stands for special-purpose acquisition company. This type of company has no commercial operation and exists with the sole purpose of raising capital through an initial public offering or for the purpose of acquiring or merging with another company. Some startups go public via SPAC deals sometimes. What this means is that they are being acquired and/or merged with a SPAC otherwise known as a blank-check company. The startup continues to run its operations as it has always done without interference from the company that acquires it or merges with it.
A SPAC deal can be seen as a boost for startups.
Valuation simply refers to the process of determining the value of a startup based on its assets, present and future earnings, capital structure, etc. Valuation also means what the company is worth and can be used interchangeably with market value.
The explanation above should give you a broader insight into startups and how they work. Now you can say you speak startup!