A recent study by Oxford Capital, a venture capital firm in the UK, looked into what the most misunderstood terms in the world of investing are. To help tackle this ignorance, Idealog breaks down the terms for everyone to easily understand.
The most misunderstood term in the world of venture capital is ‘return on investment’, clocking in 1 million searches for the definition annually.
What comes next includes the term acquisition, initial public offering (IPO) and so much more.
Oxford Capital reveals that across the world, 80% of tech and e-commerce start-ups fail because they fail to master venture capital.
In order to improve this number, Idealog is defining the top 10 most misunderstood venture capital terms.
1. Return on Investment (ROI) – 1,296,000 annual searches for the definition
Return on Investment, or in short, ROI, is a term you can’t avoid in the world of venture capital, especially for founders and investors across the board.
Many founders and investors see ROI as a metric for financial returns or strategic value and potential for growth on something the company has invested in.
As a simple analogy, a start-up can invest $1 million into the development of a product and the revenue from selling can come out as $2 million in the first year. The return on investment in that one year is 100%.
2. Acquisition – 912,000 annual searches for the definition
The term acquisition is an easy one. This refers to a company purchasing another company.
A company making this move can mean achieving goals like market expansion or acquiring technology or other intellectual property.
Oxford Capital says it is vital understanding the process of acquisition as it can influence a start-ups valuation or exit strategy. This can prevent missed opportunities and lead towards more favourable terms.
3. Initial Public Offering (IPO) – 549,000 annual searches for the definition
Now if your start-up has become so successful and you can offer your shares to the public for the first time to raise capital, you have undergone an IPO.
This is often a significant milestone in a start-up’s trajectory and is the next stage in their growth once they reach a certain stage of maturity.
4. Unicorn – 304,800 annual searches for the definition
Elon Musk’s SpaceX, ChatGPT’s home OpenAI and Fortnite’s father Epic Games are all unicorn companies. As of August 2023, there are 1,219 unicorn companies, with a total value of $3,823 billion.
Deciphered it yet?
Unicorn is a private start-up that has been assessed and has a value at over $1 billion. The likes of Facebook and Airbnb were previously unicorn companies before having an IPO.
“However, reaching unicorn status doesn’t guarantee long-term success or profitability,” says Mark Bower-Easton, Head of Distribution at Oxford Capital.
“Founders need to understand that while being labelled a unicorn can provide substantial media attention and investor interest, it can also create unrealistic expectations and pressure. But, understanding this status helps founders manage growth challenges and align their strategies for long-term success.”
5. Limited Partner – 301,200 annual searches for the definition
A common practice in the start-up world, a limited partner is a business partnership with more than one person, with one running the business side of things while the other does not partake in management and may have restricted voting powers.
Often times, start-ups will have a limited partner who is invested in the company but actually runs another business.
6. Pivot – 265,000 annual searches for the definition
This happens more often than you think. A pivot is when a start-up breaks from its original core focus and changes direction.
One example can be Netflix, who started off as a rental DVD subscription service then became an online streaming platform.
Read more: How does venture capital work?
7. Scalability – 242,400 annual searches for the definition
When a start-up receives more funding, most of the time the money is used towards increasing the scalability for growth.
What this means is understanding the business’ capability to increase production to meet demand, while maintaining profitability.
8. Cliff / Cliff Vesting / Vesting – 241,800 annual searches for the definition
Many start-ups who are making a name for themselves will get to a point where employees can receive the right to gain equity from the company.
Cliff vesting gives employees a specific amount of time before allowing them to receive this equity. It can also be used for employee pension plans.
Companies like Uber and Microsoft have successfully undergone cliff vesting, with Uber’s time period being four years and Microsoft’s five. Once an employee reaches this time period, they are fully vested.
9. Annual Recurring Revenue – 223,800 annual searches for the definition
A predictive metric, annual recurring revenue is an expected amount of revenue a company is making based on current products or services.
This metric is best for the likes of streaming services, who can predict how much they will make over one year based on how many customers have signed up.
As of August 2024, Spotify has recorded 236 million premium subscribers. If we base this off the general plan cost of $18.99, Spotify’s annual recurring revenue for 2024 is over $4 billion.
10. Lifetime Value – 216,600 annual searches for the definition
This is one of the key metrics many investors look at when it comes to evaluating a business.
The lifetime value is calculated by how much revenue a customer makes for your business over the entire relationship.
An example can be if you are a vitamin company and a customer has purchased five bottles of supplements at a price of $20 every year for the past five years, their lifetime value to the company is $500.
~
Now that you know what vital terms are in the world of venture capital, your start-up is unstoppable and ready for that success.
