INTRODUCTION TO ENTREPRENEURSHIP KEY TERMS

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1 INTRODUCTION TO ENTREPRENEURSHIP KEY TERMS ACCREDITED INVESTOR The Securities and Exchange Commission (SEC) defines an accredited as: A person with an individual or joint net worth that exceeds $1,000,000 and/or a person who has had an individual income of at least $200,000 in the past three years (or $300,000 together with his or her spouse if married) and has the expectation to make the same amount this year. The reality is that this term is a bit vague, because anybody who fits the bill can call himself or herself an accredited investor, whether or not they have any investment experience. ANGEL INVESTOR: An angel is a wealthy individual willing to invest in a company at its earlier stages in exchange for an ownership stake, often in the form of preferred stock or convertible debt. Angels are considered one of the oldest sources of capital for start-up entrepreneurs. There are also angel investment groups. In Tampa, there are many angel investment groups such as and BOOT STRAPPING: A situation in which an entrepreneur starts a company with little capital. An individual is said to be boot strapping when he or she attempts to found and build a company from personal finances or from the operating revenues of the new company. BOTTOM LINE: Net earnings and net income both fall under the bottom line description. You may hear people talk about affecting the bottom line of the company and this is simply any action that may increase or decrease the company s net earnings, or overall profit. The term bottom is in reference to the typical location of the number on a company s income statement, below both revenues (top line) and expenses. BURN RATE: The rate at which a new company uses up its venture capital to finance overhead before generating positive cash flow from operations. In other words, it s a measure of negative cash flow. (Source: Investopedia) When your burn rate increases or revenue falls it is typically time to make decisions on expenses (eg reduce staff). BUSINESS MODEL: A business model describes how a business delivers value to its customers and how it plans to generate revenue and profits from its defined operations. The business model describes how the company makes money and serves its customers. The model explains who will create the product and how, who will sell the product, and defines the structure through which revenue is generated, lays out the revenue channels, and how much profit is built into the plan. Simply put, a business model describes how a company makes money. Business Model Canvas

2 The Business Model Canvas is a strategic management template for developing new or documenting existing business models. It is a visual chart with elements describing a firm s value proposition, infrastructure, customers, and finances. It assists firms in aligning their activities by illustrating potential trade-offs. A business model canvas is a dynamic document that describes how your company creates, delivers, and captures value. The 9 Business Model Canvas Building Blocks (Source: Business Model Generation): 1. Customer Segments 2. Value Propositions 3. Channels 4. Customer Relationships 5. Revenue Streams 6. Key Resources 7. Key Activities 8. Key Partnerships 9. Cost Structure BUSINESS PLAN: A business plan is a written document that describes a business, its objectives, its strategies, the market it is in and its financial forecasts. It has many functions, from securing external funding to measuring success within your business. A business plan is a static operational document to how your business will run. CAPITAL EXPENDITURES (CAPEX): Capital expenditures are any items purchased by your business that create future benefits. Basically, if something you bought is going to be useful to your business beyond the taxable year in which you purchased it, capitalize the item(s) as assets in your accounting. Examples include computers, property, or acquisitions. CUSTOMER DEVELOPMENT MODEL: The traditional way to approaching business is the Product Development Model. It starts with a product idea followed by months of building to deliver it to the public. However the Customer Development Model begins by talking to prospective customers and developing something they are interested in purchasing/using. These concepts are promoted strongly by Steve Blank and Eric Ries who encourage startups to get early and frequent customer feedback before developing their products too far (in the wrong direction). The four steps to the model include: 1. Customer Discovery 2. Customer Validation 3. Customer Creation 4. Company Building CUSTOMER PAIN POINT: I believe design does not happen in a vacuum. Design is not art. Design should solve a problem for humans. We can find the problems that we re causing for humans by looking for pain points. Usability testing helps us understand the obvious pain that we are causing for users, which is fantastic. Nevertheless, beyond discovering user pain in our

3 products, we should be doing user research on various demographics and understanding what in their lives is causing them pain. DIFFERENTIATION: The ability to set your business and its products/services apart from that of your competition. This seems like an easy concept, but in truth it can be complex comprised of internal actions (e.g., establishing a brand, developing marketing techniques) and comprehensive analysis (assessing the competition, figuring out what unique niche you fill in the marketplace). DILUTION: The percentage of ownership lost by the founder or co-founders when shares of a company are sold to new investors. This should be agreed upon and included on a term sheet (see below). DISRUPTION: An innovation that helps create a new market and value network, and eventually goes on to disrupt an existing market and value network (over a few years or decades), displacing an earlier technology. The term is used in business and technology literature to describe innovations that improve a product or service in ways that the market does not expect, typically first by designing for a different set of consumers in the new market and later by lowering prices in the existing market. The term disruption is now often used by startups to describe any product or idea that may change existing markets or products (planned or unplanned). An example is the disruption Wikipedia caused to the Encyclopedia market. DUE DILIGENCE: The evaluation of an opportunity, which is often performed by investors in order to allow to them to make a more confident and prudent investment decision by evaluating risk. Entrepreneurs should also perform due diligence to verify they are working with a legitimate investor. Both parties should always know whom they are dealing with. ELEVATOR PITCH: An elevator pitch is a concise, carefully planned, and well-practiced description about your company that your mother should be able to understand in the time it would take to ride up an elevator. (Source: Business Know How) Being able to pitch your idea is crucial for entrepreneurs and valuable in any formal or informal networking situation. It allows you to quickly describe your concept to anyone in a short period, including potential partners or investors. ENTREPRENEUR: An entrepreneur is an individual who accepts financial risks and undertakes new financial ventures. EQUITY VERSUS DEBT: The equity versus debt comparison may seem silly to some, but you would be surprised at how many people I have come across who have no idea what either really means. Equity is simply money obtained from investors in exchange for ownership of a company, while debt comes in the form of loans from banks that must be repaid over time. Both are necessary for growth, with their own pros and cons. Equity versus debt is a critical decision for any entrepreneur and it is important to know the difference as the future of your business may depend on it.

4 FIXED VERSUS VARIABLE COSTS: A fixed cost is exactly what is sounds like, a cost that does not change with increases or decreases in the volume of goods or services that are produced by your company. These costs are obviously the easiest to predict and plan for. Rent, salaries, and utilities all usually fall into this category. GROSS MARGIN: Gross margin is expressed as a percentage and represents the percent of total sales revenue that a company keeps after subtracting the cost of producing its goods or services. The higher the percentage, the more the company keeps on each dollar of sales (that will eventually go toward paying its other costs and obligations). In simple terms, if a company s gross margins are 25 percent, for every dollar of revenue that is generated, the company will retain $0.25 before paying its overhead, which includes salaries, rent, and more. GRUNT FUND: Typically, startup entrepreneurs quickly divvy up equity in equal shares or based on monetary input. A grunt fund assigns monetary value to every tangible and intangible contribution individuals make to a startup, from intellectual property and relationships to time and cash. Each founder keeps track of his or her hours, accumulating equity in a grunt fund, based on a formula that assigns a weight to each contribution that person makes. The goal is to ensure that founders, early employees, and investors are awarded for everything they bring to the table, not just their own money. If someone wants to leave or is fired before the company begins making sales, the book has guidelines for determining how much equity they should retain, if any. (Source: ) INCUBATOR: Business incubators are projects designed to help new businesses develop and successfully launch. In some instances, the projects are overseen by colleges or universities and are based in facilities located on campus. One of our community partners is Tampa Bay Wave, a local tech startup incubator. INTRAPRENUER: Coined in the 1980s by management consultant Gifford Pinchot, intrapreneurs are used by companies that are in great need of new, innovative ideas. Today, instead of waiting until the company is in a bind, most companies try to create an environment where employees are free to explore ideas. If the idea looks profitable, the person behind it is given an opportunity to become an intrapreneur. Intrapreneurs hold many similar characteristics to entrepreneurs any may well leave their jobs to pursue a career as an entrepreneur. Companies seek out intrapreneurs to effect change within their organizations. LEAN: Also referred to as: lean manufacturing, lean enterprise, and lean production. The core idea is to maximize customer value while minimizing waste. Simply, lean means creating more value for customers with fewer resources. (Source: Lean Enterprise Institute) The definitions and usage of lean vary depending on context and application. LEAN STARTUP: Lean startup is a term coined and trade marked by Eric Ries. His method advocates the creation of rapid prototypes designed to test market assumptions, and uses customer feedback to evolve them much faster than via more traditional product development practices, such as the Waterfall model. It is not uncommon to see Lean Startups release new

5 code to production multiple times a day, often using a practice known as Continuous Deployment. You should note the slight differences between lean and bootstrapping. Bootstrapping provides a strategic roadmap for achieving sustainability through customer funding (i.e. charging customers), lean startups provide a more tactical approach to achieving those goals through validated learning. An Example of 3 Stages of a Lean Startup (Source: Ash Maurya): 1. Customer Discover (Problem/Solution Fit) 2. Customer Validation (Product/Market Fit) 3. Customer Creation (Scale) LEVERAGE: Leverage can be interpreted a couple different ways. In the financial world, leverage is most commonly known as the amount of debt that can be used to finance your business assets. In simple terms, the amount of money you borrowed to run your business. The balance you want to strike as an entrepreneur is that of your debt and equity. If you have way more debt than equity, you will be considered highly leveraged aka very risky to potential investors. MISSION STATEMENT: A one or two sentence statement that describes why your company exists, who it serves, your company s goals and your company s philosophy. Essentially, the mission statement briefly describes what your company has set out to achieve. Keep it simple and grounded in reality. Do not say your mission is to save the world when you re selling accounting software. MINIMUM VIABLE PRODUCT (MVP): The first step for a new business is to clarify the problem to be solved and develop a starter-product or offering, which is called an MVP. The goal is to gather customer feedback as quickly as possible in a build-measure-learn feedback loop, which is central to the concept. The MVP is a one-time product or offering that kicks off the feedback loop process. NON-DISCLOSURE AGREEMENT (NDA): A non-disclosure agreement (NDA), also known as a confidentiality agreement, is a legal contract between you and another party not to disclose information that you have shared for a specific purpose. Such agreements are used to discourage employees and/or business contracts from not releasing sensitive information to others. It is important that you consult with a legal adviser about the content scope of such a document. PIVOT: It means to change direction. More specifically, to make a structured course correction with a business idea, and then to test a new hypothesis or new business model to see if it works better. Companies usually pivot when their current idea is not working or has lost momentum. However you may pivot when you have launched an early version of your product/idea and it needs improvement. Some suggest designing products with the smallest set of features to please a customer base, and moving products into the marketplace quickly to test reaction, then iterating. (Source: Forbes)

6 RETURN ON INVESTMENT: (ROI) The return on money invested in a company based on net profits. While this can indicate a return on money invested in a company based on net profits thus helping you determine how profitable your business is the formula for determining ROI is flexible, and the statistics used to calculate this percentage vary depending on what you re trying to measure. One calculation is: TERM SHEET: A proposed agreement between a business and the investment company which outlines the conditions of the investment. Essentially, a document that shows what the investor will get in return for their funds. VARIABLE COSTS are just the opposite. They can vary depending on a what a company is producing (such as Amazon Web Services usage), and as a result are much harder to forecast. If you can identify something, that is causing people pain and you can develop a product that takes that pain away, that product is very likely to be successful. The goal is to find the most important pain point and then to find a way to solve that pain for people in a usable way that does not actually cause them more pain. VENTURE CAPITAL (VC): Venture capital provides long-term, committed share capital to help unquoted companies grow and succeed. Obtaining venture capital is very different from raising a loan. Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of your success or failure. Venture capital is invested in exchange for a stake in your company and, as shareholders, the investors returns are dependent upon the growth and profitability of your business. There are differing views on taking funding from Venture Capital investors. Some argue that the involvement of VC in early startups reduces the entrepreneurial spirit and changes the direction of the company due to the overhanging financial commitment. Venture capital firms are only interested in companies with high growth prospects that are managed by experienced and ambitious teams who are capable of turning their business plan into a reality.