The terms for businesses in startups can be confusing for those who have no knowledge of this field, but in essence, they are very simple. Therefore, I created this series of articles with the desire to help you better understand the terms commonly used with startups, from investment, finance, marketing, corporate governance, etc.
At the beginning of this series, we will introduce investment terms in startups that you may hear a lot on Shark Tank.
INVESTMENT STAGE: The startup investment life cycle will have the following stages.
Angel round: angel round is a startup stage that is only at the idea stage. Angel investors can be relatives, friends, and the investment at this stage is usually about 10-50 thousand USD to help the startup have money to operate in the first days.
Pre-seed round: is the investment stage where startups need money to be able to create the first product that can be commercialized (minimum viable product). In this round, the startup can raise capital from 50-250 thousand USD.
Seed round: This is a financing round that helps startups have money to be able to deploy and sell products to the market. This round is called “seeding” because once a product can be successfully marketed, these seeds are more likely to grow into plants. A startup can raise initial capital from 100k to 2 million USD for this round.
Series A, B, C, D, E: These are funding rounds with the aim of helping startups grow by boosting sales, expanding markets, recruiting, developing new products, acquiring other companies. , etc Series A round can raise capital from 1-20 million USD. Serie E can be up to billions of dollars.
Going public (IPO): IPO is a listing on the stock exchange, this is very necessary so that investors, especially investors in rounds from series A onwards, can sell shares on the exchange. and take profit. This is also a channel that helps the company call large amounts of capital from large institutional investors on the stock market. Ant Group's IPO deal (under Alibaba) will raise up to $ 35 billion if it is not blocked by the Chinese government.
INVESTORS: Startup investors are often divided into the following main groups.
Angels: Angel investors often invest when the founders only have an idea or a product that is only experimental and has not yet brought in revenue. Angel investors can be everyone who has money, or even friends and relatives. However, Angel investors can also invest in pre-seed or seed rounds.
Accelerators & Incubators: These are training and support centers for startups, helping startups to have more formal knowledge in building business models and raising capital. These centers will have demo days for investors, and with luck, startups can receive $20.000 to $150.000 in pre-seed or seed rounds. A quite famous Accelerator in the US is Techstars.
Venture Capital: These are a form of financing where capital is invested into a company, especially investing in startups. Depending on the investment form and size, funds can invest from Angel round to series C, D. One of the most famous venture capital funds is probably the Vision Fund of Softbank owner Masayoshi Son. This fund has invested in We Work, Uber.
Equity firms (investment funds): These are traditional stock investment funds. In addition to investing in listed stocks, these funds often also invest in startups. They usually invest from Serie B onwards.
VALUATION: Some commonly used terms in startup valuation include.
Due diligence: the investor's thorough understanding of the startup (business activities, products, financial situation, ownership structure) before investing.
Unicorn: a startup with a valuation of 1 billion USD or more.
Pre-money valuation: the value of the startup at the present time if there are no new investments.
Post-money valuation: the value of the startup after receiving the investment.
Post-money = Pre-money + investment
For startups, the pre-money or post-money valuation will affect the percentage ownership of founders and investors:
VALUATION METHODS: Finally, How To Value a Startup?
Some common methods include:
Venture Capital method: This method is based on some formulas and calculation models of investment funds.
Berkus Method: Based on a few key factors of startups and individually pricing each component: (1) fundamental value, (2) technology, (3) execution, (4) strategic relationship strategy, (5) product and sales.
Cost-to-duplicate method: valuing startups by calculating the cost to rebuild the startup's business model and product. This is the method to "submerge" startups.
Method Multiples: multiple means the ratio between the value of the company and a certain factor, this ratio will be based on other startups that have been invested. Commonly used ratios are valuation/user, valuation/revenue.
For example, if a US cloud company is valued at $1 million with 20,000 users, the rate is $50/user. If there is a similar company in another country, this company can base its valuation on the figure of $50/user (in reality, this number will be lower due to the risk of the country market and users).
Discounted cash flow method: For startups with positive, healthy cash flow, it is possible to value the cash flow that startups will bring in the future.