Key terms to know when talking about start-ups

Start-up

refers to a young, innovative company that creates a new product or service with the aim of rapid growth. A start-up often faces high upfront costs and limited early revenue, so it typically requires significant (external) funding to scale. A start-up is generally considered a private company, since its shares are usually not yet publicly traded on a stock exchange.

Founder/Entrepreneur

is the person who initiates and builds a start-up and may act individually or as part of a founding team. A serial entrepreneur is someone who repeatedly founds and builds new companies.

Life cycle of a start-up

A start-up typically progresses through several stages in the development of its product or service. It usually starts with an idea, then moves to researching product-market fit – in other words, determining whether a sufficient market exists for the product – and turning that initial idea into a viable product. The path to product-market fit is not a linear sequence of steps, but an iterative cycle between product development and learning from market feedback.

Thus, with a go-to-market strategy, the start-up acquires initial customers and generates its first revenue streams while continuously adapting the product. 

With customers secured, the company focuses on expanding its business operations to drive consistent revenue growth and move towards profitability. Later stages often involve geographic and market expansion to capture a larger market share and build a leading position. What started as a tiny team evolves into a larger organisation with more formal structures. Ultimately, possible exit paths for founders and investors include an IPO (initial public offering) or an acquisition, though the company may also choose to remain private and independent. 

Throughout its life cycle, a start-up typically requires significant capital to reach critical milestones. These funds are raised in financing rounds, and the related process is called “fundraising”. Start-ups prepare a “pitch deck”: a short presentation that introduces the company and its product, team, business model, financials and an outlook to potential investors and partners. 

Financing round

is a structured process in which a company raises capital from external investors, typically in exchange for equity (ownership stakes in the company) or, less commonly, debt. These rounds are often led by one or more lead investors who negotiate the terms of the round and set the valuation. Lead investors commonly conduct due diligence on the start-up and may take a seat on the board of the company to support and monitor its development. 

The financing rounds can be classified into early stage, early growth and growth stage. There is no fixed number of financing rounds that every start-up has to go through – the number and type of rounds vary depending on the capital requirements and the company’s development.

• Pre-Seed and Seed (Early stage): The start-up is in its earliest stage of development and typically generates little to no revenue. Investors participating in pre-seed and seed financing rounds accept high risk and high failure rates in exchange for the potential for substantial returns.
• Series A (Early growth): The start-up has proven initial demand and now focuses on scaling the product and refining the business model. It may generate early revenue.
• Series B, Series C, Series D, … (Growth stage): The start-up has established product-market fit and consistent revenue growth; the focus shifts to scaling up operations and expanding into new markets to capture larger market shares. Investors in Series B and later financing rounds generally face lower risk and lower failure rates but also have more modest return expectations.

Sector

describes the market segment or industry in which a start-up operates. There are also terms that describe a company’s target market – the group to whom the company sells its product or service. The most important terms are:

• B2B (Business-to-Business): A company sells products or services to other businesses.
• B2C (Business-to-Consumer): A company sells directly to individual consumers.
• B2B2C (Business-to-Business-to-Consumer): A company sells to another business, which then sells a product or service to an end consumer.
• B2G (Business-to-Government): A company sells to public sector organisations or government entities.

Investors

Most investors invest in start-ups in return for a percentage of ownership in the company (equity). Typical start-up investors include:

• Angels / Angel investors:
  individuals who invest their own private funds in start-ups. They frequently contribute valuable experience – often as former entrepreneurs – and provide access to professional networks and mentorship.
• Incubators and accelerators:
  organisations that provide support for start-ups. Incubators help founders turn an idea into a product, while accelerators help them to rapidly scale their business at a later stage. Both provide mentorship, physical workspaces, networks and structured workshops.
• Venture capitalists (VCs):
  investment firms that typically invest larger amounts and manage the funds from other investors such as institutions, corporations, family offices (organisations that manage the wealth of high-net-worth families) or individuals. Alongside capital, most VCs offer start-ups strategic support and an extensive network to accelerate growth.
• Institutional investors:
  these can be, for example, pension funds, insurance companies, sovereign investors, family offices, banks and financial institutions.
• Corporates / Corporate investors:
  companies that invest in start-ups for financial, strategic or combined reasons. They often seek access to new technologies, innovations, products and markets, as well as information on them, through these investments.

If a start-up does not require external funding, it is “bootstrapped” – financed with founders’ own capital and early revenues.

Venture capital (VC)

is a form of private equity financing provided to early- and growth-stage high-potential companies that are considered too risky for traditional bank lending. A venture capital fund consists of multiple start-up investments, either following a generalist approach across sectors or focusing on a specific sector.

Due diligence

is a structured process of investigating and verifying the information, potential and risks associated with a company, investment or transaction. It typically covers several elements, such as commercial, financial, legal and tax due diligence.

Valuation

refers to the estimated value of a start-up at a specific point in time. Given various uncertainties, such as limited data, it is no easy task to estimate the (future) value of a company. In the very early stages, start-ups typically have no established revenue streams and often exist only as an idea and a founding team, which makes traditional valuation methods difficult to apply. Factors that influence valuation include, for example, team quality, (forecasted) revenue and (potential) growth, product and market opportunity. The valuation is typically set by the lead investor(s) in a financing round and is important as it directly affects ownership of the company, potential returns, influence and risk.

A start-up valued at $ 1 billion or more is called a “unicorn”, whereas a start-up valued at $ 10 billion or more is called a “decacorn”.

Exit

means the process by which founders and investors sell their ownership in a company, the so-called liquidity event. A liquidity event usually occurs in one of the following forms:

• Trade sales / acquisition
  The company is sold to another company.
• IPO (Initial Public Offering)
  The company becomes publicly traded on the stock market.

Sarah Heinz is an investment manager at KfW Capital. KfW Capital invests in venture capital funds across Europe. 
sarah.heinz@kfw.de