A/B Testing: Also known as split testing, this is a comparison of two different versions of a webpage to see which one has the better conversion rate. The webpages are shown to similar visitors and the one with the better performance is kept. Startups often use A/B testing to determine the effectiveness of their landing pages.
Accruals: These are earned revenues and incurred expenses which impact a business’s financial statements, including the income statement and balance sheet. Accrual accounts allow a business to show assets and liabilities that don’t have a cash value, such as accounts receivable and future tax liability.
Acquihire: An acquihire is when your business is being purchased predominantly for its staff, skills and talent rather than the product or service that the business was selling. This usually happens if a distressed sale is needed or if the business is looking to wind down, as the business closes after the transaction.
Angel Investor: These are usually affluent individuals who are willing to provide capital for start-ups in exchange for equity or convertible debt. There are various websites that provide a platform to match angel investors with start-up investment opportunities in Australia.
Balancing books: At the end of an accounting period, the debit and credit figures of the business should be totalled and brought into an agreement to determine the profit or loss made in that period.
Bootstrap: This means starting a start-up without any external help or capital; i.e. essentially self-funding a startup. Some startups will choose to go this route as it saves time on capital raising and means the business will not have to answer to its investors.
Burn rate: This is the rate at which a new business spends its initial venture capital. It is usually quoted regarding cash spent per month. If the burn rate exceeds expectations or there is a failure to generate revenue, the burn rate will need to be reduced.
Capital raising: Startups will need funding to start its business or expand. Capital raising is the process of obtaining capital or financing from investors, venture capital firms or other sources.
Churn rate: This is the rate at which a business is losing its customers. It is usually calculated by dividing the number of customers at the start of the quarter by the number of customers lost that quarter. Evidently the smaller the churn rate, the better for the business.
Conversion/Conversion rate: In the context of start-ups, conversion usually refers to turning visitors into customers. The conversion rate is the amount and speed at which this happens. This will mean different things to different start-ups depending on the industry they are in. For example, conversion for app-developers may mean the number of visitors that download the app.
Convertible note: This is a short-term debt for the company and usually comes in the form of a promissory note. Equity is usually issued in return for capital investment in a start-up. A convertible note contains an automatic conversion feature, usually triggered once the company has raised a certain amount, which allows the company to convert debt owed into equity. The automatic conversion will also be coupled with a discount rate, usually at a rate of 10-40%.
Debt: Any amount of money that is owed by your business to another party is considered debt.
Disruptive: One of the marks of a start-up, in general, is that it tends to be a disrupter in its industry. This means it works against the norm and provides an often cheaper or more convenient alternative for consumers. For example, Uber disrupted the taxi industry with its ride-sharing service.
Divestment: The opposite of investment, this is essentially the process of selling an asset. The term is more commonly used when there is a major change in corporate strategy, for example, the divestment of a subsidiary to focus on other aspects of the business.
Due diligence: This process is where the purchaser undertakes a review of the relevant material disclosed by the vendor of the business, including the business’ operations, liabilities, assets, value, potential and risks of the business.
Elevator pitch: This is a pitch that could be done in the ride up an elevator to a potential investor. In general, it’s a pitch that is less than 5 minutes long which covers the salient points of your pitch, including your idea, the market opportunity identified and your business plan.
Equity financing: Another way to raise capital, equity financing refers to the sale of shares to raise funds for business purposes. This could range from selling shares to friends and family to initial public offerings (IPOs) by public companies. Start-ups may use different equity instruments for its financing needs depending on what stage of growth they are at. For example, while equity financing may start off with selling convertible preferred shares to angel investors, once the start-up has grown large enough they may switch to selling common equity.
Freemium: A mash-up of ‘free’ and ‘premium’, this is used to describe a business model that offers both free and premium services. This usually works with the business offering a limited version of its service for free, then requiring the customer to pay for more advanced features. Many software companies use this business model.
Funding: All startups and small businesses will need funding whether it is from external or internal sources. There are various types of funding available to start-ups. See also “Seed funding” and “Capital raising”.
Gamification: This uses game theory and game mechanics to incentivise customer’s engagement with a business. In general, businesses do this by offering a reward or achievement of a goal. For example, the use of frequent flyer rewards programs by airlines is a type of gamification.
Government grants: These are types of funding offered by governments on Federal and State/Territory level to start-ups or small businesses. They will vary according to State/Territory, and there are criteria that must be met before they can be granted.
Gross profit: This is the total sales revenue minus the cost of goods sold. It is usually seen in comparison to net profit.
Innovators: Innovators are those that think outside the box, who can inject new methods and ideas into startups and make changes in the industry. Innovators are also businessmen as they value and make money off the new ideas or products that they have thought up.
Intangible assets: In contrast to tangible assets, these are assets without a physical shape, but that adds to a business’s value. This includes a business’s intellectual property as well as goodwill.
Invoice finance: An invoice is a statement that itemises a transaction between a business and a third party. Invoice financing is a method for businesses to borrow money based on the amount payable to them from customers. In this case, the invoice acts as collateral for invoice financing and has less risk than extending a line of credit for the business.
Kicking the tyres: A term commonly used in the business sector to refer to researching an investment and its business before putting money into it.
Lean startup: This is a management structure theory for a startup and refers to a flat structure where businesses can shorten long product development cycles for shorter iterative cycles divided into phases.
Leverage: This is the use of financial instruments to increase the return on an investment, such as through investing in options contracts. It is also the use of debt to finance a business’s assets, as doing so this way allows a business to invest in business operations without increasing equity. A business with more debt than equity is highly leveraged.