Glossary Venture Capital

All technical terms of the article The History of Venture Capital in alphabetical order. The number at the end names the section that introduces the term.

A

• Accelerator – Programme that gives founding teams money, mentoring and access to investors for a few months in exchange for a small stake; Y Combinator (2005) was the first. 7
• ARD – American Research and Development Corporation, founded in Boston in 1946 by Doriot, Flanders and Compton; the first venture capital firm, famous for DEC. 2

B

• Bayh-Dole Act – US law of 1980 that transfers the patents from state-funded research to the universities; the basis of licensing offices and many spin-offs. 4
• Biotechnology – Field that arose with Genentech (1976) as the second large area of venture capital beside information technology. 4
• Business angel – Founder or manager who has become rich and gives their own money and advice in the earliest phase; since the 2000s a stage of its own before the funds. 7

C

• Carried interest – The general partners’ share of a fund’s profit, usually twenty per cent, after the limited partners have their money back. 3
• Corporate venture capital – Stakes taken by a corporation in startups with its own money to see markets and technology early; Intel Capital (1991) was the pioneer. 5

D

• Dilution – The shrinking of the existing owners’ share when a round issues new shares; the value of the smaller share can nevertheless rise. 5
• Down round – Financing round at a lower valuation than the previous one; frequent after the interest rate turn of 2022. 8
• Dual-class structure – Two classes of shares, one of which carries more votes; since Google’s IPO in 2004 the means by which founders keep control. 7
• Due diligence – Examination of a company’s technology, market, contracts and people before an investment. 5

E

• Endowment – The invested wealth of a university; since the 1980s, beside the pension funds, the most important limited partners, with Yale as pioneer. 4
• ERISA – US pension law of 1974; the interpretation of its prudent man rule in 1979 opened venture capital to the pension funds. 4
• Exit – Sale of a fund’s stakes through an IPO or the takeover of the company; without it every gain stays on paper. 3

F

• Fairchildren – The companies and funds that emerged from Fairchild Semiconductor, from Intel to Kleiner Perkins and Sequoia. 3
• Family office – Administration of a family’s wealth; before 1946 the most important source of venture capital, and again with BioNTech in 2008. 1
• Financing round – Stage in which a company takes in money for new shares; named after the share series Seed, Series A, B, C, each tied to the goals of the previous one. 5
• Fund – Contract for a term, usually ten years, in which limited partners put in money and general partners invest it in twenty to thirty companies. 3

G

• Games – Field of venture capital since Atari (1975), Sequoia’s first investment, up to Zynga, Supercell and Roblox. 4
• General partner – Manager of a fund who makes all decisions and is paid with fee and carried interest. 3
• Get big fast – Doctrine of the Internet years after Bezos: in a new market whoever is big first wins; losses are the price. 6
• Growth equity – Money from hedge funds, sovereign funds and corporations for companies that have already delivered the proof; has let companies stay private for a long time since 2009. 7

I

• Initial public offering (IPO) – First sale of a company’s shares to the public; since Netscape in 1995 also for companies without profit, rare since Sarbanes-Oxley in 2002. 3
• Internal rate of return (IRR) – Annual return with which funds state their results; misleading without the multiple of the stake. 2

J

• JOBS Act – US law of 2012 that eased IPOs and raised the shareholder threshold for disclosure from 500 to 2,000; allowed long private life. 7

L

• Lean startup – Method after Eric Ries (2011): build a minimal product early, measure, learn, instead of planning for a long time. 7
• Limited partner – Backer of a fund who is liable only with their contribution and does not interfere: pension funds, endowments, family offices, sovereign funds. 3
• Limited partnership – Legal form of the fund since 1959: backers as silent partners with limited liability, managers as general partners, ten-year term; free of the rules for public companies. 3
• Liquidation preference – Right of the preferred stock to receive the stake back first when the company is sold, before the founders get anything. 5

M

• Management fee – Annual fee of the general partners, usually two per cent of the fund, for salaries and office. 3

N

• NASDAQ – Electronic exchange since 1971 that admitted young companies with few requirements and became the exit market of venture capital. 3
• Neuer Markt – Segment of the Frankfurt exchange for growth companies from 1997 to 2003; brought Germany founders and funds, then frauds, losses and distrust. 6

P

• PayPal mafia – Founders and early employees of PayPal who, after the sale in 2002, founded or financed Tesla, SpaceX, LinkedIn, YouTube and the Founders Fund. 6
• Pension fund – Assets for occupational pensions; since 1979 the largest backer of funds in the USA, in Europe largely excluded to this day. 4
• Platform – Service that brings providers and users together and becomes more valuable for all with every participant; the business model of Uber, Airbnb and the social networks. 7
• Portfolio – A fund’s holdings, usually twenty to thirty companies, most of which fail. 3
• Power law – Distribution of a fund’s results in which a few hits bring almost the whole gain; in the data of Horsley Bridge six per cent of investments produced sixty per cent of gains. 7
• Preferred stock – Shares with preferential rights, above all the liquidation preference, that funds receive instead of ordinary shares. 5
• Private equity – In the narrow sense the debt-financed purchase of mature companies; shares legal form and fees with venture capital, nothing else. 5
• Prudent man rule – Principle of the pension law ERISA under which trustees may only invest prudently; since 1979 applied to the whole portfolio, which permits ventures. 4

S

• SAFE – Simple Agreement for Future Equity, published by Y Combinator in 2013: a promise of shares at the next round instead of a valuation today. 7
• Sand Hill Road – Street in Menlo Park at the edge of Stanford, home of Kleiner Perkins, Sequoia and many other funds; synonym for venture capital. 3
• Sarbanes-Oxley Act – US law of 2002 after the accounting scandals that requires audited control systems of listed companies and made small IPOs uneconomic. 6
• Secondary – Sale of existing shares, for instance by employees or early funds, to new backers without a capital increase; usual since DST at Facebook in 2009. 7
• Seed round – First small financing of a company, often from business angels or seed funds, before a larger fund comes in. 7
• Small Business Investment Company (SBIC) – Private company with a state licence and state loans under the law of 1958; the apprenticeship of many venture capitalists. 2
• Software as a service – Software sold as a subscription over the net; a favourite field of the funds since Salesforce (2004) because the revenue is predictable. 7
• Sovereign fund – Investment assets of a state, such as Saudi Arabia’s, Abu Dhabi’s or Singapore’s; since the Vision Fund in 2017 the largest backers of the mega rounds. 8
• SPAC – Empty, already listed company with which a firm comes to the exchange by merger; 613 of them went public in 2021. 8

T

• Term sheet – Non-binding summary of the conditions of an investment, negotiated before the contracts are written. 5
• Token – Digital unit of a cryptocurrency sold without rights in a company; in 2017 the means by which crypto projects raised billions. 8

U

• Unicorn – Private company with a valuation of more than a billion dollars; coined by Aileen Lee in 2013, when there were 39. 7

V

• Valuation – Value that a financing round ascribes to a company, before the new money (pre-money) or after (post-money); determines how many shares an amount buys. 5
• Venture capital – Money for shares in a young company whose failure is more likely than its success; the few hits pay for the many losses. 1
• Venture capital firm – Enterprise whose sole purpose is to venture other people’s money in young companies and to look after them; the first was ARD in 1946. 2
• Vesting – Rule under which founders and employees earn their shares over years and leave them behind if they leave earlier. 5
• Vision Fund – SoftBank’s fund, closed in 2017 at 93 billion dollars, mostly from sovereign funds; wrote billion-dollar cheques and lost with WeWork. 8

Y

• Yozma – Israeli programme of 1993 that started ten funds with foreign partners with a hundred million dollars and withdrew in 1997. 6