From Concept to Wall Street: A Complete Guide to Entrepreneurship and Venture Capital - page 13


Naturally, the book uses many professional terms that are part of the common venture capital jargon. There are also terms that are used to signify several different meanings. For instance, the term Venture Capital (or VC) is used to describe the area of investments of venture capital in startup companies, but in many cases it also refers to Venture Capital Funds or to the people working in such funds. The purpose of the following short glossary is to create a uniform, basic, and common denominator for all readers (for a more comprehensive glossary, see Appendix B).

A startup is a company founded by entrepreneurs on the basis of an idea, the majority of its assets, termed intellectual property (IP) are intangible. Initially, the company's activity focuses on Research and Development (R&D), in order to prove the feasibility of the idea and to develop the prototype/preliminary product.

Financing in the preliminary stage, or the Seed, is obtained in many cases from private investors, also known as Angels. These angels invest their personal funds in young companies in order to gain a high Rate of Return. Down the road, the company is financed in several Rounds by venture capitalists of various types, comprising the venture capital industry. The first class of investors is the venture capital funds, which specialize in high-risk investments and undertake such investments on behalf of several investors (usually Institutional Investors). The funds provide investors with screening and investment management services, and offer companies financing and assistance in business management and development. Other investors in startup companies and in venture capital funds are Corporate Investors, who typically invest in ventures in areas close to their lines of business, and other financial investors such as institutional investors who invest directly in companies. In consideration for their investment, investors receive part of the company's Equity, usually in the form of Preferred Shares, which grant the investors preference in dividends, and upon dissolution and sales, as well as other rights protecting the investment and its value. The main terms of the investment are fixed in the Term Sheet, after which a detailed investment agreement (Stock Purchase Agreement) is signed. In later stages, the company may also receive financing through Debt, or by a loan combining debt and equity (Mezzanine Loan).

Once the development has concluded and sales have commenced, the company can raise capital from the public through an IPO. Listing the company for trade also allows the investors in the company to make their investment more liquid, and after a Lock-Up Period, they can sell shares directly on the stock exchange or in the course of a Secondary Offering. The main Exit techniques are the sale of shares in an IPO, and, subsequently, a Private Placement or a Merger with, or Acquisition by, a strategic investor, in consideration for shares, cash, or a combination of the two.

Part I: Establishment and Development of Ventures

Along and winding path leads from a mere idea to ultimate success. Part I discusses the issues which entrepreneurs and companies need to address in order to transform an interesting idea or project into a valuable company. It emphasizes the practical aspects of establishing and building a startup, on the basic assumptions that an interesting idea is insufficient for success and that the execution of the idea is no less (or even more) important than the idea itself. The financing aspects of startups will be discussed in detail in Part III.

Startups are companies whose assets are usually primarily intangible. Although these companies engage in a variety of businesses, their common denominator is their reliance on the power of ideas. This is the focal point of companies representing the new economy, an economy founded mainly on intellectual property. Regardless of the company's line of business—be it biotechnology, Internet, communications, software, or otherwise—the value of these companies depends mainly on the intangible assets they create. These assets comprise, primarily, the company's manpower or human resources, as well as work methods, business models, algorithms, and production processes created by such manpower or bought or hired by the startup from others. Aside from the creation of intangible assets, the value of the venture depends to a great extent on the protection afforded to such intangible assets and on their introduction into the market.

A startup company is born from an idea which constitutes a solution to a problem arising or anticipated in an existing or future market. The idea is formed and consolidated by entrepreneurs, financed by investors, supported by consultants, and executed by entrepreneurs and employees. Another characteristic of most startup companies is their focus on R&D. Finally, there comes the stage in which the fruit of the idea is reaped, and all the persons involved realize their investment, whether such investment was made in the form of human or financial capital.