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VC Glossary
52Searchable A-Z dictionary of venture capital terminology
A
Angel InvestorAn individual who invests personal capital into early-stage startups, typically at the pre-seed or seed stage. Angels often provide smaller checks ($25K–$500K) along with mentorship and introductions.
Annual Recurring Revenue (ARR)The annualized value of recurring subscription revenue. The primary growth metric for SaaS businesses. Monthly Recurring Revenue (MRR) is the monthly equivalent.
B
BlitzscalingA strategy of prioritizing speed of growth over efficiency in an environment of uncertainty, typically in winner-take-all or winner-take-most markets. Coined by Reid Hoffman.
Burn RateThe rate at which a company spends its cash reserves, typically expressed monthly. Gross burn is total monthly spend; net burn subtracts revenue. Used to calculate runway.
C
CAC (Customer Acquisition Cost)Total sales and marketing spend divided by new customers acquired in the same period. Should be decomposed by channel, as blended CAC can mask expensive paid acquisition behind efficient organic growth.
CAC Payback PeriodThe number of months it takes for a customer's gross profit contribution to recover their acquisition cost. 12–18 months is generally healthy for SaaS; shorter is better.
Cap TableA spreadsheet or ledger showing the equity ownership structure of a company, including shares held by founders, investors, employees, and any outstanding options or convertible instruments.
Carried Interest (Carry)The share of fund profits (typically 20%) that goes to the general partners as performance compensation. Carry is only earned after returning all committed capital to LPs, sometimes after clearing a hurdle rate.
Churn RateThe percentage of customers or revenue lost over a period. Logo churn counts customers; revenue churn accounts for expansion and contraction. Net negative churn means existing customers grow faster than others leave.
Convertible NoteA short-term debt instrument that converts into equity at a future financing round, typically with a discount rate (15–25%) and a valuation cap. Accrues interest that adds to the conversion amount.
D
Deal FlowThe pipeline of potential investment opportunities a fund evaluates. Proprietary deal flow (opportunities seen before competitors) is a key competitive advantage for top-tier funds.
DilutionThe reduction in existing shareholders' ownership percentage when a company issues new shares, typically during a financing round. Dilution is expected but should correspond with meaningful value creation.
Down RoundA financing round at a lower valuation than the previous round. Signals deteriorating performance or market conditions and can trigger anti-dilution protections for earlier investors.
DPI (Distributions to Paid-In)Cash actually returned to LPs divided by total capital contributed. The ultimate measure of fund performance, though it only becomes meaningful as a fund matures and exits investments.
Dry PowderUncommitted capital that a fund has available to deploy. High industry-wide dry powder can inflate valuations as more capital competes for a finite set of quality deals.
Due DiligenceThe comprehensive investigation of a potential investment, covering financials, technology, market dynamics, competitive landscape, team background, legal standing, and customer references.
E
ExitThe event through which investors realize returns on their investment, typically via IPO (initial public offering), acquisition (M&A), or secondary sale.
F
FlywheelA self-reinforcing business dynamic where each component accelerates the others. Amazon's flywheel: lower prices → more customers → more sellers → better selection → lower costs → lower prices.
Fund of FundsAn investment vehicle that allocates capital across multiple venture funds rather than directly into startups, providing LPs with diversification across managers and vintages.
G
General Partner (GP)The managing partners of a venture fund who make investment decisions, manage the portfolio, and operate the fund. GPs contribute a GP commit (typically 1–5% of the fund) alongside LP capital.
Gross MarginRevenue minus cost of goods sold, divided by revenue. For SaaS, gross margins of 70–85%+ are typical. Marketplace and hardware businesses have structurally lower margins.
I
IRR (Internal Rate of Return)The annualized return accounting for the timing of cash flows. Rewards funds that generate returns quickly. Can be misleading for young funds with a single early exit.
L
Limited Partner (LP)Investors who commit capital to a venture fund but do not participate in day-to-day management. Common LPs include pension funds, university endowments, family offices, and sovereign wealth funds.
Liquidation PreferenceA term that determines the order and amount of payouts in a liquidity event. A 1x non-participating preference means investors get their money back before common shareholders receive anything.
LTV (Lifetime Value)The total economic value generated by an average customer relationship. For SaaS: (monthly revenue × gross margin) / monthly churn rate. LTV/CAC ratio above 3x is considered healthy.
M
Management FeeAn annual fee (typically 2% of committed capital) paid by LPs to cover the fund's operating expenses: salaries, travel, office, and administrative costs.
MarkupAn increase in the valuation of a portfolio company, typically recognized when a subsequent financing round prices higher than the previous one. Markups increase TVPI but do not represent realized returns.
MoatA sustainable competitive advantage that protects a company from competitors. Types include network effects, switching costs, economies of scale, brand, regulatory capture, and proprietary technology.
N
Net Revenue Retention (NRR)Revenue from an existing cohort after accounting for expansion, contraction, and churn. Above 100% means customers spend more over time. Best-in-class SaaS companies achieve 120–150%+.
Network EffectsWhen a product becomes more valuable as more people use it. Direct network effects (more users = more value, e.g. social networks) and indirect (more users attract complementary supply, e.g. marketplaces).
O
Option PoolShares reserved for future employee equity grants, typically 10–20% of the company. Usually created or expanded during financing rounds and often included in the pre-money valuation, diluting founders.
P
Participation RightsA liquidation preference feature where investors receive their preference amount AND their pro-rata share of remaining proceeds. More investor-favorable than non-participating structures.
Platform RiskThe vulnerability of a business that depends heavily on another company's platform (e.g., building on iOS, selling on Amazon, distributing via Google). Platform owners can change rules, fees, or access at any time.
Post-Money ValuationThe company's valuation immediately after a financing round. Calculated as pre-money valuation plus the amount of new capital invested.
Power LawThe mathematical distribution governing venture returns: a small number of investments generate the vast majority of a fund's returns. A single investment can return the entire fund. This shapes portfolio construction strategy.
Pre-Money ValuationThe company's implied valuation before new capital is invested in the current round. Pre-money plus investment equals post-money.
Preferred StockA class of shares with special rights (liquidation preference, anti-dilution, voting rights) that venture investors typically receive, in contrast to common stock held by founders and employees.
Pro-Rata RightsThe contractual right for an investor to participate in future financing rounds to maintain their ownership percentage. Valuable in hot companies where access to later rounds is competitive.
Product-Market Fit (PMF)The degree to which a product satisfies strong market demand. Evidenced by high retention, organic growth, and customers who would be very disappointed if the product disappeared.
R
Rule of 40A benchmark where a SaaS company's revenue growth rate plus profit margin should exceed 40%. A company growing 60% with -15% margins scores 45, which is above the threshold. Balances growth against efficiency.
RunwayThe number of months a company can operate before running out of cash, calculated as current cash divided by monthly net burn rate. Most companies aim to maintain 12–18 months of runway.
S
SAFESimple Agreement for Future Equity. A convertible instrument created by Y Combinator that converts into equity at a future priced round. Unlike convertible notes, SAFEs are not debt, have no maturity date, and do not accrue interest.
Secondary SaleThe sale of existing shares from one holder to another, rather than new shares issued by the company. Allows early investors and employees to achieve partial liquidity before an exit event.
SyndicateA group of investors who co-invest in a round. One investor typically leads (sets terms, takes a board seat) while others participate at the same terms.
T
TAM / SAM / SOMTotal Addressable Market (entire market), Serviceable Addressable Market (segment you can reach), and Serviceable Obtainable Market (realistic near-term capture). Investors prefer bottom-up sizing over top-down estimates.
Term SheetA non-binding document outlining the key economic and governance terms of a proposed investment. Serves as the basis for negotiation before definitive legal documents are drafted.
Total Addressable Market (TAM)The total revenue opportunity available if a product achieved 100% market share. Sophisticated investors prefer bottom-up TAM calculations based on customer count × willingness-to-pay over top-down industry report figures.
TVPI (Total Value to Paid-In)The sum of unrealized portfolio value and distributions divided by total capital contributed. The most commonly cited fund performance metric, though it relies on subjective portfolio valuations.
U
UnicornA private company valued at $1 billion or more. The term was coined when such valuations were rare; as of 2024, there are over 1,200 unicorns globally.
V
Venture DebtLoan financing provided to venture-backed companies, typically used to extend runway between equity rounds. Often includes warrants that give the lender the right to purchase equity.
Vintage YearThe year in which a fund makes its first investment. Fund performance is benchmarked against peer funds of the same vintage to account for market cycle effects.
W
Winner-Take-All / Winner-Take-MostMarket dynamics where one or two dominant players capture the majority of value, often driven by network effects or economies of scale. These markets justify aggressive growth spending.
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