Confessions of a VC newcomer; the ABCs of VCs
Being a newcomer to any industry is never easy. It’s almost like walking into a movie theatre in the middle of the movie — everyone around you already knows everything that has happened, and have their own guesses on what is about to happen next, while you are still trying to figure out who are the key characters and what is the context of their relationships and objectives.
This is especially true for the highly-competitive and hyper intellectual VC world, in which you are constantly introduced to brilliant founders across various sectors, technologies, and business models. And yes, you are expected to immediately understand everything they are talking about.
How do I know this? Well, it’s just so happened that I’ve recently made a big career (and geographical) move, away from the equity research world in NYC, to the more dynamic VC space in Tel Aviv. And if I’m being totally honest, I really thought that after completing my BA from Columbia University (with blood, sweat & tears) and spending four years at a major investment bank in the US, the transition back to Israel, my home country, would be easy peasy hummus squeezy. I know the culture, I know the language, and I know the financial world… this should be easy! Right?
…. Wrong! While my professional background on the public side of the financial markets is — at the very least — somewhat related to the private markets, I was amazed to find out just how much I don’t know. In fact, one of my greatest challenges right off the bat was sorting through the VC vocabulary. From one deal flow meeting to another, the list of unfamiliar terms that I casually jotted down to look up later continued to grow longer and longer (and longer).
Ultimately, this encouraged me to reflect on my early days as an equity research analyst, and dive in headfirst into what I know to do best… research! I’ve decided to embrace this opportunity to get to the bottom of things and build up a basic dictionary that will help me sort through the startup jargon. The “ABCs of VCs”, if you will.
And I am sharing this with you, hoping that it will be a helpful resource to all of you VC newcomers out there! There are many more, but the below seem to be the 15 most common terms for early stage/seed companies.
- Alpha (1st developmental stage)- alpha is the earliest version of a startup’s product. It is meant for internal consumption only, and is being tested in a controlled environment at the end of the development process.
→ The goal of alpha testing is to detect any potential issues and/or design flaws before beta testing begins.
2. Beta (2nd developmental stage)- beta is the refined & improved version of alpha following the initial testing. In beta testing, the product is released to a limited number of external users under real-world conditions in order to detect any deficiencies ahead of commercial production.
→ There’s also a Beta public version, in which public members use the product and provide feedback.
3. Minimum Viable Product (MVP) — this is the cheapest, quickest, yet functional version of the startup’s product. It is an integral part of the development process as it allows for quick validation and iteration process that is based on real user-feedback.
→ Not to be confused with a beta version: MVP aims to validate the startup’s product/idea, while beta’s goal is to collect feedback ahead of the launch.
4. Mockup — a mockup is like a “sketch” model of what the product/platform will ultimately look like. If a mockup is also functional in any capacity, it is considered a prototype.
→ This helps designers, developers, and other stakeholders visualize product design ideas.
5. POC — proof of concept — a test project (often with potential customers) aiming to demonstrate and verify the validity of a startup’s product before an official project/collaboration launches.
→ Not to be confused with a prototype: POC aims to show that a product is both functional and can be developed, while a prototype shows how it will be developed.
6. Sandbox — a test environment that imitates real-world conditions, in which developers can test their products before releasing it to the market.
→ This allows developers to run tests and experiments of the product with no consequences for failure and malfunction.
7. Design Partner — prospective customers who agree to “try out” the product at any point between inception through the first product delivery. Design partners get access to the startup’s product/services at low-to-no cost, while the startup receives useful feedback to further fine-tune the product.
→ Sometimes, if the partnership is successful, design partners may become long term customers.
8. ARR — annual recurring revenue — a key metric used by subscription-based businesses (largely SaaS) to describe normalized revenue from existing contracts. Often goes hand in hand with MRR (monthly recurring revenue). There are debates on how this is calculated, but it’s typically one month’s MRR*12.
→ This metric provides an important insight on how a company’s business is growing year over year, and helps form future growth assumptions.
9. Deliverable — Deliverable are measurable and verifiable outcomes/results that must be completed in order to reach key milestones in the development process (e.g. code releases, initial prototypes, etc.). They can be both internal (for company employees) and/or external (for customers/investors).
→ Deliverables are important as they help guide and measure the product development plan.
10. ESOP — or Employee Stock Ownership Plan, in which key employees receive shares of the startup so that they can benefit from a possible monetization event in the future (like an exit).
→ Shares of the ESOP pool can be contributed by either the founders, or, both the founders and investors following the financing round (a case-by-case situation).
11. Cliff — the minimum amount of time (typically 1 year) that is required of employees to stay in the company before they can start earning their equity.
→ As employees shares are all initially subject to vesting (typically 4 years), a cliff is a way for startups to protect their share in exchange for a minimum commitment from employees.
12. Freemium —as in the combination of “free” and “premium”. It is a type of business model in which users get access to basic features for free, and can access more advanced features for a fee.
→ This has become a pretty popular user acquisition strategy in recent years, and especially among internet start-ups.
13. Launch — a launch is a product’s first release to the market. Following the launch of version 1.0, any future updates are called “releases”.
→ It should be noted, however, that the terms “launch” and “release” are often used interchangeably, so it’s always best to clarify before making any assumptions!
14. SAFE — or Simple Agreement for Future Equity — a type of warrant entitling investors the right to purchase stock in future equity rounds (or IPOs), subject to certain predefined parameters.
→ SAFE was created in 2013 by the famous Y Combinator accelerator to fund participating seed-stage startups. Today, SAFE notes are mostly common in equity crowdfunding markets.
15. Stealth mode — a startup operating in stealth mode is actively avoiding public attention while preparing for a public launch at some point in the future.
→ This gives founders time to work on their product/service and test the market while being invisible to competitors.
Lastly — let me just say this. Despite my short tenure and newcomer challenges discussed above, being an early-stage investor is everything I dreamt it to be; it’s about invention and innovation, and constantly meeting new people and learning new things about different sectors, technologies, and business models. It requires a combination of human, strategic, and operational skills, incorporating both financial aspects and the impact and responsibility that come with it, with the ultimate goal being to help entrepreneurs and their companies grow and (hopefully!) change the world. This is all that anyone can really ask for in a job, right?
