Do you have to eat your own dogfood to become a unicorn? Can growth hacking reduce your customer acquisition cost? Is it OK to crowdsource if you’re in stealth mode? If you’re not agile will you lament your inability to fail fast?
Whether or not those questions make sense to you is a good mini-test of your knowledge of start-up lingo. The start-up world has its own set of vocabulary that can be confusing to people who are not immersed in it. But if you want to be active in the start-up scene, not knowing the jargon can be risky. At a recent pitch day attended by a friend of mine, one of the VCs asked a start-up founder, “What’s your Total Addressable Market?” The founder had no idea what he was asking, which needless to say did not impress the VC.
Here’s a guide to some of the lingo that will help you navigate your way through the start-up world with confidence.
Know the players
The key players in the start-up ecosystem are the start-ups themselves, and their founders. But what exactly is a start-up? Some people think that any small business is a start-up, but an important criterion is necessary in order to quality as a start-up. A startup needs to be a small business that has intentions to be a big business. It will do this through scaling its operations, and by disrupting a market with a new innovation.
The angel investors and venture capitalists often provide the funds to make this scaling and disrupting possible. Angel investors, or friends and family or an accelerator, will usually provide seed money, and venture capitalists will do the Series A, the first institutional investment.
The goal for all start-ups and their investors is to join the ranks of the spectacularly successful companies known as unicorns (the cutoff was assumed to be a valuation of over $1 billion, but with that becoming somewhat commonplace, many will strive to be a decacorn, worth more than $10 billion).
Innovation and product development
Innovation and product development are the next steps in the process, where the startup attempts to refine its technology and business model to ensure product-market fit.
Design thinking is one popular approach to discovering customer pain points and figuring out how to solve them. It has its origins in the processes used to design physical products, and involves brainstorming (often using copious quantities of postit notes) and rapid prototyping.
Another is Lean Startup, a methodology created by Eric Ries that has its roots in Toyota’s lean production techniques and agile software development. Firms using Lean Startup create a minimum viable product (MVP) that is the first, simple version of a product that can be shown to a customer to get their reactions. Based on customer feedback, the firm will go through iterations of improving the MVP, again showing it to customers, and then refining it further.
If this process shows that things are not going in the right direction, the firm may then want to pivot to a different problem or market segment, or zoom in on a specific feature. Iterating and pivoting allow a startup to fail fast, recognizing quickly that what it’s doing isn’t working and either adapting or, if necessary, throwing in the towel, either way getting a head start in moving on to something with a better chance of success rather than dragging out an approach that is not promising.
Once the start-up’s product or service is ready, it’s time to spread the word. A key metric to think about are the Total Addressable Market (TAM) (the revenue opportunity available, defined as the sum of revenues for all companies selling that product or service). Related to that is the Serviceable Addressable Market (SAM), which is the portion of the TAM a company intends to target, and the Serviceable Obtainable Market (SOM) which is the portion of the TAM a company realistically believes that it can capture.
Of course, the tendency is for companies to give high numbers for these targets, but there needs to be a strategy to get there and a way to monetize (make money). Many companies start with a freemium approach, which offers a basic service for free and then charges for additional features. The hope is that the product or service will go viral (spread quickly by word of mouth). One technique startups use to attempt to achieve this is growth hacking, a modern version of guerilla marketing that is implemented on the web and uses evidence-based decision-making.
If a start-up succeeds, it will experience exponential growth, characterized by a hockey stick shaped growth curve. It can look forward to additional investment rounds intended to propel the company to new heights and ultimately an initial public offering (IPO) or exiting through a big buyout offer from a larger firm. But if its burn rate (rate of using up cash) is too high it may only be able to get more cash through a down round (round of financing in which investors purchase stock from the company at a valuation lower than that of the previous round) that leads to excessive dilution for the founders (their share of the equity is reduced). If things go really badly, the company’s only option may be to accept an offer for an acqui-hire, in which a larger company acquires them just to get its hands on their team, or failing even that, liquidating the firm. If that happens, hopefully the founders will fail forward by learning from what went wrong and using the wisdom gained as the foundation for the next new venture.
Rochelle Kopp and Steven Ganz are co-authors of Valley Speak: Deciphering the Jargon of Silicon Valley, a new book dedicated to defining the startup ecosystem’s vocabulary in a way that is both rigorous and entertaining.