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10 Common Startup Investment Terms Explained
by Startacus Admin
Securing investment for your startup is indeed a daunting task, not only because of the difficulties you may face in accessing opportunities and convincing investors that your business is worthy of their cash but because of the complex lexicon which accompanies the process.
Without the proper vocabulary to converse confidently about matters of funding and investment, many startups find themselves tongue-tied, or presenting an impression of unpreparedness to those they hope to woe. Here is a brief explanation of some of the most common terms and phrases (the jargon) that you should be familiar with, when embarking on your journey towards startup investment.
Seed Funding- This is a collective term which refers to a number of forms of capital investment, which are intended to help a business grow from its early stage to the point where it is capable of generating its own income. Seed Funding is often also referred to as ‘seed capital’ or simply ‘seed investment’.
Venture Capital- This form of funding provided by venture capitalists (VCs) or VC firms is given to startups which can demonstrate long-term growth potential but often lack the ability to generate enough income to sustain themselves over the period of growth.
Equity Crowdfunding- In this popular form of funding investors are given an equity share of the business in exchange for making an investment. The investment target is usually reached by a large number of investors making small / medium levels of investment, but larger investments are not uncommon.
Rewards Crowdfunding- This operates in a very similar way to equity crowdfunding, however investments are usually much smaller, and supporters are rewarded with non-equity ‘gifts’ such as complimentary products, unique experiences, and so forth.
Venture Capitalist- These are investors, and often groups of investors, who invest large sums of money (often 7 figures or more) in startups that have demonstrated the potential for long-term growth. They differ from angel investors in that they will usually require a significant level of control over the business’ future, including a place on the board of directors and so forth.
Angel Investor- This is a high net worth individual who invests in startups and sometimes established businesses for many of the same reasons as the aforementioned venture capitalist. However, the sums of money involved are usually much smaller, and the relationship that they have with the startup is usually not as formal, with many preferring to hold a consultative / support role, lending their skills, contacts, and experience to the business where necessary.
SEIS and EIS- These are tax relief schemes introduced by HMRC to incentivise investment in new and high-risk businesses. SEIS or The Seed Enterprise Investment Scheme, provides significant tax relief for investors who inject up to £150,000 into startups and growing businesses. EIS or The Enterprise Investment Scheme does the same, but for businesses which would usually be classified as ‘high-risk’ allowing them to raise up to £5M investment. Both of these schemes are extremely generous, and allow investors to claw-back up to 50% of their investment in the form of tax relief- being registered for EIS or SEIS can increase your chances of securing investment.
Pitch Deck- This is a short presentation of slides that helps to support information about your business put forward during a pitch. This is often an integral portion of a pitch to investors, and when used effectively can play a key role in sparking the interest of your audience. Check out our guide on the individual slides you should include in your pitch deck.
ROI- No, not ‘Republic of Ireland’ but rather ‘Return on Investment’- from a startup perspective this can be tricky to wrap your head around, but for an investor, it is the key consideration when deciding whether or not to support your business. It is essentially what an investor will, or can expect to get in return for the investment that they make. As a startup founder, you might use the same term in relation to the results of a digital marketing campaign, or investment in the business’ infrastructure.
Traction- This is demonstrable evidence that your business had gotten a foothold within the industry - i.e. that people are availing of your service. In almost every case, an investor will hold evidence of traction as a key determining factor in their decision to invest.
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