Startupedia book v5.0

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By

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Special thanks to Fundación Innovación Bankinter for the
publication of this book

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Summary
Definition of…
1) Startup ……………………………………………………………………………….5
2) Entrepreneur ….………………………………………………………………….…5
3) Pain ...………………………………………………………………………..……….6
4) Market/Target Market ………………………………………………………..…...7
5) Competitive Advantage …………………………………………………………...8
6) Lean Strategy …………………………………………………………………….....9
7) Metrics ……………………………………………………………………………...10
8) Traction ……………………………………………………………………..……...11
9) Shareholder V Stakeholder …………………………………….………………...12
10) Shareholders’ Agreement ……………………………………………..………...13
11) Business Angel …………………………………………………………………...14
12) Venture Capital ……………………………………………………………...…...15
13) Customer Development Process …………………………………..…………...16
14) Accelerator ……………………………………………………………..…….…..17
15) Mentor ………………………………………………………………………..…...18
16) Pivot ……………………………………………………………………..………..19
17) Friends, Family, Fools (FFF) ……………………………………….…………...20
18) Seed Stage/Seed Capital ………………………………………………...……...21
19) Growth Stage/Growth Capital …………………………………………….…..22
20) Business Model …………………………………………………..........................23
21) Monetization …………………………………………………..............................24
22) Freemium …………………………………………………....................................25

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23) Burn Rate ………………………………………………………………….……...27
24) Customer Acquisition Cost …………………………………………...………...28
25) Customer Lifetime Value …………………………………………………..…...29
26) Investment Rounds …………………………………………………...................30
27) Equity ……………………………………………………………………………..31
28) Valuation (Pre-and Post-Money) …….………………………………………...32
29) Dilution ………………………………………………….......................................33
30) Vesting ……………………………………………………………………….…...35
31) Tag-Along/Drag-Along Cause ……….………………………………………..36
32) One-Pager ………………………………………………………………………...37
33) Internal Rate of Return ………………………………………...………………..38
34) Downround ………………………………………………………….…………...39
35) Crowdsourcing …………………………………………………………...……...40
36) Scalibility ………………………………………………………………….……...41
About Startup Spain …………………………………………………………………42

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Introduction
Doing a startup is a cool thing these days. But mastering the vocabulary
industry is another story! Startupedia is a new series of informative blog
posts here at Startup Spain. Twice a week, we have defined some of the
industry’s keywords. Don’t worry! Our goal is not to bore you, but rather
to enable you to dominate our jargon in a way that even your
grandmother could understand.
We wish you a good and interesting reading…
@ willschubert
@JuliePaje

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Definition of: Startup (n.) [stahrt-uhp]
1: A start-up company (or startup) is a newly established small business. The term
often refers to ICT companies operating in conditions of high uncertainty, strong
growth potential and scalability. (Here is a well-written expansion on the definition of
a startup by Eric Ries)
2: The brainchild of one or more crazy people. Endeavor in which said madmen devote
countless hours just for the sake of sleep deprivation to create and develop stuff
nobody understands. Not recommended for the faint of heart.
Definition of: Entrepreneur (n.) [ahn-truh-pruh-nur, -noor]
1. Person who commits to the endeavor of transforming an idea into a real startup,
business or enterprise, either for profit and/or social benefit. This person organizes,
manages and leads this organization, and in doing so, assume a great deal of risks and
challenges.
2. Insane person who’s delusions of grandeur make him risk his time, money, prized
possessions, dog, first-born child, grandma, and soul to pursue an idea that he is
convinced will be The Next Big Thing (against all the odds). Here is a pretty sweet
graphic of how to know if you´re likely to be a founder.

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Definition of: Pain (n.) [peyn]
1. A pain is a problem that exists among consumers in the market. Pain is especially
relevant in the entrepreneurial world because an entrepreneur´s goal should be to
address a particular pain that is not currently being addressed (or in a way that is more
effective than current options). A common mistake that entrepreneurs make is
centering their business model around a “really cool product” rather than creating a
product/service that actually addresses an existing pain in the market. Here is a great
article about pain written by one of the startup teams over at Tetuan Valley.
2. A source of sadness and suffering for normal people; a source of opportunity, joy,
and happiness for entrepreneurs – further evidence that entrepreneurs are not normal
people.

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Definition of: Market/Target Market (n.) [tahr-git mahr-kit]
1. A market is the group of consumers that could potentially be interested in a product
or service that is offered. A “target market” is a highly specified segment of the market
on which a business decides to focus their marketing efforts. Typical segmentations
used to define a target market include geography, demography, psychology, and
consumer behavior.
2. Where you go once a week to buy your fruits and vegetables, like this guy:

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Definition of: Competitive Advantage (n.) [kuhm-pet-i-tiv ad-
van-tij]
1. A competitive advantage is an advantage that a company has over its competitors.
There are 2 types of strategies to focus on when trying to find a competitive advantage:
differentiation and pricing. In a differentiation strategy, a company focuses on distinct
characteristics of their product/service that make it better (for the customer) than their
competitors. In a pricing strategy, a company focuses solely on achieving a lower price
than their competitors. For all companies (and especially Startups), it is essential that
they maintain a strong advantage in at least one of these two categories in order to
remain/become competitive and capture a significant amount of the market.
2. A simple way to think about competitive advantage is to consider the classic movie
situation of two men vying for the heart of a beautiful woman (think of Aladdin,
Moulin Rouge, Princess Bridge, etc.). The first man is a seasoned stockbroker with a
penthouse apartment in New York City. He drives a Ferrari, wears nothing but
designer suits, and spends no less than 200€ on dinner every night. The second man is
a struggling novelist with disheveled hair and worn blue jeans who lives in a crowded,
damp apartment. However, he also happens to be the most romantic man in the entire
world, and is capable of making the woman happier than any other man could. The
first man clearly represents a company executing a pricing strategy, as he will provide
the woman with the most economic benefits. The second man, on the other hand,
represents a company executing a differentiation strategy, as he offers qualities that no
other “product” can offer. In the end, the woman (customer) will choose her man
(product) according to what she values most. Therefore, if movies have taught us
anything, it is that a company should always focus on differentiation instead of pricing,
because the poor struggling novelist always beats the wealthy stockbroker.

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Definition of: Lean Strategy (n.) [leen strat-i-jee]
1. Lean Strategy, as applied to the tech/software industry, is a method with which a
company aims to maximize their product´s adaptability within the market. In the past,
a company in the tech industry would need many months (or years) and a lot of money
to perfect their product before releasing it to the market. However, it often turned out
that this “perfected” product wasn´t actually what customers wanted, and the
company would immediately fail, having wasted an enormous amount of time and
money developing an undesired product. Similarly to Lean Manufacturing (made
famous by Toyota), Lean Methods work to minimize this waste. Therefore, companies
release a Minimum Viable Product (MVP) as soon as possible and seek immediate
feedback from customers. Based on this feedback, they adapt their product in real time,
eventually developing a highly desired product (which is much less likely to fail)
without having wasted so much time and money. This methodology is especially
important for Startup companies because they often do not have the resources
necessary to spend months perfecting their product. If you´re interested, here is a more
in-depth discussion of the application of/strategy behind Lean Startups by Carmen
Nobel over at Harvard Business School.
2. Another possible definition of Lean Strategy is that it requires so much work and
effort from the entrepreneurs that they do not have time to eat. By preventing them
from eating, Lean Strategy causes them to actually become “lean” .

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Definition of: Metrics (n.) [me-triks]
1. A business metric is defined as any type of measurement used to gauge some
quantifiable component of a company´s performance. Business metrics can be applied
to help analyze past performance, make projections for the future, and identify areas of
the company that need improvement. They help company managers set/measure
performance goals and make more educated business decisions at every point in the
management process. A common example of a business metric is Cost to Acquire
Customers (CAC), which companies use to determine exactly how much they are
spending per acquired customer. This measurement is particularly important because
it will show a manager exactly how efficiently their marketing efforts are working.
2. Another way to think of business is that they are a cold, hard slap in the face when
things are going badly. While you can always make things look good on the surface
with a little bit of strategic manipulation, once you get down to the nitty gritty
numbers, reality will always rear its ugly head.

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Definition of: Traction (n.) [trak-shuhn]
1. Traction is a general measurement of a product´s penetration within the market. The
amount of “traction” a product has achieved is a reflection of the extent to which the
product has been adopted by the market. Put simply, a product with no traction has
not yet “caught on” in the market; once a product gains traction, it has “caught on” in
the market, and can begin to build momentum and take off.
2. For Startups, the first stages of the development process can often feel like they´re
stuck in the mud going nowhere. No matter how much they rev their engine, the tires
are just spinning in mid-air, making no contact and the car is not moving at all.
However, once they are able to gain traction, the car finally begins to move forward
and the product takes off.

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Shareholder VS Stakeholder
So first, the Definition of a Shareholder (n.) [shair-hohl-der]:
A shareholder in a company is any party that owns at least one share of the company.
Therefore, shareholders are the owners of the company, and have the ability to make a
profit from the company´s success while also running the risk of suffering a loss from
the company´s failure.
Now for the Definition of a Stakeholder (n.) [steyk-hohl-der]:
A stakeholder in a company is defined as any party that has an interest in the company.
The list of stakeholders in a company can include everyone from investors, employees,
and suppliers to the local government and community.
So…what´s the difference?
The best way to think about the difference between shareholders and stakeholders is
like the different between squares and rectangles: Every square is a rectangle, as it fits
within the geometric specifications of a rectangle (4 right angles and 2 pairs of parallel
lines). However, not all rectangles are squares, as they do not all fit within the
geometric specifications of a square (4 right angles and 4 equal sides). Similarly, all
shareholders are stakeholders, as they all fit the qualifications of a stakeholder (they
have an interest in the company). However, not all stakeholders are shareholders, as
they do not all necessarily fit the qualifications of a shareholder (not every stakeholder
owns shares of the company).
So now that you know the difference between the two, do you think it´s better to be a
shareholder or a stakeholder? Our good friend Fredrik Hoel seems to think that it´s
best to be a steak-holder:

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Definition of: Shareholders’ Agreement (n.) [shair-hohl-
ders uh-gree-muhnt]
1. A Shareholders’ Agreement is a contract that defines the mutual obligations,
privileges, protections, and rights of the owners (shareholders) of a company. It is
written to ensure that the rights of the shareholders are protected and to clearly outline
how the company should be operated.
2. A Shareholders’ Agreement is really like an intricate plan of how to cut up the pie
that is the company. It details how the pie should be divided, along with who gets each
piece and what exactly that piece entitles them to. Depending on which piece of the pie
you get, it may come with special rights and privileges (ice cream and cherries) on top.

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Definition of: Business Angel (n.) [biz-nis eyn-juhl]
1. A Business Angel (also known as an Angel Investor) is an individual investor who
invests their own money in early stage Startups, generally in exchange for equity. Their
investment is often the only way a Startup can stay afloat in between initial seed capital
and venture capital (thus the word “angel”). Business angels are typically former
entrepreneurs themselves, and their investment is generally more than just monetary.
In addition to providing the capital, they will stick around to help mentor and advise
the entrepreneurs as they try to grow the business. These days, many business angels
are pooling together in larger groups (called “angel groups” or “angel networks”) in
order to expand their investment abilities.
2. Once family and friends come to their senses and stop providing you with seed
capital for your idea, business angels are the way to go! Not only do they have the
money you need, but most of them have been entrepreneurs themselves, so you can be
sure that they are equally as delusional and crazy as you.

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Definition of: Venture Capital (n.) [ven-cher kap-i-tl]
1. Venture capital is capital provided to early stage companies that have very high
growth potential. Companies that seek venture capital are typically companies that are
still too young (haven’t been in operation for long enough) to raise funds by issuing
debt. These investments are generally very high risk due to the typical rate of failure
among such young companies. For this reason, venture capitalists (VCs) invest only in
companies with potential for an extremely high rate of return, often asking for equity
and sometimes even decision making abilities in return for their investment.
2. Coincidentally, the word “venture” happens to be very close to the word “vulture”,
both structurally and semantically. In addition to their distinct feather formation, huge
wingspan, and bright red faces, VCs also have a tendency to hang around until
Startups are at their weakest moments and then swoop in for the kill, demanding a
large amount of equity in exchange for the money that they know the Startup can´t live
without. Of course not all VCs are evil vultures, but if you find yourself in a meeting
with 4 partners in a VC firm that look like the picture below…beware.

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Definition of: Customer Development Process (n.) [kuhs-tuh-
mer dih-vel-uhp-muhnt pros-es]
1. The Customer Development Process is a 4-step process through which Startups
discover, test, and validate various hypotheses that their business is based on. In step
one (Customer Discovery), the business figures out if they actually have customers
willing to pay for their product (this step is done using methods very similar to Lean
Strategy). In step two (Customer Validation), they make sure that their market is, in
fact, large enough to support a viable business model. In step three (Company
Creation), they test if their current business model is scalable. Finally, in step four
(Company Building), they test that their business structure/operations is set up in a
way that could successfully support the scaling of the company. For more about the
Customer Development Process, here’s Steve Blank (the guy who coined the term)
talking about it:
2. I usually use this second section for an ironic or funny definition, but at the moment
all things funny seem to be escaping me. It may be the lack of sleep or perhaps the bad
yogurt that I just ate, but it also may be the fact that there is nothing funny about the
Customer Development Process. It is just the right way to do business. If you are
running a startup, you should use it. Simple as that. If you don’t, you run the risk of
doing everything completely wrong, and if you do, you dramatically increase your
chances of doing it right. So stop reading this blog post and start doing working on
your Customer Development Process!

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Definition of: Accelerator (n.) [ak-sel-uh-rey-ter]
1. An “Accelerator” is a program designed to increase the rate at which a startup grows
and develops as a business. Accelerators host a group of (generally) early-stage
startups and provide them with extra resources that will help them in their business
development. Throughout the program, startups typically receive (from the host of the
accelerator program) capital, mentoring from experts within the host´s business
network, co-working space, and more. The process is designed to increase the chance
of success and long-term growth of the startup companies, therefore decreasing the
amount of risk assumed by investors.
2. Accelerator programs are kind of like the business equivalent of P90X. In just a short
amount of time, they will transform you from that struggling startup eating potato
chips in bed at 4 AM to the next Facebook, bench-pressing small cars and becoming
captain of the national power lifting team! Well, ok…maybe that´s not always true;
some may still fail. But give it a shot and your next startup may end up looking
something like this:

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Definition of: Mentor (n.) [men-tawr, -ter]
1. The word mentor is technically defined as a “wise and trusted counselor and teacher”
or “an influential senior sponsor or supporter”. Here in our (wonderful) world of
startups, we think of mentors as experienced entrepreneurs, investors, or other actors
in the startup world who help young entrepreneurs. These mentors help by offering
advice and suggestions, sometimes even volunteering to sit on decision-making boards.
Their advice can be incredibly helpful for entrepreneurs at almost every step of the
startup process, which is why pre-accelerators, accelerators, incubators, and other
similar programs often build up very large networks of mentors to advise their
startups and speed up the development process of the companies. For a quick example
of some mentors, check out the list of awesome mentors that we have at Tetuan Valley!
2. Like Luke Skywalker, young entrepreneurs are, and like Yoda, mentors are. Benefit
from mentors, every young entrepreneur could. Much experience, mentors have; little
experience, young entrepreneurs have. Without their small, green, 900 year old friend,
save the galaxy the young entrepreneurs will not. Also be harder to save their startup,
it will. You might say, “Try my hardest to find a mentor, I will”, but no! Try not. Do, or
do not. There is no try.

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Definition: Pivot (n.) [piv-uht]
1. A pivot, in business terms, is when a business changes a fundamental part of its
business model. This occurs when a business recognizes that certain parts of the
business model are under-performing or simply modeled incorrectly. Some examples
of when a business needs to pivot would be if the product is not correctly tailored to
the intended market, the target market chosen is incorrectly chosen, the business is
focusing on developing and promoting the wrong part of the product, or many more
things. One classic example of a pivot was the company Flickr. Flickr first started as an
online gaming startup but was struggling to catch on in the market. However, they
observed that one particular part of their product – an application that let users share
and post photos during gameplay – was becoming very popular with their users. They
decided to pivot their business to focus on just the development of the photosharing
application, and two years later sold their company to Yahoo! for $35 million.
2. A pivot is when an entrepreneur realizes that what he/she has been pouring his/her
heart into for the last several months or years is actually not going to be successful.
However, because entrepreneurs are tough, stubborn people, instead of calling the
business a failure and starting over from scratch, they change their business model and
call it a “pivot”.

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Definition of: Friends, Family, Fools (FFF) (n.) [frends, fam-
uh-lee, fools]
1. Friends, Family, Fools (commonly abbreviated FFF) is a reference to what is typically
the initial source of funding for young startups. In the earliest days of a startup, when
the idea is still raw, waiting to be molded into something real, it is very difficult (and
often unwise) for entrepreneurs to secure investment from venture capitalists.
Therefore, the best place to turn is to their friends, their family, and any fools they may
be able to convince of their potential. Friends and family are certainly the easiest way
for startups to get funding, as they have a personal relationship with the entrepreneur
and are therefore more likely to believe in their potential for success. However, because
friends and family are so willing to hand over their money (generally without doing
nearly as much due diligence as they should), it is especially important for the
entrepreneur to be up front and clear about the risks involved. It is a great way for
startups to raise the money they need, but if everyone involved isn´t fully aware of
what´s happening, it could lead to some ugly Christmas dinners in the future. With
regard to the “fools” in the equation, they are essentially very early Business Angels.
As foolish as they may be, they are often a saving grace for entrepreneurs, and the only
reason that startups are able to survive.
2. Sometimes when I think of Friends, Family, and Fools, it reminds me of another
famous trio: the three wise men. Just like the three wise men, Friends, Family, and
Fools come bearing gifts (money!) for an infant (your startup) that was just recently
born in the back of a crowded inn (your garage/office/shower/wherever you´ve been
developing your idea). Also like the three wise men, most people will probably think
they are crazy for giving you money. For your sake, we hope those doubters are wrong.
Note: If your Uncle Balthazar or your best friend Melchior show up at your door with
a horse and a fancy robe, reeking of frankincense and offering you a bottle of myrrh to
help finance your new photo-sharing platform, you may want to start looking
elsewhere for help.

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Definition of: Seed Stage/Seed Capital (n.) [seed steyj/seed
kap-i-tl]
1. Seed Stage: As with many business-related terms, the specifics of what exactly
qualifies as a Seed Stage company are a bit foggy. However, a simplified definition
would be that a seed stage company is a business, just recently incorporated, that has
yet to fully establish commercial operations. Another way to think of it is that the seed
stage of a company is directly before the Startup stage.
2. Seed Capital: Now that you know the definition of a seed stage company, I imagine
you can figure out what seed capital is as well. Seed Capital is the capital invested in a
company while they are still in the seed stage. Because these companies are so early on
in their development process and still have no real validation of their product/service,
seed capital investments carry with them an even higher risk than startup investments.
Due to this risk, seed capital is not usually provided by venture capitalists, but instead
by Friends, Family, and Fools (FFF) or Business Angels.
3. For a more visual (and admittedly, more corny) definition of the relationship
between these two terms, picture the market as a big open field of soil, and the
entrepreneur as a farmer. One day, while harvesting some of his award-winning
tomatoes, the farmer had a revelation, and suddenly realized that his big open field of
soil could really use some Innovative Mobile Gaming Platforms. So the next day, he
took the trip into town, bought some Innovative Mobile Gaming Platform seeds, came
back to the farm, and planted them in the open soil. The company was now in its seed
stage: it was just recently planted, and had yet to produce any actual results. Over the
course of the next few months, the growth and development of the Innovative Mobile
Gaming Platform plant would depend not only on the hard labor of the farmer, but
also on a little help from Mother Nature. If conditions were right, the clouds would
open up and sprinkle down just enough seed capital for the plant to thrive. If the
farmer did things correctly (and got very lucky), the seed would one day grow to be a
great, fruitful, thriving tree (company).

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Definition of: Growth Stage/Growth Capital
(n.) [grohth steyj/grohth kap-i-tl]
1. The Growth Stage of a company is typically categorized as the stage directly after
the “startup stage” in the company’s life cycle. During this period, the business is
already fully operational, has its first loyal customers and has
developed traction within the market. With this traction, they have begun to grow their
revenue and profits at a steady (and usually pretty rapid) pace. In order to support this
growth, they now need to expand, for which they need…
2. Growth Capital is the money invested in a company during its growth stage with
the specific aim to support the further growth and expansion of the business. It is often
used for things like product development, new market penetration, acquisition and
other expansionary tools and strategies. The money in this stage generally comes from
bank loans, venture capitalists, and company-earned profits. Investments in companies
at this stage are significantly less riskier than those in seed stage companies, as they are
earning real, steady profits, and have already established themselves within the market.
3. Another way to think about these two terms is to simply continue the metaphor
from last Thursday’s words. Now, the plant has started to grow, and is a small tree
producing a decent amount of fruit (it is in the growth stage). However, in order for it
to continue to sustain its growth and become even more fruitful, it needs even more
water, soil, and sunlight (growth capital).

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Definition of: Business Model (n.) [biz-nis mod-l]
1. Essentially, a business model is a description of the way in which a business aims to
operate and make money. Business models can be very simple, like a business who
buys fresh produce directly from farmers and resells it at a slightly higher price in their
storefront. Or, business models can be very complex, like a mobile app that has three
different revenue channels, each a little more confusing than the last. Whatever the
case, a business model should define how the business plans to create value, deliver
their product or service to customers, and collect money. This model will serve as a
guide for their business’ operations, and in some cases may help managers figure out
how to improve the business.
2. BONUS WORD: The Business Model Canvas is a tool that businesses can use to
develop and structure their business model. It focuses on 9 different variables (see
chart below) that the creator must define. Once these variables are defined, they can
easily be organized to create a business model. It is a very helpful tool, and by
separating the business into smaller segments, it makes it easier for the creator to
organize the final model.

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Definition of: Monetization (n.) [mon-i-tahyz-ey-shuhn]
1. Monetization is the process of earning money from business operations. While that
may seem like a very simple concept that every business should easily be able to do, it
is actually not so simple these days. With startups in the internet and mobile sector, the
process of monetizing their products is becoming increasingly complex, and it is
something that many entrepreneurs often struggle with early on in the startup process.
Every entrepreneur has a great idea of a product or service that will solve a
problem/serve a purpose in the market; that’s what gets them started. However, if a
business can’t figure out a way to make money from that product or service, it will
eventually become impossible to support their business and they will fail. Therefore,
defining a plan to monetize their product or service should be one of the first things
that an entrepreneur does when starting their business. If they do not, they run the risk
of discovering bad news (that they can’t actually make money from their product) after
putting in a whole lot of time and effort.

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Definition of: Freemium (adj.) [free-mee-uhm]
1. The Freemium business model is a business model that provides a combination of
free and premium services for the customer (thus the name: Free + Premium =
Freemium. Clever, huh?). In a Freemium model, a company will offer a basic version of
the product for free in order to generate interest and grow users. Once the user begins
using their product, they offer certain upgrades, features, or virtual goods for the
product that will add value for the customer. These extra upgrades, instead of being
free, are offered at a premium, and therefore generate income for the
company. Because it is relatively inexpensive to produce and deliver software products,
this model is particularly popular in the software sector. One of the most popular uses
of the Freemium model today is in mobile applications. Companies bring users in by
allowing them to download and use their application for free and then hope that they
enjoy it enough to purchase in-app upgrades and extra features. Also, it is important to
note that many companies who use this model will place ads in their free product
versions to ensure that they are still generating some income no matter if the user
chooses to upgrade to premium or not.
2. As mentioned in the introduction, the Spanish football team has won all 3 of the last
major international competitions (UEFA Euro 2008, FIFA World Cup 2010, and UEFA
Euro 2012). Not only is this an unprecedented feat, but Spain also managed to do so
while displaying characteristics similar to those of a company using a Freemium
business model (I’ll admit it´s a bit of a stretch, but just stick with me here. It actually
works). In the group stages of each event, when winning every game is not 100%
necessary, Spain played using its “basic, free version”. In the group stage of Euro 2008,
they won all 3 of their games, but gave up at least one goal in each. In the group stage
of the World Cup, they lost their opening game to Switzerland and just barely beat
Chile 2-1. Finally, in the group stage of Euro 2012, they tied Italy 1-1 to open the

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tournament. In all 3 tournaments, they did enough to advance; they were certainly
good, but by no means dominant. However, once the games became one-loss-
elimination, they immediately upgraded to the premium version of the Spanish
football team. In 10 elimination games (3 in Euro 2008, 4 in the World Cup, and 3 more
in Euro 2012), they did not give up a single goal. They outscored their opponents 14-0
and dominated the field. And that, my friends, is why they are the European
Champions yet again.

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Definition of: Burn Rate (n.) [burn reyt]
1. The definition of Burn Rate is fairly simple: it is the rate at which a company spends
their money. However simple it may be though, it is a particularly important metric for
startup companies who are in between rounds of funding. By using their burn rate
coupled with the amount of money they received in their previous financing round, a
startup can calculate exactly when they will need their next round of financing to be. It
is also important in any business (startup or old, established business) to help manage
individual projects. By calculating the burn rate, a project manager can determine the
necessary budget for the project.
2. Sometimes, when startups are incredibly successful and want to speed up the time
until their next financing round in hopes of raising a huge amount of money, they will
actually withdraw very large amounts of cash from their available capital and use it as
fuel for an enormous bonfire. This way, they can simultaneously celebrate their coming
success with an exciting party and accelerate their burn rate. It’s a win-win situation!
(Note: none of the above is actually true. Nobody does that.)

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Definition of: Customer Acquisition Cost (n.) [kuhs-tuh-
mer ak-wuh-zish-uhn kawst]
1. The Customer Acquisition Cost (CAC) is one of the most important metrics for
startups to manage/pay attention to. It measures exactly how much money a company
is spending per new customer. It is particularly important for startups for two reasons:
1) By analyzing and managing their CAC, an entrepreneur can determine if their
current marketing efforts and business model are actually effective, and, if not, they
can tweak it in certain ways to make it so. 2) When pitching their idea to potential
investors, showing that they have a healthy CAC (meaning low) can be a very
convincing argument, as it shows the investor that the money invested will go a long
way to support the growth and progress of the company.
2. Sometimes, acquiring customers is kind of like playing a carnival game. As an
entrepreneur, you confidently step up to a booth with your pockets full of cash, ready
to master the childish looking game and win that huge stuffed pelican you’ve had your
eye on since you arrived. You hand your money to the guy working the booth, pausing
for a second to think about how or why he grew his facial hair that way, and he places
5 balls on the counter in front of you, stepping out of the way to let you take your shot.
Your goal in this game: throw the balls to knock down the targets (customers) moving
around at the back of the booth. It seems simple enough, so you grab a ball and hurl it
toward the targets, only to hear the gentle thud as your ball hits the cloth at the back of
the tent, completely missing all targets along the way. Luckily, you’re an entrepreneur,
so failure doesn’t bother you. You try again, focusing a bit more, and this time you get
one. Three more throws and you get one more target. Not too bad. You spent $5 and
got 2 customers. Your CAC is $2.50. Of course, the more you work on your skills and
accuracy, the better return you´re going to have, and therefore the lower your CAC
numbers will be. The real lesson here: if you are a good enough entrepreneur, one day
you will be a master of carnival games and live in a house full of stuffed pelicans.

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Definition of: Customer Lifetime Value (n.) [kuhs-tuh-
mer lahyf-tahym val-yoo]
1. The Customer Lifetime Value (CLV) is a calculation that measures the total predicted
net profit from a company’s relationship with a customer. A company will predict the
length of a customer’s relationship and will also predict the yearly income that will be
generated by that relationship. With those numbers, they can use the Net Present
Value equation to figure out exactly how much that customer’s “lifetime value” will be.
This calculation is particularly important when compared with
the Customer Acquisition Cost because it shows the company if the money they are
spending to acquire each company is actually worth it or not. It can also help
companies determine how important customer retention is, a factor which can help
decide how much effort they want to put into areas like customer service.
2. Customer Lifetime Value is the perfect way for a business to dehumanize their
customers. Instead of thinking of each individual as a customer who they want to help
and satisfy, calculating the CLV allows the company to remove all human
characteristics and think of them solely as a number. With this number, they can
determine just how unimportant a customer is to them, allowing them to choose how
horrible and unfriendly they would like their customer service representatives to act.
It’s a great tool!

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Definition of: Investment Rounds (n.) [in-vest-muhnt rounds]
1. For startups, there are 3 initial rounds in the investment process. The first is seed
funding, which typically comes from Friends, Family, and Fools. Once the startup runs
through their seed capital and have their feet under them (and a demo ready to go),
they go to the next round: Angel Investor Round. As we’ve talked about before, the
money in this round comes from business angels. With these funds, a startup can
usually run for at least a year or so, by which point they should (if things go well) be
ready to do some serious progressing and expanding. Once they get to that point, it’s
time to go to the third investment round: the Series A round. In this round, startups
will go to venture capital firms seeking very large amounts of money (a fairly safe
generalization, according to Wikipedia, would be a range of $2-$10 million) that they
hope to use for further product development, marketing activities, etc. For some
startups, the Series A round of funding is the end of the road, and from there they are
all set to make it on their own. For others, they may go on to raise funds in future
investment rounds (similar to a Series A round), or eventually, if they’re lucky, they
may even have an IPO. For a much more technically detailed explanation of the
different rounds, check out Y Combinator co-founder Paul Graham’s essay on the topic.
2. In some ways, running a startup is sort of like playing a classic side-scrolling video
game (think original Super Mario Bros.), where the levels represent the everyday
development of the company, and the bosses represent the necessary investment
rounds. Every so often, when you reach a certain point in the development of the
company (the end of the level), you need to face a boss (raise some funds). As you get
further into the game, you’ll notice that raising those funds (beating the bosses) gets
harder and harder. Therefore, you need to make sure you improve enough during each
level to be able to beat the boss and raise those funds. Unfortunately, some startups
won’t be good enough to last to the end of the levels (if I had a nickel for every internet
startup who had succumbed to death by Goomba…); others won’t have what it takes
to get past the bosses. However, for some lucky startups, they will be able to make it all
the way past Bowser, the big evil venture capitalist ,and save the princess once and for
all. (Sadly, we all know that there have been tons of Super Mario sequels, so likewise
with startups, the fight goes on).

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Definition of: Equity (n.) [ek-wi-tee]
1. Equity is a pretty well-known and well-understood concept. It is a representation of
the ownership of a company, and therefore the right to future profits. It is particularly
important to entrepreneurs, as it can be their strongest (or only) bargaining chip during
the early stages of their company. It is what they will give to angel investors and VCs
in exchange for their much-needed investments. However, these kinds of deals with
equity can be dangerous, and it is incredibly important that the entrepreneur is careful
when handing it out to investors. When a company isn’t worth very much, it is easy to
justify adding in a few percentage points more to get a deal done quicker; but once (if)
the company is successful and becomes worth millions and millions of dollars, those
“few percentage points” could end up resulting in the founders losing some serious
money.
2. When figuring out what to do with their equity, entrepreneurs would be wise to take
notes from the great Frodo Baggins. Throughout their journey as entrepreneurs, they
need to think of their equity as “Their Precious”, and need to take incredible care of it
at all times. If they get careless or take their eye off it for just a second, their best
friend, Samwise Zuckerberg, or a venture capitalist (represented fairly accurately in
this analogy by the small, slimy, emaciated creature known as Gollum) may sneak in
and try to take it from them. Therefore, an entrepreneur must be strong, brave, and
dedicated; and with the right team and a little luck, they will make it past the dark
army and to Mount Doom, where they can finally sell their equity for a huge sum of
money. Then, having created an incredible business and saved Middle Earth from
certain destruction, they can finally relax and return to the Shire to find a spouse and
live a true hobbit’s life.

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Definition of: Valuation (Pre- and Post-Money) (n.) [val-yoo-
ey-shuhn (pree- and pohst-muhn-ee)]
1. When a startup company is ready for VC funding, they will first go into what is
called Round A of financing (as discussed briefly in the “Investment Round” post from
last week). In this round of funding, the VC and the startup will agree upon how much
they believe the company to be worth. This amount is the pre-money
valuation. Starting with this number, they then add the amount of capital that the VC
plans to add, and arrive at the post-money valuation. Once the money has been added,
the VC now owns a certain amount of shares of the company, and as a result, the total
number of shares available has increased. This process is now as dilution, and will be
explained as next Tuesday´s word. Be sure to come back to learn more .
2. The valuation of a company is kind of like when you were 8 years old and your
teacher allowed the class to give themselves grades for their own essays. Most of the
people in your class gave themselves reasonable grades, because they were mature
enough to critique their own work and be honest about how good or bad they had
done. However, there was always that one kid that nobody ever liked who always gave
himself 100%´s and then smirked about it because he thought he and his work were
both that awesome. However, once Little Johnny the startup comes to a VC with a $100
million valuation, that´s when the VC (teacher) has to sit him down and teach him how
to be realistic.

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Definition of: Dilution (n.) [dih-loo-shuhn]
1. Dilution is often misunderstood. Unfortunately, it’s also one that many
entrepreneurs – or startup employees of any kind – often cannot afford to
misunderstand. Dilution is most simply defined as a decrease in value of one’s shares
that results from the issuance of new shares.
For example, if an employee is hired by a startup before completion of any funding
rounds and is given 5% equity, they will own 5% of the total shares. For simplicity’s
sake, we will say the company has 1,000,000 shares, giving the new employee 50,000
shares of the company. However, shortly after the employee starts, the startup gets a
round of funding worth $1 million from a VC wanting 25% of the company. As we
discussed last Thursday, that means that the company has a post-money valuation of $4
million ($1,000,000/.25 = 4 million), and therefore a pre-money valuation of $3 million.
However, while all this valuating is going on, we must remember that new shares need
to be issued in order to give the VC their 25% of the company. To calculate the number
of new shares needed, we plug our info into a simple equation where x is the number
of new shares needed, and 1,000,000 is the number of existing shares:
x /(1,000,000 + x) = .25
With this info, we can determine that the company must issue 333,334 new shares,
which now belong to the VC. The company now has 1,333,334 total shares. As you’ll
recall, the employee owned 50,000 shares. When the company only had 1 million
shares, this gave him 5% of the company. However, 50,000 shares is now only worth
3.7%. To put this in perspective, 5% of the now $4 million company is $200,000; 3.7% of
the same company is only $148,000.
Considering that dilution occurs every time a startup receives a round of funding (and
considering the difference between 5% and 3.7% is a whole lot more than $52,000 when
you’re talking about companies worth hundreds of millions of dollars), it is very
important that employees and founders take it into consideration when negotiating
their equity shares within the company.

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2. In case that explanation wasn’t clear enough, let’s think about it in more relatable
terms: it’s a Saturday night, you’re drinking with your friends, your drink runs out,
and you decide to mix a new drink (note: though such accuracy and responsibility is
very unlikely in this scenario, we will assume that you have the discipline and skills of
a highly trained chemist when mixing your drinks). First, you pour in 100mL of vodka.
At this point, there exists only 100mL worth of liquid, and vodka owns it all. However,
because you enjoy the thought of having a healthy liver, you then add 200mL of
Sprite. Now the drink consists of 300mL of total liquid, yet there is still only 100mL of
vodka. Therefore, just like the employee in definition 1, vodka’s ownership of the drink
has been diluted. It owned 100% of the drink before, but now it only owns 33%. By
adding the extra Sprite, you have cheated the vodka out of 67% of the company that is
started, and vodka is now very poor and sad. If experience has taught me correctly, it
will most likely exact its revenge in the form of a serious hangover the next day.

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Definition of: Vesting (v.) [ves-ting]
1. In the business world, the term vesting refers to a schedule created by an employer
to give employees access to their stock options gradually over time. Instead of just
giving them instant access to all of their shares when they are first hired, an employer
will come up with a schedule so they get access to the shares bit by bit over time. For
example, they might vest their stock options over their first 5 years with the company,
giving them access to 20% more every year. This process ensures that the employee
still get what they are promised, but also motivates them to continue on with the
company for the entire 5 year period so that they gain access to all of it.
2. Outside of the business world, vesting takes on a whole new meaning. It is the act of
cutting the sleeves off of one´s shirt in order to make a make-shift vest out of the
material. It is a technique, made popular in the 90s, that is most commonly used when
the shirt-wearer is feeling overheated or simply wants to show off their biceps, and
therefore no longer has use for the sleeves. By cutting off the sleeves, they make a nice,
ragged looking “vest” item that simultaneously cools them off, shows off their arms,
and ensures that no member of the opposite sex will come in contact with them for the
rest of the day. To hear a funnier take on vests, check out Demitri Martin’s comments
on the subject:

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Definition of: Tag-Along/Drag-Along Clause (n.) [tag-uh-
lawng/drag-uh-lawng klawz]
1. Today’s Startupedia features definitions of two very popular clauses in shareholders’
agreements. Chances are, if you have received VC investment money at any point in
your career, you have probably seen either a Tag-Along or Drag-Along Clause or both
(unless you didn’t read the terms of your agreement…). First, a Tag-Along clause is
one that protects the interests of the minority shareholders in the event of a third party
purchase of the company. This type of clause will prevent any majority shareholder
(the “majority” is defined elsewhere in the agreement) in the company from selling
their shares to a third party unless the third party is willing to purchase the shares of
the minority shareholder under the same conditions. Conversely, a Drag-Along clause
is one that protects the interests of the majority shareholder. With this type of clause, if
the majority shareholder wishes to sell their shares to a third party, the minority
shareholder is forced to also sell their shares under the same conditions. This prevents
the minority shareholder from refusing to sell their shares to the third party and
threatening the success of the deal.
2. The Tag-Along and Drag-Along clauses are kind of like rules that your parents
might put in place for you and your younger brother (imagine you are the majority
shareholder and your little brother is the minority shareholder). Your little brother is
way less cool than you and doesn’t have nearly as many awesome friends as you do.
Therefore, to protect his interests and make sure he’s happy (as the youngest child,
your parents have always cared more about him than you), your parents made a rule
that any time you want to go and play sports with your friends your little brother is
allowed to tag along and play as well. This is a tag-along clause. However, because
they have spent the last 12 years listening to you complain about how “they only ever
care about him” and “we never do anything I want to do”, your parents finally caved
and made a rule in your favor: any time you go to the movies as a family, you get to
choose what movie you see. No matter what it is, your little brother is forced to come
with you. This is a drag-along clause. I hope he likes Star Wars as much as you…

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Definition of: One-Pager (n.) [wuhn-pey-jer]
1. These days in the startup world, one-pagers are incredibly important for every
entrepreneur. Though business plans are still accepted – and often expected – as a way
of presenting one’s business to potential investors, one-pagers are becoming more and
more popular. Essentially, they serve as the “executive summary” of the business plan,
highlighting all of the important details of the company and grabbing the reader’s
attention. However, unlike an executive summary or a regular old business plan, one-
pagers tend to be much more visually appealing and aren’t limited to a few paragraphs
of boring prose with a graph or two below. This more open-ended format allows the
entrepreneur to get creative and make their business stand out and stick in the mind of
the investor. A good one-pager is something that an investor can read in just a couple
of minutes, proves to them that the idea is both good and profitable, and gives them
confidence in the team that created it.
2. According to recent finds at various archaeological sites around the world,
entrepreneurs in ancient civilizations used to create incredibly long documents – some
extending up to hundreds of pages – to describe the structure and plans of the
company they wished to found. They called these documents “Business Plans”, and it
seems they would actually print them out and give them to every potential investor
that they met with. Sometimes, they would even spend copious amounts of money to
bind the documents in an attempt to make them look “more professional”. One expert
I spoke with told me that he recently discovered a “Business Plan” for a company
called Bores R’ Us written and prepared by company co-founder Brian Mc Borinson. “It
looks like it’s never even been touched!”, the archaeologist told me with an excited
smile on his face, “I think I may have been the first person to actually lay eyes on the
contents of these pages.” He opened the document to show me, but after glancing
briefly at the first page, immediately fell asleep.
The existence and prevalence of these “Business Plans” is a tremendous discovery, and
could have drastic effects on the way we do business here in the modern world. I think
it should serve as an important reminder to entrepreneurs of all ages and generations
to make sure that we do not slip back into the habits of our ancestors, creating
unnecessarily long documents with nothing but BS filler words and meaningless
projection graphs just to convey our simple business ideas. Instead, we must take full
advantage of the resources we have today to create complete, concise one-pagers and
presentations that get our ideas across without wasting anyone’s time.

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Definition of: Internal Rate of Return (n.) [in-tur-
nl reyt uhv ri-turn]
1. The Internal Rate of Return (IRR) is a term that you will find in every Intro to
Finance class textbook. Its technical definition can at first seem a little confusing, but
it’s applicable meaning is pretty far from complicated. In financial terms, the IRR is
known as “the rate of return that makes the net present value of all cash flows from a
particular investment equal to zero.” Now that’s quite a mouthful, and if you aren’t too
familiar with finance, it can take a few reads (plus a google search or two) to really
start to grasp what it means. Here at Startupedia, however, we’re all about simplifying
things for you. So in simple terms, what is the IRR? The IRR is essentially the projected
rate of growth that a particular investment will have. Say a company is looking at 5
different possibilities for investment. By calculating the IRR for each project, they will
be able to know which project has a greater chance for strong growth, and will
therefore be able to rank them according to priority.
2. Some experts believe that the term “IRR” has its roots in the Spanish verb “Ir”,
which means “to go”. When the term first came to be, financial executives translated
this verb into English, and began using it when they chose a project, saying, “We
would like to go with this project instead of those other ones.” Thus, IRR became a
term that was used to choose which project a company would pursue. Of course, it is
very difficult to be certain where a term came from. Said “experts” may be wrong, and
I also could have completely made this story up. We may never know.

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Definition of: Downround (n.) [dounround]
1. A few weeks ago, we brought you the definition of Valuation: the value of a
company determined by Venture Capitalists during a round of funding. However, that
“value” is merely a number created by the VCs, and typically has no actual money
behind it. Therefore, after the first round money is invested into the company, they will
have a period of normal operations eventually followed by another funding round. By
the time the next round comes around, things have changed at the company. They
have a different number of customers, they have a different amount of income, and a
different outlook for the future. Because things have changed, the VCs now have to
determine a new value for the company based on current information. Unfortunately
for some businesses, their valuation in the second round of funding comes out lower
than their first round, indicating that investors think the company’s value has
decreased. This decrease in valuation is known as aDownround. Such rounds can be a
huge bummer for companies, and dilute the value of the shares distributed in the
previous round. Also, they tend to happen far more often during industry crises like
the dot com bubble of the early 2000s when a large amount of internet companies were
initially overvalued until the bubble burst and their value quickly went down the toilet.
2. A company having a downround is kind of like a hyped up sports phenom failing to
live up to expectations. Let’s take basketball, for instance. Coming out of college, Player
X was thought to be the next Michael Jordan, and was destined to lead his team to
multiple championships in the first few years of his career. Upon being drafted, Team
Y offered him an enormous contract guaranteeing him $100 million over the first 5
years of his career, showing their utmost confidence in him as a player. Unfortunately,
over the first few years of his career, Player X is overwhelmed with the media attention
and expectations, suffers a minor injury, and is never able to recover and regain his
place atop the basketball world. After his 5 year contract with Team Y expires, he
needs to seek employment with another team. However, because of his disappointing
performance for the last 5 years, the rest of the teams in the league are no longer
willing to pay him $100 million, and he instead humbly accepts a measly 5 year/$10
million contract. Player X has experienced a serious downround. (Bonus points if you
comment with the name of the player below, whose story is essentially explained in
this post).

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Definition of: Crowdsourcing (n.) [kroud-sawrs--­‐ing]
1. Crowdsourcing is a method of production, problem-solving, and innovation that is
becoming more and more popular in today’s digital world. When a company has a
problem to be solved, they can send their problem out to a large “crowd” of engineers
(this is often done using crowdsourcing websites like AgentAnything and many many
others) who then work on the solutions individually. These engineers aren’t contracted
by the company, but are most often compensated in some way, be it with money,
prizes, recognition, or other creative ideas the company might have. In many cases, it
can allow companies to solve problems very quickly and for less money than it might
cost to have an in-house engineer working on the project. Additionally, because many
different crowd workers can submit solutions to the problem, it gives companies a
diverse range of solutions from which to choose, occasionally allowing them to
combine solutions to get an even better one.
2. Crowdsourcing is the perfect way to ensure that you do no work yourself. By
sending your problems to “crowds” of problem solvers, you no longer need to worry!
Just sit back, relax, maybe watch a movie or two, grab a beer, and wait. Soon, you will
have a whole smorgasbord of solutions to choose from without having lifted a finger
(well, except to grab your beer). So the next time you find yourself pulling your hair
out over that one little problem that you just can’t seem to solve, have no fear. Send it
to the crowd.

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Definition of: Scalibility (adj.) [skeɪləәˈbɪlɪtɪ]
1. Scalibility is a pretty easily definable word. Put simply, it is the ability of a business
or product to adapt to increased demand. For example, if you create a product and are
able to sell a certain amount locally, great job. But now that you’ve got your feet under
you, how much can you grow? Is your product something that you can sell to the
masses? Is your business model set up in a way that will allow you to sell on a national
or global level? How far exactly are you going to be able to take this business? The
answers to these questions determine the scalability of your product and are very
important things to address when looking for investment. Investors of all kinds should
be interested in your company’s ability to grow, as it is that growth that will ultimately
result in their profit.
2. Mediocrity is defined as the state of being neither good nor bad. It is a perfectly
acceptable way of life for some people. Unfortunately for entrepreneurs, mediocrity is
not ok. When you are getting started, have some traction locally, and start looking for
investment, mediocrity is very far from being ok. You had better go in being able to
prove that you are scalable and that you are going to grow like ivy on an abandoned
building. If you come into a meeting with a VC and say, “Well, I’m not too sure if we
would be able to handle much more demand, so I think we’re ok where we are now.”,
you had better not expect them to give you any money.

43.
About Startup Spain
Why moan about the crisis when we can Startup Spain?
About two and a half years ago Techcrunch contributor Marina interviewed us asking
how we planned to change the Spanish startup ecosystem. At that point we had a
vision, but planned on figuring out tactics as we went along. Constant pivoting to
figure out what works wasn’t considered “normal” in Europe, and neither was trading
in the suits I wore in my last job at London’s South Kensigton for our never-to-be-
ironed, bright orange Tetuan Vendetta t-shirts
In those years we struggled a lot. Like most startups we ate, breathed, and (barely)
slept lean. We took a hard line on “for entrepreneurs, by entrepreneurs” and having
been entrepreneurs ourselves, took a very protect-and-serve attitude that often had us
pitted against other organizations in Spain. But, through that, we built a lot too. We
started the first non for profit pre-accelerator in Europe which after it´s 5th edition now
comes complete with an army of 200 alumni. We launched Startupbootcamp, the first
pan-European accelerator, making Madrid the second of it´s five partner cities. We
grew and we spread when two of our co-founders moved on to launch new projects
(@abarrera is busy with @42press and @btkutz with@Infoadmyo), and we now have a
new senior team on board, including another former suit, @jmcobian, our visa
experiment @kmelan and a MBA with a performer background known as @startupjedi.
We have met a lot of amazing people who helped show us the way, from superstars
like Paul Kedrosky and Vivek Wadhwa, to our earliest entrepreneurs and mentors who
grew right alongside of us. And, most importantly, we learned a lot. Looking for
people who had the same goals as we did, we turned many an old competitors into
new allies. Soon we realized that instead of working in-spite of the government it is
especially essential in countries like Spain to work with it. But how to do that when
everyone here is complaining about the status quo? It is necessary to look inside of
organizations to find those few who really want to make a change, and engage them
with entrepreneurs so they know how and where to help best.
So what are our plans for the next months?
Two weeks ago we received a letter from the Kauffman Foundation confirming we had
been invited as members of the future Global Partner Network that will help foster
entrepreneurship in 14 countries initially. After seeing what Techstars has done
with Startup America, and learning from the crew at Startup Chile – we decided now
was the moment to start-up Spain. We quickly bid $100 for startupspain.com in our
first domain auction and launched the brand kicking off this huge task with four initial
initiatives:

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• The Angel School which sets out to help develop “the other side” by providing
insight to a new generation of informed angel investors in Spain.
• Open sourcing of the Tetuan Valley model so Startup School preaccelerator
Affiliates and potential future clones can help entrepreneurs worldwide
• Build regional and national programs to invest, fund and accelerate entrepreneurs
that base their startup’s operations in Spain and support all existing local
programs and institutions both public and private that are aligned with our
objectives of creating jobs and redefining our country’s economic and productive
model
• Fighting to get 5000 guiris a visa in Spain. This basically proposes we should
copycat the Startup Chile import-export scheme. The difficulty in getting a visa in
Spain is a roadblock that needs to be sorted out in order to move ahead and, if
unresolved, will rob the Spanish economy of time it doesn’t have. Thanks to the
openness of some friends in our former colony we know it’s going to take at least
5 years to reach the speed of 1000 startups per year, but, as they say in Techstars,
we need to do more faster
Yes, it is hard to start-up in Spain, but when has any real entrepreneur shied away
from difficult? It doesn´t make sense for us to sit around and moan when we can make
things here easier, and more importantly, worthwhile. So that’s the challenge, and
that’s what we intend to fight for under one common name: Startup Spain. Will you
join us?
@luisriverag
If you would like more insider knowledge on the industry, follow us on
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46.
This book is dedicated to all the people
that strive everyday to be
the change they want to see in the World