Navigating the startup world can feel like learning a new language. I remember this well from my first venture, a community website I launched back in college. I faced unfamiliar terms and concepts daily, and it often felt overwhelming. Now, after years of investing in startups as an angel investor, I've seen these concepts play out in real time, both the successes and the missteps. For any new founder, understanding these essential startup terms is a huge advantage. Here’s a breakdown of the terms you’re likely to encounter as you dive into the startup world.
MVP (Minimum Viable Product)
One term that comes up early—and for good reason—is MVP, or Minimum Viable Product. When I launched my college startup, I didn’t know much about building an MVP; I simply created what I thought the community needed. But in startup terms, an MVP is a basic version of your product that solves a core problem for your customer. It should be “viable,” meaning it works well enough to test with users.
From my perspective as an investor, the MVP is a powerful tool. I’ve seen companies like Dropbox, which started with just a video prototype, use their MVP to gather feedback and validate their idea. If it serves a real purpose, you’ll quickly know from customer reactions—and that’s invaluable for guiding your next steps.
Burn Rate
Burn rate is a startup’s cash flow speedometer, showing how fast money is being spent. I’ve seen founders underestimate this number, which can be a costly mistake. As an angel investor, I always keep a close eye on burn rate when assessing a company because it tells me how long the startup can operate before needing more funds.
For instance, if a startup has $500,000 in the bank and a burn rate of $50,000 per month, it has a ten-month runway. This number is crucial because it defines a timeline, and I advise founders to keep an eye on their burn rate as if their company’s life depends on it—because it often does.
Product-Market Fit
Product-market fit (PMF) is the holy grail for startups. Achieving PMF means your product truly meets a market need, and customer demand starts driving growth. As an investor, I’ve seen firsthand how crucial PMF is for long-term success. The difference between companies that find PMF and those that don’t can be stark.
A classic example is Airbnb, which struggled initially but eventually found its PMF by making high-quality photos a standard for listings. Once they figured out what customers truly wanted—a seamless way to book unique accommodations—their growth took off. In my investments, I look for signals of PMF, like positive feedback loops or growing customer numbers, because it indicates the company is ready to scale.
Angel Investors vs. Venture Capitalists
My role as an angel investor is to provide early-stage funding, often when a company is just an idea and a vision. Angel investors tend to write smaller checks—my investments have ranged from $10,000 to $50,000—but we’re often the first in, supporting founders at the riskiest stage.
Venture capitalists (VCs), on the other hand, enter later with much larger investments aimed at scaling a startup. VCs bring institutional support and can guide companies through growth phases, but they typically expect a bigger ownership stake. Understanding the difference is key for founders deciding when and how to raise money.
Seed Rounds and Series A, B, C
When I started my first company in college, I had no idea about funding rounds. Back then, any investment felt like a major milestone. Now, I see firsthand how structured funding can propel a startup forward. A seed round is typically a company’s first significant funding event, aimed at building the MVP and proving the concept.
As the company grows, Series A, B, and C rounds often follow, each stage representing increased investment and a clear path to scaling. In my role as an angel investor, I’m usually involved in the early seed stage, but I’ve worked closely with founders as they progress through later rounds, helping them understand the expectations and responsibilities that come with each stage.
TAM (Total Addressable Market)
TAM, or Total Addressable Market, estimates the full revenue potential if everyone in the target market used the product. When evaluating startups, I look at TAM to understand the opportunity size. For instance, a company aiming to disrupt the coffee industry would have a massive TAM, but if it’s focusing on a niche product, the TAM might be smaller.
Uber initially defined its TAM based on the traditional taxi market but expanded it as the company grew. By creating a better experience, Uber tapped into demand that went beyond taxis, massively expanding its TAM. A realistic TAM helps investors see how big a company could become if it captures a solid share of the market.
ARR (Annual Recurring Revenue)
In the world of SaaS startups, ARR—Annual Recurring Revenue—is a critical metric. It represents the yearly subscription revenue from customers and is an important measure of stability. As an angel investor, I like ARR because it shows predictability. If a startup has $500,000 in ARR, I know it has a strong recurring revenue stream.
Take a company like Slack, which built its ARR by retaining loyal business customers. Consistent ARR can attract larger investors, as it signals steady growth potential.
Bootstrapping
Bootstrapping is when a founder uses personal funds or revenue to grow a startup without outside investment. This approach gives founders full control but can also be challenging without a safety net. While I’ve worked with plenty of venture-backed startups, I also respect those that bootstrap, often because they’re laser-focused on sustainable growth.
Mailchimp is a great example of a bootstrapped company. The founders grew their business without outside funding, eventually reaching over $700 million in revenue. Bootstrapping isn’t for everyone, but it’s an option for founders who want to maintain control and don’t need massive capital.
Final Thoughts
These are just a few essential terms in the startup lexicon, but they’re critical for navigating the early stages of a venture. From my perspective as an angel investor and a former founder, understanding these terms will help you approach your business with greater confidence. Startups thrive on vision, grit, and growth, but knowing the language can make the entrepreneurial journey just a bit easier. I hope these insights, drawn from my experiences in the field, help you feel more prepared as you step into the exciting world of startups.