This week, I’m beginning a new segment called “The Entrepreneur’s Lexicon.” As a striving entrepreneur myself, I have discovered that there are a lot of buzzwords out there. These words are often thrown around in conversation, on blog posts, and over social media channels as if everyone should know them. Well, I didn’t know them when I first came on the entrepreneurial scene, and even after two years of exposure, I still find ones that I’m not sure about or have never heard of. So I’m starting a guide for all of us. Consider it the Urban Dictionary for entrepreneurs. I will define words and phrases I’ve run into, and I’ll provide links to national as well as local uses of the term. If you have requests for future terms to be covered, or edits you’d like to suggest for the definitions, please comment below!
This week’s theme is: “Money Matters.”
Being an entrepreneur, among other things, means managing money to generate business. If you’re running a lemonade stand, you might start with your parents’ $10 investment. If you’re running Twitter, you have to consider millions of dollars of investment against the revenue your company brings in. This leaves entrepreneurs with several options for getting their businesses started. Here are five of them.
“Friends and Family”
This phrase is used to describe the round of investments entrepreneurs receive from their friends and family members. These investments can be anywhere from $10 to $250,000. If you have a lot of friends who believe in you, or a wealthy Uncle who wants to keep his money “in the family,” this kind of funding can go a long way towards getting you the capital you need to develop a product or service and acquire customers. Friends and Family investments are not to be confused with credit cards and bank loans. These are real people who are footing the bill for your adventure. You should treat them fairly and reward them when you succeed.
Examples: Mom, Dad, your best friend who just sold his first company, that accountant you know who’s willing to provide billing service for later financial consideration.
Angel investors are not your friends and family. They are interested investors who do not represent a hedge fund, an investment firm, or any other organization governed by a board. They are sometimes considered the mavericks of the investment landscape, and they often come to the table with $50,000 or more. Sometimes, angel investors will group their investments together and deliver larger amounts to an entrepreneur’s coffers, but this rarely exceeds $1 million. Angels are investing their own money and expect large returns on their investments. You need to sell them on your dream, and they need to believe you’re going to make a profit somewhere down the road. Despite the name, these are not the people to approach when trying to save your hopelessly insolvent non-profit.
VC stands for Venture Capital. When you hear someone say “VCs,” they could be referring to the firms that invest large amounts of money (often more than $1 million) or the people making the decisions for these firms (Venture Capitalists). The VC landscape has grown in size and has all kinds of predefined rules about how much of your company VCs get for their investment, how soon you have to offer an exit strategy, what advice (and/or control) they will have in your company, and how to handle various other legal issues like intellectual property and prior investments. There are also three distinct rounds of venture capital funding you might hear people talk about. They are: Series A, Series B, and Series C. Series A starts around $2 million, and as you might imagine, Series B and C are progressively larger and come later in the life of a startup. If you want to know more about Venture Capital, there are great books and resources to be googled and devoured.
By far the most common practice is to build your own business on your own dime. Sometimes this means leveraging your credit cards, sometimes it means gutting your retirement portfolio, and sometimes this means building your business out of your garage at night while you grind out a day job. This is what entrepreneurs call “bootstrapping.” It derives from the idiom: to lift yourself up by your bootstraps. Successful bootstrappers often build sustainable businesses that grow slower and focus more on budget, revenue, and product over market size and customer expansion. There are examples of these people and their companies all around you. In Chicago, there are meetup groups like the Lean Startup Circle, Bootstrapper’s Breakfast, and others. There is also a local radio show called “Bootstrapping in America,” although they cover investment and non-bootstrapping topics as well.
Crowdfunding is what Obama uses to fund his campaign. It involves taking relatively small amounts of money ($10 – $10,000) from lots of people (100 – 1 million) who are interested in participating in and growing your organization. These people may know nothing about your business other than what is publicly available. It is not yet legal for investors to crowd fund for-profit companies. However, the JOBS Act has stipulated that crowdfunding be made legal, and as a result, there are a lot of people (both in government and private business) trying to figure out exactly how to implement this new funding platform. For now, the only examples come from the non-profit and art sectors, although some companies have managed to get away with crowd funding by selling their product in advance as part of the deal you get for “donating” $50.
That’s it for this week. Like I said, if you have comments or suggestions on these or future phrases to add to The Entrepreneur’s Lexicon, please comment below. Until then, here’s to making sure jargon is not an obstacle to your success!