If you poll your neighborhood venture capitalist or software founder and ask, “what percentage of US GDP is software?” you might hear 30% or 40% or maybe even 50%. The answer is 10%.

Services dominate our economy. 72% of US GDP or $20 trillion dollars a year is spent on services, and services are over 80% of household spend. Despite its overwhelming size, aside from some successful marketplaces, venture investors have placed few bets in pure services companies. There are two compelling reasons: (1) services businesses require labor that is expensive and reduces the gross margin percent, resulting in less cash to fuel growth and (2) scaling demands hiring more labor– a slow and expensive process compared to software companies.

However, these obstacles are eroding because of artificial intelligence.

AI is making certain services businesses considerably more efficient by automating tasks and multiplying the productivity of the labor force. A Bain study estimates that professional services companies could reduce the cost of service by 41% using AI. Even if the improvement is only 20%, the savings comes close to paying for the entire US defense budget.That’s profound. Improvements in the 20–40% range result in a gross margin percent that rivals software companies in their cash efficiency.

AI-powered services are also considerably more scalable, even when there is a meaningful labor component. This generation of services companies are less dependent on hiring, allowing them to maintain service levels as they grow with only modest labor input.

The implications are significant. The largest segment of our economy which has been a venture capital desert, is now an oasis of opportunity. We think that we are at the dawn of many billion dollar “services as software” companies.

Let’s also be clear: there will be large portions of the services economy where AI cannot or will not be able to automate. Your kid’s swim lessons are likely to need the same amount of instructor attention. And I don’t know about you, but I’m not looking to have an AI-powered haircut just yet. Nonetheless, the services economy is so vast, that crossing off major portions still leaves a lot of undiscovered country.

We are particularly interested in professional services companies using AI to deliver services the traditional way. We think these companies will have an advantage because they will not require that customers change their behavior and they have distribution and customer data already. The auditor will deliver their services as they always have. The financial planner, the same. What changes is the degree of automation in the back office, which is insulated from the customer.

If you are a founder building a services as software company, we would love to talk.

The Services as Software Revolution was originally published in Venture Evolved on Medium, where people are continuing the conversation by highlighting and responding to this story.

Much has been written lately about the actual and anticipated decline in series A valuations. Most founders have accepted that the price of money and risk has shifted, and they are prepared for the forthcoming dilution manifest in lower multiples.

What many founders and existing shareholders may not be considering is the impact of SAFEs or convertible notes on dilution. With rare exception, notes issued in the last decade have all had “caps.” More precisely, a valuation cap is a maximum valuation at which the note will convert into equity at the next qualified financing. Importantly, a cap is not a valuation. If the equity round is done at a lower price than the cap, the conversion of the notes occurs at that lower price. It’s similar to how full ratchet anti-dilution works.

Furthermore, if a note also has a discount, the note converts at a discount to the round price (or the cap, whichever is lower). So it’s possible that the valuation is below the cap and the notes convert a discount (typically 10–25%).

Most founders and existing investors have modeled out cap tables assuming notes convert at the cap. That’s treating the cap as if it is a valuation. This assumption worked during the up markets we’ve experienced the last 12 years, but it is about to break. Another perspective: companies pre-sold equity at what they thought was a predetermined price…that is likely to be considerably lower.

Here’s an example. Let’s say a company issued $5M of notes at a $100M pre-money cap without a discount. It then raises a round of equity at $60M pre-money. Let’s assume the notes convert post-money. Isolating the effect of the additional dilution: the founder was considering the $5M to be 4.8% dilution ($5M/$105M post-money) but instead it’s 7.7% ($5M/$65M post-money). Ouch. The presence of a discount will exaggerate this difference! Three percent might seem small but that’s quite significant when you multiply it against a meaningful exit valuation.

The antidote to this latent potential dilution is to focus. Focus allows a company to stretch cash by aligning its team and cost structure with a smaller number of the most impactful initiatives. Easy to write, hard to accomplish. But if successful, it provides a company time to achieve the milestones that argue for higher valuations and get beyond the caps.

Noted: More Dilution Awaits was originally published in Venture Evolved on Medium, where people are continuing the conversation by highlighting and responding to this story.

In one of my first venture capital interviews, an exasperated partner mentioned a “cram down.” I had no idea what that meant, and to keep pace with the conversation, I guessed it wasn’t good. Lucky for me, I was right, and I eventually worked for that firm for 13 years. That coin flip in my head could have landed the other way.

Half the challenge of learning a new industry is understanding the dialect. Translating esoterica like “carried interest” to “profit share” can be a breakthrough for those starting in the industry. For founders, translating what a VC is saying is key to devising a deal together, and certainly helps to turn down the intimidation factor.

I’ve been underwhelmed by other venture capital glossaries, and I’d like to increase access to venture capital for individuals who are unable to access the traditional ways of learning venture capital finance. Therefore, I’ve decided to open source this glossary that is an amalgamation of work from my colleagues at Origin Ventures, my TAs at Chicago Booth, and my own editing. Please share terms you think we should add or any corrections in the comments, and give a clap if you find this helpful.

2-AND-20

The most common compensation structure for a General Partner (GP) led VC fund. The terms refer to an annual management fee of 2% of the assets under management and 20% carried interest (20% of the fund’s profits).

ACCELERATOR

Fixed-term, competitive, cohort-based program designed to accelerate progress for seed-stage startups. In exchange for providing modest funding (often a grant or note), mentorship, and education, the accelerator takes an equity position in each company. The accelerator culminates in a pitch event with prospective investors in the audience (“demo day”). Y-Combinator is the most selective and highest-performing accelerator in the US; Techstars and 500 Startups are two additional prominent programs.

ACCREDITED INVESTOR

An individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. They are entitled to this privileged access by satisfying at least one requirement regarding their income, net worth, asset size, governance status, or professional experience.

ACV: Annual Contract Value

The value of a contract over a 12-month period.

ANGEL

High-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company.

ANTI-DILUTION PROTECTION

Anti-dilution protection is a mechanism in a venture capital deal that increases ownership of previous investors in the event the company raises money at a lower price in the future. These mechanisms are also called ratchets, and there are different levels of “power.” A full-ratchet adjusts conversion prices to effectively retroactively adjust prior rounds to the future round’s price. A weighted average ratchet adjusts conversion prices to based on (1) the relative size of the previous and future round and (2) the relative prices (to prevent an extreme case of raising a small amount of money at a low price improving the price of a substantially larger round previously). Weighted average can be “narrow-based” or “broad-based.” The difference is how the formulae account for option pools.

ANTI-PORTFOLIO

A set of very successful investments in which a venture investor had opportunity to invest, but chose not to. It’s a combination of humility (revealing big mistakes), while also flexing (I had access to these deals).

AOV: Average Order Value

The average revenue per order, typically used to measure consumer-focused businesses. Also called cart size.

ARR: Annual Recurring Revenue

Metric used by subscription businesses to represent the value of recognized recurring revenue normalized to a one year period.

ARPA: Average Revenue Per Account

Total revenue divided by number of accounts; interchangeable with average selling price (ASP).

ARPU: Average Revenue per User

Total revenue divided by the number of users.

AUM: Assets Under Management

The total value of LP capital (assets) committed to a venture capital firm in its constituent funds.

BOOKINGS

Dollar value of signed contracts in a specified period. Bookings represents future revenue potential that must be earned/recognized over time by delivering the product or service. For example, a three year, $100K per year SaaS contract would be $300K in bookings upon signing. After the the first year, it would only be $100K of recognized revenue.

BOOTSTRAPPED/BOOTSTRAPPING

A description of a startup where the founding team has self-financed the growth to-date with their own funds (and time/effort). Most founders in the early stages of building their business are said to be “bootstrapping” their company.

B2B: Business-to-Business

A situation where a business enters into a commercial transaction with another business. Contrasted with B2C.

B2C: Business-to-Consumer

A situation where a business transacts directly between itself and consumers who are the end-users of the company’s products or services. Contrasted with B2B.

BRIDGE / BRIDGE ROUND

A financing that takes place between traditional rounds (Seed, Series A, etc.). Often this is driven by a firm realizing a higher-than-anticipated burn rate and failing to make their capital last until their next planned round. It can also be when a company is close to a milestone where achieving it creates an inflection point in value. Bridges are often raised from current investors since the failure can scare away new investors but some external investors may see bridges as a chance to get into deals they otherwise could not. Bridges tend to be structured as convertible notes.

BRING ALONG RIGHTS

A term in a financing that allows a majority of shareholders to force smaller investors to sell. This is typical in venture financings, and is used to prevent small shareholders from holding up a company sale.

BURN RATE

The rate at which a startup consumes cash during the course of normal operation. Typically expressed in terms of the cash depleted per month, the burn rate is an indicator of a startup’s solvency and number of months until the company is out of cash (the “cash runway”) and will need to raise more money or sell by then. The term runway is a metaphor for a plane that must get airborne before the end of the runway.

CAC: Customer Acquisition Cost

The cost associated with acquiring customers; includes all sales and marketing costs.

CAC/LTV RATIO

Customer acquisition cost (CAC) divided by customer lifetime value (LTV); measures effectiveness of marketing and sales; has a large impact on the capital requirements of a business.

CAC PAYBACK PERIOD

The number of months it takes for the contribution margin of a customer to exceed the CAC. CAC payback periods fewer than 12 months are ideal, under 18 months are sustainable and more than 18 months needs addressing.

CAPITAL STACK

The amounts of capital in various securities in a company and their relative seniority in a liquidation (in order of claims to underlying assets). Senior Debt has the senior most claim, followed by subordinated or mezzanine debt. Various series of preferred equity follow, often with the latest series the most senior of the preferred equity. Common equity is the very bottom of the stack, but captures all of the remaining proceeds. Preferred equity in venture capital settings almost always has the ability to convert into common equity. Also known as “liquidation stack” or “preference stack.”

CAPITAL CALL

An LP’s commitment to a fund is not wired up front. Instead, a fund calls capital as it needs it. When a fund needs cash for an investment, management fee to operate the firm, and/or for certain expenses, it sends a notice to its limited partners requesting the cash. This is called a capital call. LPs usually have a period of time (typically 10 days) to wire the money to the fund. Funds operate this way so that they can optimize the LPs’ IRR in the fund. Some funds use lines of credit to wire money for an investment and then use the LP capital to pay off the line when the wires arrive 10 days later.

CARR: Contracted Annual Revenue

Same as ARR but also includes revenue under signed contract but not yet recognized. The longer the implementation time, the bigger the difference between ARR and CARR.

CARRY / CARRIED INTEREST

A profit share earned by the managers of a venture fund, typically earned by the general partners usually after the fund has returned more than the amount of capital it has called from its limited partners. Typically, carried interest is 20% of these net profits.

COGS: Cost of Good Sold

Direct costs attributable to the production of the goods (or services) sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. In software companies, this is often hosting and support costs.

COHORT

A group of customers that became customers in the same month (or quarter). Analyzing the behavior of cohorts (cohort analysis) can reveal how loyal customers are their tenure with the product lengthens.

COMPOUNDING DIVIDEND

A dividend payment that is a fixed percentage multiplied by the original per share price plus the dividends that have accrued over time. The equation to calculate the amount of compound interest per share is:

A=P*(1+(r/n))^nt) — P

where A=Dividend amount per share, P=Price per share, r=dividend rate (decimal), n= number of times dividend is compounded per year, and t=time in years. See “Simple Dividend.”

CUMLATIVE DIVIDEND

A cumulative dividend is a right in a preferred share to a fixed amount or percentage of a share’s original par value (for example, 8% of the Series A Original Issue Price). The term “cumulative” refers to the fact that dividends accrue over time if they are not paid and must be paid before any dividend payments to common shareholders. That is, cumulative shareholders must receive both the current period’s dividend, as well as all unpaid past dividends when dividends are eventually paid. Note that just because dividends are cumulative does not mean they are paid in a liquidation event! The payment timing must also be specified in legal language. See “Non-cumulative Dividend.”

CONTRIBUTION MARGIN

A product’s price minus all associated variable costs. For a SaaS business, this is typically revenue minus support costs minus cloud hosting costs.

CONVERSION PRICE / CONVERSION RATIO

Venture firms purchase preferred stock when making an investment into a company, as opposed to common stock that founders hold. Preferred stock typically gets paid a liquidation preference ahead of the common stock. Instead of the preference, which is typically limited to 1.0x the capital invested, preferred holders can convert into common at the conversion price. The conversion price is set equal to the purchase price (a 1:1 conversion ratio) when the shares are issued, but can be altered due to anti-dilution protection, stock dividends, and other events.

CO-SALE RIGHTS

A right customarily provided to preferred shareholders that allow the preferred holders to sell their stock if other key holders (usually the founders) sell theirs. Nicknames include the “anti-bailout provision” and “tag along rights.”

CLIFF

A cliff is a period of time (usually a year) during which vesting does not accrue until the end of the period. For example, if one has a one year cliff and a four year vest on an option, if they departed on day 364, the percent vested would be zero. At the end of day 365, the percent vested would be 25%. Cliffs are both retention mechanisms and designed to prevent equity from being in the hands of employees who didn’t work out.

THE CLOUD

Used to describe a resource (e.g., storage, streaming music, software, etc.) that is always accessible through the Internet versus being installed on a local computer or local server (“on premises”).

CONVERSION RATE

Percentage of users that take an action that is next in a sequence toward purchase. For example, a business might observe a 20% of users progressing from visiting a website to downloading an app — a 20% conversion rate. When specific steps are not specified, it is assumed that the conversion is from initial encounter with a company to purchase.

CONVERTIBLE NOTE

A form of debt that converts into equity, typically in conjunction with a future financing round; commonly used for seed rounds to delay the task of deciding the value of the company and to simplify the financing.

CRAM DOWN

See “Pay-to-Play”

CRM: Customer Relationship Management

Software used to manage the relationship between a business and a prospective customer. Can also encompass managing the relationship after the sale.

CUSTOMER SUCCESS TEAM

A team whose sole function is to ensure that customers achieve their desired outcome while using a product. Customer success is often tasked with upselling existing customers and performing account management functions. A customer success team that is effective can lead to a lower gross churn rate and additional expansion revenue.

CVC: Corporate Venture Capital

A branch, division, or financial arm of a corporate entity dedicated to investing in startups. Unlike a traditional VC, however, CVCs are not exclusively focused on optimizing returns for a separate investor. In addition, corporate venture groups aim to derive strategic value from investments. This may mean that the CVC is an on-ramp for Corporate Development (M&A) teams, a lens for monitoring industry trends, or a way to outsource some form of R&D. CVCs often invest directly off of the balance sheet for the parent corporation and thus they are not limited partners like there would be in a VC Fund.

DAU: Daily Active Users

Number of unique users interacting with a product over a given day. Used as a measure of user engagement with a product.

DEAL FLOW

Quantity of opportunities that a fund/angel considers in a period of time.

DECACORN

A company with a valuation at or exceeding $10B. See “Unicorn.”

DILUTION

The percentage reduction in equity ownership existing investors experience, often in new rounds of financing or expansions of option pools. The amount of dilution is dependent on, among other things, valuation, dollars invested, and amount of option pool expansion.

DISCOUNT

A feature of a convertible note of SAFE that reduces the price at which the note or SAFE converts into the next round of equity. For example, a discount of 20% means that the note or SAFE converts at 80% of the price set by the next round (this assumes no valuation cap). This discount is used to compensate investors for the risk they take and is designed to induce investors to invest. See “Valuation Cap.”

DOUBLE TRIGGER

An option that has a double trigger will accelerate its vesting to 100% if both (1) the company is acquired and (2) the employee is not retained for employment by the acquirer. See “Single Trigger.”

DOWN ROUND

A round of financing in which the valuation of the startup decreases relative to the valuation in its prior round. So-called “Flat Rounds” are when the valuation stays basically the same. Both Down and Flat Rounds are typically viewed negatively by investors who are expecting to see strong, consistent growth quickly after investment.

DPI: Distributed to Paid-in

A fund performance measure equal to the cash distributed to Limited Partners by the Fund divided by the total amount of capital paid into the fund to date.

DRAG ALONG RIGHTS

See “Bring Along Rights”

DRY POWDER

The remaining capital in a fund that is not yet invested in companies or consumed as fees or expenses. In a 10-year fund, the bulk of dry powder is often spent in the first 4–6 years, with the remainder held in reserves for potential follow-on investments. Industry data sources often report on the dry powder of the entire industry as a measure of future supply of venture capital dollars. Unfortunately, this is a term of war — when war was fought with muskets and cannon balls, the ability to wage war depended on your stockpiles of dry gunpowder.

ECOSYSTEM

The various intertwined stakeholders (investors, founders, accelerators, corporates, mentors, universities, etc.) in the startup economy in a specific geographic area.

ENTERPRISE

Segment of the market that includes large companies of 1,000 or more employees. Enterprise customers tend to demand different sales and marketing approaches than the small and medium (SMB) segment.

ESOP: Employee Stock Option Pool

See “Option Pool”

EXTENSION ROUND

An investment round that is done typically at the same terms as the last round, and often using the same round nomenclature (seed extension, series A extension, etc.). Extensions are usually a smaller amount of capital, designed to get the company to a point where it can raise the next round of capital more confidently.

EXIT

An exit or exit event is a situation where a private company is sold (in whole or part) and if there are sufficient proceeds, proceeds are distributed to debt holders and equity holders. Types of exits include company sale, recapitalization, sale of shares following a lockup that follow and IPO, liquidation/asset sale, etc. See “Recapitalization”, “IPO”, “Liquidation.”

F&F: Friends and Family Round

See “Pre-Seed Round”

FLAT ROUND

An investment round done at the same per share price as the last round. This can be because the company has made little progress, or if the company has grown revenue but the market revenue multiples have declined.

FOLLOW ON

An investment into an existing portfolio company by investors who are already on the cap table. These can be seen as a good thing for investors when the firm is growing in that it can mitigate dilution. However, investors may deploy follow on capital intro struggling startups to keep them afloat, though only if the capital is deemed to have a strong chance of turning the fortunes around (i.e. not sending “good money after bad”).

FMV: Fair Market Value

Value of an investment based on GAAP rules articulated in topic 820 (previously FASB 157). These GAAP rules govern valuation of assets, including illiquid assets that are typical in a venture capital portfolio.

GENERAL PARTNER

A general partner means either (1) a partner in a venture capital fund that is making investment decisions and has carried interest, or (2) the legal entity, usually a partnership, that governs investment decisions, vesting of carry, and adding/removing partners. The general partner entity is also what receives carried interest proceeds.

GROSS CHURN RATE

The percentage of revenue lost in a given time period due to customers canceling their contract or discontinuing service entirely. See “Net Churn Rate” and “Logo Churn Rate.”

GMV: Gross Merchandise Value

Total dollar value of items sold in a marketplace. Marketplace businesses report this number as a measure of economic activity flowing through the marketplace, but this number does not represent the revenue of the marketplace business. The revenue is GMV multiplied by the “take rate”.

IPO: Initial Public Offering

An initial public offering is a financing event where the shares of private company are traded on a public market for the first time. Usually in an IPO, the company sells new shares in exchange for cash. IPOs are often incorrectly considered an exit event — management and existing investors are usually subject to a lock up that prevents them from selling their shares for 6 months or longer, so liquidity is delayed. See “Lock Up.”

INCUBATOR

An institution that hosts and develops startup companies, providing them with office space, resources, advice and networking opportunities, often for indefinite periods of time. Often incubators generate their own startup ideas that they attempt to launch. Incubators can also have a team that provides shared services to all of the fledgling companies in the incubator. Incubators often own a much larger percentage of a company vs. accelerators. Some incubators are organized as non-profits.

J-CURVE/ “HOCKEY STICK”

The graphed value from a startup business over time, with time on the x-axis and value on the y-axis. Initially, investment is spent without earning a return and value dips negative. When revenue traction begins to be established, the curve turns upwards, hopefully dramatically. The best firms will then experience exponential growth that causes a chart to look like the shape of a hockey stick or the letter “J”.

LEAD INVESTOR

The entity or individual that makes the largest investment in a given venture capital round. As the primary financier for the round, the lead investor determines the current valuation of the company. In later rounds, the lead investor may be the primary candidate to take a board seat, in governance terms afford that to the round’s investors.

LIMITED PARTNER

A limited partner means either (1) an investor in a venture capital fund, or (2) the legal entity that is the “fund” and makes capital calls, holds investments, and gets direct returns from portfolio companies. The word “limited” is used because LPs have limited liability and limited control over investment decisions.

LIQUIDATION

The process of selling remaining assets of the business and distributing any proceeds to debt and equity holders. Usually liquidations happen when a company is not successful as a business or in a process to sell the entire company.

LIQUIDITY

Within a company, it refers to access to usable cash. Within a fund, it can refer to successful exits.

LIQUIDATION PREFERENCE

Preferred equity term that specifies a multiple of capital that the preferred equity holder would receive ahead of other series of equity in a liquidation. Liquidation preferences are expressed as a multiple of capital invested and are typically 1x. There are various ways these preferences can be structured, stacked, and eliminated– all subject to a negotiation between an investor and a company at the term sheet phase. The most common is straight preferred (also called non-participating preferred). Participating preferred with a cap and fully participating preferred are other choices. See “Straight Preferred,” and “Participating Preferred.”

LOCK UP

Restricted period of time (usually 6–24 months) during which shareholders may not divest, sell, hypothecate their equity holdings in a company that has recently become public. This is usually to (a) retain key employees at a sensitive time, (b) prevent an oversupply of sellers when investment bankers are trying to carefully align supply and demand of IPO shares. Investors in startups are usually required to agree to lockups when they make their initial investments into companies.

LOGO CHURN RATE

Measures the number of customers, not revenue dollars, that cancel in a given period divided by the total number of customers. See “Gross Churn Rate” and “Net Churn Rate.”

LTM: Last Twelve Months

For younger startups, it may not be useful to report financial data or performance metrics for the prior calendar/reporting year. Strong growth rates mean that such data would be poor indicators for current investment decisions. Instead, many firms choose to share data for the 12 months directly preceding a current round.

LTV: Lifetime Value

A prediction of the net profit attributed to the entire future relationship with a customer; takes into account predicted churn, revenue and cost of service. Many companies mistakenly use revenue instead of net profit — mainly because in most software companies COGS is very low and Revenue and net profit are very close.

MAJOR INVESTOR

An investor which invests more than a certain threshold (measured by number of shares or dollars invested) is classified as a major investor in many deals. Certain rights, usually pro-rata rights and information rights (and sometimes shareholder voting rights) are afforded to major investors only.

MAGIC NUMBER

A measure of a company’s marketing effectiveness.

(CQR — PQR) / PQSM

Where

• CQR is current quarter revenue
• PQR is prior quarter revenue
• PQSM is prior quarter sales and marketing spend

Magic numbers over 1.0 are considered good. That means a company is efficiently turning sales and marketing spend into revenue.

MARKETPLACE

A type of e-commerce website where product or service information is provided by multiple third parties and transactions are processed by the marketplace operator.

MARKUP

A markup happens when VC X invests in a portfolio company of VC Y at a higher price than the company’s last priced round. This allows VC Y to show that its current holdings have an unrealized gain in value, making the VC and its LPs happy. This gain is “on paper” and only until an investment is exited and converted into cash (or liquid stock) is the markup realized.

MAU: Monthly Active Users

Number of unique users interacting with a product over a given month. Used as a measure of user engagement with a product.

MILESTONE

A business objective or goal. Often investors want to understand what milestones can be achieved with a round of capital in an effort to understand if a company’s narrative at that point will be compelling enough to raise the next round at a step up in valuation. In addition, bonuses and subsequent tranches of capital might be contingent on achievement of a milestone. Milestones were used in ancient times to mark distance along a road — so it makes sense as a term to use for progress.

MRR: Monthly Recurring Revenue

A measure of the predictable, recognized and recurring monthly revenue for a subscription business; excludes one-time and variable fees.

MVP: Minimum Viable Product

A version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort.

NET CHURN RATE

Gross Churn Rate minus dollars of revenue lost due to downgrades plus revenue gained due to upgrades or expansions. See “Gross Churn Rate” and “Logo Churn Rate.”

NRR: Net Retention Rate

Measures the percentage of revenue retained from customers over a specific period. This includes upgrades/expansion and downgrades/cancelations.

NRR = (starting ARR — downgraded ARR — Churned ARR + Expansion ARR) / Starting ARR x 100

The formula can also be used with quarterly or monthly recurring revenue.

NON-CUMULATIVE DIVIDEND

Similar to a cumulative dividends, a non-cumulative dividend is a right of a share to a fixed amount or percentage of a share’s original par value. Unlike cumulative dividends, a non-cumulative dividend does not accrue and does not result in a future obligation to the shareholders if a dividend is not paid when due. See “Cumulative Dividend.”

OPTION POOL

A number of options on common stock that startups use to compensate select employees. These options are “reserved” in a “pool” at company formation or in conjunction with a financing to ease the process of granting options to employees. This is the primary tool that startups use to distribute equity ownership to employees as an incentive. This pool is often expanded during subsequent financings (at the urging of the VC). Options granted from the pool typical vest (See also “Vesting”).

PARI PASSU

Pari Passu in venture capital settings usually refers to payments being made to two or more groups of investors at the same time or seniority and in the same manner. Most often used to refer to liquidation preferences being equal and paid in parallel and not serial or senior/junior to one another. In Latin, the term means “Equal Footing”.

PARTICIPATING PREFERRED

An economic feature of preferred stock which directs the proceeds from a sale or liquidation to first pay the liquidation preference amount and the preferred shareholder’s percentage of remaining proceeds to the preferred stock holder. This is also called a “double-dip” because investors are (a) getting their money back (downside protection) and (b) a percent of remaining proceeds (upside). Single-dip is straight preferred, where investors have to choose between (a) or (b) above. (see “Liquidation Preference” and “Straight Preferred”).

PAY-TO-PLAY

A provision in a term sheet or a company’s legal documents that requires existing investors invest in subsequent rounds to avoid consequences. Those consequences include preferred stock converting to common (and thus losing the preferred rights and economics), a reverse stock split which would reduce ownership percentages (called a “Cram Down” or the nicer, “pull-through”), or other penalties. A pay-to-play provision is designed to induce investment when a company is not faring well, preventing free-riding by a subset of the investors.

PREFERRED STOCK

A class of stock with rights and economics that are superior to common stock. Typically, investors own preferred stock and founders/management owns common stock (or options on common stock). The main economic advantage of a preferred stock is the liquidation preference. The main control advantage of preferred stock are protective provisions (veto rights on various corporate actions taken by the board of directors).

PRE-MONEY

Equity value of a company before cash is invested.

PMF: Product-Market Fit

Proof that a target market is interested in a product being sold, usually evidenced by revenue from customers.

PREMPTIVE / PRO-RATA RIGHTS / RIGHT OF FIRST REFUSAL

A right of a security that affords the holder the right to invest additional capital in future rounds of financing (i.e. invest more as a follow-on). The dollar amount of this right is often what would maintain the current security holder’s ownership stake. That said, the pro-rata amount to which an investor is entitled can be calculated lots of different ways, and it’s best to read the legal language to see how the number of shares is calculated. While these rights can prevent dilution of the investor, some investors ultimately waive their rights if they lack capital funds (see “Dry Powder”) for an investment at that time or to make room for a prestigious investor that requires a large allocation. See “Pro-rata”

PRO-RATA

A portion to which a shareholder is entitled when dividing something up, whether it’s proceeds in a sale, pre-emptive rights (see “Preemptive Rights”), or voting power. In Latin, it translates to “by rate.” At a high level, it’s calculated by taking the number of shares a shareholder owns and dividing it by a total number of shares. What’s included in the denominator is defined in legal documents and can vary.

POST-MONEY

Equity value of a company after cash is invested. Pre-money + investment amount = post-money. In other words, founder contributes company worth its pre-money and investor contributes cash, and together they form the “new” company that is valued at the post-money.

PULL THROUGH FINANCING

See “Pay-to-Play”

Q-o-Q: Quarter-over-Quarter

Growth, expressed as a percent, measured from one quarter to the next.

QSBS / 1202 TAX TREATMENT

Qualified small business stock provisions (or, techically, §1202 of the internal revenue code) allow investors to exclude a significant portion, potentially up to 100%, of a capital gain when the gain arose from selling qualified small business stock (QSBS). An investment qualifies as QSBS by meeting a set of specific criteria, that includes (among other requirements): (1) gross assets less than $75M, (2) not in certain trading businesses, (3) stock is issued by the company (not a secondary) which must be a c-corp. Holding periods longer than 3 years get a 50% exclusion of gains, four years for a 75% exclusion, and 100% after five years. The total exclusion per investor is capped at $15M. There are lots of ways to “break” QSBS. For example, a certain amount of stock buybacks can invalidate QSBS for everyone. 1202 is designed to encourage investment in small companies, and rewards those investors with reduced (or no) federal tax as an incentive.

RATCHET

see anti-dilution protection.

RECAPITALIZATION

The process by which a company’s capital stack (mixture of debt and equity) is restructured by buying out portions of securities, replacing securities with new ones, or renegotiating terms of securities. Typically executed as a new financing, recapitalization is often seen in larger private equity deals (ex. LBOs) but can also occur in earlier startups, especially if earlier investors need liquidity and are willing to sell their stake in a company or if a company has such a large capital stack that (a) management has little incentive or (b) the company can’t raise financing. Other times, a debt holder might be bought out to reduce the debt servicing expense.

RESERVES

Capital in a fund that’s available for existing portfolio companies (follow-on investments), and is also set aside for projected fees and expenses.

RESTRICTED STOCK

Stock that is owned by an individual (usually a founder or senior executive) that is subject to reverse vesting. Restricted stock is preferred to options because (1) the holder can vote the shares, (2) the stock is owned starting at the grant, which means the long term capital gains clock begins at the grant. Options holders do not own stock until exercise, and so the long term capital gains clock begins later at exercise, (3) there is no exercise price to pay. Restricted stock is often granted at the early stages of the company because a grant of stock is a taxable event, and if the stock is worthless, no tax is owed.

REVERSE VESTING

When a founder (or other employee) has restricted stock, the individual owns all of the stock at the time of grant. However, to implement vesting, the company has a right to repurchase the stock if the individual is no longer employed by the company. The percentage of the stock holdings that can be repurchase declines with time (this is the “reverse” aspect). This effectively implements traditional vesting, where the individual owns more and more of their ownership as time goes on. Reverse vesting differs from traditional vesting with an option, which specifies that the percentage of the option grant that can be exercised grows with time.

ROLLING CLOSE

Instead of a typical close where all investment happens at once on a single day, a rolling close accepts investments over time and at different times. It is typical for SAFE investments to be accepted in a rolling close.

RULE OF 40

If a company’s (i) year over year growth rate, plus (ii) EBITDA margin percent is 40% or more, then the company is a “rule of 40” company. It indicates that such a company has a healthy and sustainable balance between growth and profitability.

RUN RATE / REVENUE RUN RATE

Annualized revenue, often a recent month * 12 or a quarter * 4. This is a more useful measure than TTM revenue for companies that are growing rapidly, but assumes the company’s fortunes remain constant and that all revenue is recurring.

RVPI: Residual Value to Paid In

A fund performance measure equal to the total fair market value of investments in a portfolio which have not yet exited divided by the total amount of capital paid into the fund to date.

SAAS: Software-as-a-Service

A software licensing and delivery model in which software is licensed on a subscription basis and is hosted remotely in the cloud (as opposed to installed on customer’s premises).

Note: Many firms offering novel products will describe their offering in a similar format (ex. Autonomy-as-a-Service (AaaS), Robots-as-a-Service (RaaS), etc.)

SAFE: Simple Agreement for Future Equity

An alternative to Convertible Notes for seed or bridge rounds. An investor makes a cash investment in a company, but gets company stock at a later date, in connection with a specific event. Unlike a convertible note, it is not a debt instrument and therefore has no maturity date or accrual of interest.

SDR: Sales Development Representative

A sales representative that communicates via phone and email (i.e., an “inside” rep versus meeting face-to-face in the field as an outside rep would) who solely focuses on outbound prospecting of customers, often setting up appointments for outside sales representatives.

SECONDARIES

Transactions where one investor buys out the ownership position of another equity holder. Typically this is a venture or private equity fund, including some that specialize in secondaries, that will purchase equity from existing investors in a startup prior to an exit or traditional liquidity event. This might include sales by earlier VCs who need to return capital to their LPs or employees of a startup who want to cash out on some of the value the startup created. Secondary Investors are typically passive financial investors only.

SIMPLE DIVIDEND

A dividend payment based only on a fixed percentage of the original per share price. Additionally, please note that the start/commencement date upon which to calculate dividends is based on when cash is received by the company and not on the close date of the round. See “Compounding Dividend.”

SINGLE TRIGGER

An option that has a single trigger will accelerate its vesting to 100% if the company is acquired.

SLOW NO

When a venture investor undergoes a long decision process, often with many diligence requests of a company, and ultimately deciding to pass. The decisions in order of preference for a founder: fast yes, slow yes, fast no, slow no.

STRAIGHT PREFERRED

An economic feature of preferred stock which directs the proceeds from a sale or liquidation to either (a) pay the liquidation preference amount or (b) the preferred shareholder’s percentage of remaining proceeds to the preferred stock holder, but not both. This is also called “non-participating preferred” or “single-dip.” (see “Liquidation Preference” and “Participating Preferred”).

STRATEGIC

An investor in a round that has strategic value to the company in which it is investing. These often are corporate investors that can assist the company in some way. Examples include introduction to customers, integration with the strategic’s products or sales teams, preferential pricing, etc.

STRIKE PRICE

Options are issued with a strike price, which is the price one must pay (it can be per share or total for the entire option grant) to exercise the option and buy the shares. It’s a way for an option to entitle the holder to get the equity upside from a certain point (the strike price and greater). Often in acquisitions, options holders are simply paid the difference between the purchase price of the company per share and the strike price per share.

SPAC: Special Purpose Acquistion Vehicle

A SPAC is an entity that raises capital for the purposes of searching for a company to purchase (and sometimes operate). They are sometimes called “shell companies” because the company is capitalized but it has no operations. SPACs are usually public companies. Companies bought by a SPAC become public without having to go through an IPO process. SPACs usually feature a team that searches and vets companies, and sometimes that team intends to operate the company once acquired.

PRE-SEED ROUND

The earliest round of investment, which typically ranges from $250K to $2M and is generally used to build a proof of concept before the company has a repeatable sales process; sometimes called an “angel round” or “friends and family” round.

SEED ROUND

A round of investment, which typically ranges from $250K to $5M and is generally used to start or continue building a product and to obtain initial customers.

SEED+ ROUND

Round that is between a Seed and Series A round.

SERIES A ROUND

A company’s first significant round of professional venture capital financing, which typically ranges from $3M to $30M and generally follows a seed round. Companies in this stage typically have an initial product built and meaningful revenue (in the $1M+ ARR range), and use the capital for marketing, sales, and product development. Series A financing is commonly offered in the form of preferred stock and less likely to be structured using convertible notes.

SERIES B ROUND

A company’s second significant round of financing, which typically ranges from $8M to $100M and follows a Series A round. Companies raising a Series B round have demonstrated repeatable sales processes and have improving performance metrics; sometimes called a “growth” round.

SIDECAR

Investment vehicles or funds that are created with the purpose to invest in parallel with other funds or vehicles. For example, a fund might make an investment in a company out of its fund, with an additional amount from a sidecar pool of capital raised from founders in its network.

SMB: Small and Medium Business

Segment of the market that includes small businesses (fewer than 100 employees) and medium-sized businesses (100–999 employees); larger businesses are considered the enterprise segment.

SPV/ SPE: Special Purpose Vehicle / Special Purpose Entity

A legally distinct entity created to isolate risk when investing in a deal. SPVs usually make a single investment in one company. Typically used by non-fund investors such as angel groups, an SPV is similar to a fund’s LLC in that it allows investors to put capital into a startup without exposing the remainder of an investor’s assets to the operational and legal risks of a startup. Also used by funds when a fund is out of money, and a firm raises money from LPs for an investment in a single portfolio company.

STUDIO

A studio (or Venture Studio) is an organization that generates business ideas within and then assembles management teams to lead the companies with the most promise. Studios have a shared resource pool to help the companies with product, engineering, finance, sales, etc. Studios often have a pool of capital to invest in the companies as well. The goal of a studio is to spin companies out and get them financed externally, retaining a high ownership position since the studio is considered the founder. This is similar to accelerators in the way that both help with shared resources at early stages, but differs since accelerators do not generate the ideas, management teams are already in place, and therefore the ownership position for accelerators is much less.

SYNDICATE

A self-organizing group of investors formed to participate in a round of financing for the purpose of sharing the cost and risk associated with the transaction. Often Angel Groups may manifest as a syndicate when one individual investor is unable to supply sufficient capital to cover a round of financing.

TAKE RATE

Percentage of GMV that a marketplace business retains as revenue.

TERM SHEET

A brief document used to negotiate key elements of an investment between investors and entrepreneurs. While not a legally binding contract, the term sheet summarizes in brief, clear language what the terms and conditions will be. Once a term sheet is signed, lawyers translate this summary into lengthy legal documents that constitute the financing and that are more detailed and legally binding.

TRANCHE

A tranche refers to investments that is done in parts, usually conditioned a company achieving an objective (also called a milestone) or passage of time. For example, a $10M financing might be in two tranches: a $6M investment at close, and $4M when the company reaches $3M in revenue. In French, tranche means “slice.”

TTM: Trailing Twelve Months

A period used for a particular financial metric (for example, revenue) that includes the last twelve months of operations.

TVPI: Total Value to Paid-In

A fund performance measure equal to the current value of remaining investments within a fund, plus the total value of all distributions to date, divided by the total amount of capital paid into the fund to date; also equal to DPI + RVPI.

UNICORN

A company with a valuation at or exceeding $1B. See “Decacorn.”

UNIT ECONOMICS

Unit economics are the direct revenues and costs associated with a particular business model expressed on a per unit basis. For instance: in a consumer internet company, the unit is a user. This analysis verifies the underlying fundamental economics work before considering overhead and infrastructure of the business.

UI/UX: User Interface / User Experience

Terms used to describe the aesthetics, ease of use, and behavior of software. UI/UX is often used to refer to the efficiency of software in encouraging users to take a specific action.

VALUATION

The assessed enterprise value of a startup, inclusive of its tangible and intangible assets. During a fundraise, the valuation determines what percentage ownership of a company an investor is able to buy with a given check size and how much dilution existing investors will suffer. At exit, the terminal valuation defines the value of that investor’s ownership and, thus, their eventual return.

VALUATION CAP

Used with convertible notes and SAFEs, a valuation cap sets a maximum valuation at which the note or SAFE would convert into the next round of equity. While many people presume a valuation cap to be equivalent to a valuation, it is not. If the equity round is done at a lower price than the cap, the conversion occurs at that lower price (this assumes no discounts to the price). Valuation cap can be either pre-money or post-money, and to determine that, look to see what shares are included in the denominator in the legal. See “Discount” and “Pre-Money Valuation” and “Post-Money Valuation.”

VESTING

Allows a grant of equity or options to be made at a point in time, but ownership of those securities happens gradually over time or on an achievement. This incentivizes top talent to stay with a company or fund and increase equity value. A vesting schedule lays out the time it takes for ownership to accrue. If an employee leaves an organization before they are fully vested, they typically retain ownership of vested securities and forfeit unvested ones.

WARRANT

An option that is typically issued to an investor or service provider or partner outside of an option pool. This is done because option pool grants tend to be relatively uniform and granted to employees, while warrants are usually highly customized — they can feature strike prices unrelated to the company’s current value or can require milestones to be achieved by a partner to be exercisable. Warrants can be used to provide an investor a lower effective valuation while keeping the headline valuation higher.

Venture Capital Glossary was originally published in Venture Evolved on Medium, where people are continuing the conversation by highlighting and responding to this story.

I was a guest on the Private Equity Funcast discussing what makes a great board member.

I’ve assembled this advice having been in thousands of board meetings and having witnessed some outstanding board directors.

In addition, in my Chicago Booth VC Lab class, we do a board simulation that includes outside guests with board experience. At the conclusion of the class, the guests share their general advice about boards, both from the investor and founder perspectives. I’ve collected that feedback over the last decade, and it’s infused in my advice in this podcast.

This appearance was a consequence of a tweet storm I did about board meetings, board members, and board materials.

What Makes a Good Board Member: Podcast was originally published in Venture Evolved on Medium, where people are continuing the conversation by highlighting and responding to this story.

This list of resources that was originally composed for my students in Chicago Booth’s Private Equity and Venture Capital lab as an augmentation to the class. I’ve assembled it since 2001 when I started in venture and continue to add when I find interesting resources in my work at Origin Ventures. It was designed to assist less experienced students learn more about the industry and for advanced students the ability to go deeper on topics of interest. Over the years, it’s grown to the point I decided to make it public to help others interested in the business. I hope you find it useful.

Email Newsletters and Blogs:

PE and VC:

• Dealbook (NY Times)
• Axios Pro Rata
• Termsheet (Fortune)
• Daily Pitch (Pitchbook): Choose from daily newsletters focused on PE or VC or both

PE

• Buyouts
• PE Hub
• Private Equity News (Dow Jones)
• The Deal: M&A in general, includes private equity
• Private Equity International

VC

• A VC: Blog of Fred Wilson of Union Square Ventures in NYC.
• StrictlyVC: Regular newsletter covering VC industry and deals.
• Kauffman Fellows Journal: Content from Kauffman Fellows. Has a tilt toward LP content packaged for VCs.
• Feld’s Thoughts: Brad Feld of Foundry Group and Techstars. One of the authors of Venture Deals, so if you like that style, you’ll like this blog.
• Venture Evolved: Professor Heltzer’s blog on touching on getting a job in VC and the VC business and startups from the perspective of a former software engineer. And guides to hiking national parks.
• Accelerated: Newsletter produced by twins who invest at a16z.
• TechCrunch: Covers technology companies, including startups and venture firms.
• Both sides of the table: Blog by LA-based entrepreneur turned VC, Mark Suster (Booth grad).
• Startup Digest. Published by Techstars. Good event calendars in major entrepreneurial hubs. Regular newsletter on startups based on geography.
• Ensemble VC: This newsletter, written by one of the former authors of the Kauffman Startup Digest, unpacks interesting data and stories on VC and tech markets
• Venturebeat: Similar to Techcrunch.
• Venture Capital Journal
• WSJ Pro: Venture Capital

Tech Companies

• Stratechery: Longer form blog content on various tech companies/topics.
• The Neuron: AI-focused trends newsletter/blog
• The Rundown AI: Latest AI news

Podcasts

• Startup: Podcast about an entrepreneur starting a podcast company (so meta). Totally behind the scenes and unfiltered. It’s fabulous and a must for entrepreneurs and those interested in VC.
• Masters of Scale: Podcast by Reid Hoffman, Linkedin Co-founder and partner at Greylock. Interviews Silicon Valley founders/execs.
• How I Built This: Podcast that features founders walking through the history of their high-profile companies.
• 20 Minute VC: Host Harry Stebbings interviews prominent VCs and founders.
• Acquired: Hosted by two venture investors who do deep research on prominent companies, walking through their histories and sometimes interviewing the founders. Roughly 3 hours each, and some in multiple parts, they are fascinating journeys.
• This Week in Startups: Hosted by Jason Calacanis, Founder and CEO of Mahalo and former EIR at Sequoia. Longer format.
• A16z:Published by Andreessen Horowitz. Covers wide range of topics mostly focused on various industry trends
• Private Equity Funcast: one of the rare podcasts focused on later stage investing, it’s hosted by the PE firm Parker Gale.
• Private Equity Fast Pitch: PE fund managers explain their funds’ strategy.
• Origins: Inside Venture Capital: A rare podcast from the LPs’ perspective.
• Running Through Walls: Venrock’s podcast.
• Starting Greatness: From Floodgate’s Mike Maples, Jr.
• The Full Ratchet: Devoted to angel and VC investing, with interviews with prominent VCs, tech companies on how deals got put together, why companies started, etc.
• How to Start a Startup: Series of lectures (videos) from CS 183b at Stanford. Includes luminaries like Peter Thiel, Sam Altman, Ben Horowitz and others. Useful advice for entrepreneurs and VCs who want to better understand how to build a company.
• Decoder: Podcast hosted by Nilay Patel, editor-in-chief at the Verge
• Invest Like the Best: Covers a very broad range of investors and CEOs, including VC and PE
• Founders: Each week, the host reads a biography about history’s best entrepreneurs, and discusses them on the podcast.
• Dwarkesh Podcast: In depth and long-form interviews with tech elite

Glossary

• Half the work in learning the venture capital business is learning the lingo. I created this glossary with help from my Origin Ventures colleagues and TAs at Chicago Booth to help bring clarity to commonly used terminology in the industry.

Trade Associations/Industry Data

These trade associations are great sources of industry news, statistics and listing of member firms. They also provide industry background publications, although from a biased point of view.

• American Investment Council. Industry association for PE.
• National Venture Capital Association. Industry association for VC. Publishes VERY helpful yearbook and data package each year.
• Preqin. Company focused on data and intelligence for the alternatives assets industry. Tends to focus on PE and not VC. Frequently publishes useful free data/reports as marketing pieces.
• Pitchbook NVCA Venture Monitor. Reports on VC investing and fundraising each quarter.
• Pitchbook
• Carta Data Desk: Carta is the leading software that companies use to manage cap tables. As a result, it gets a lot of data on financings. It uses this data to publish interesting industry statistics, especially on valuation data
• Hamilton Lane. Consulting firm advising large investors regarding investment in alternatives.

Get Started on Your Own as an Angel

• AngelList is the most prolific platform for angel investments. It’s pushed the envelope on democratizing angel investing and bringing down the cost and complexity of building a fund/track record. It’s expanded to provide backoffice infrastructure to smaller funds and angels.
• Republic is another angel investing platform that generally has lower minimum investments.
• OurCrowd is yet another that also has its own committed funds and a network of scouts around the world that screen investments.
• StartEngine is one more to consider.
• Hustle Fund has an angel squad that allows one to invest alongside the fund into specific deals.

Due Diligence

Due Diligence Resources:

• Claude. AI LLM. If you aren’t using Claude Co-work to automate your personal and professional life…do it today. Particularly helpful with diligence. Here are some suggested prompts to understand markets. Eventually you should be building scheduled tasks / agents. Connect it to other software using connectors (MCP servers)
• ChatGPT: AI LLM. Alternatives include iAsk and Gemini.
• Crunchbase: crowdsourced database of venture backed companies, venture financings and VC firms.
• Wayback Machine: shows websites as of a given time in the past. Great to see how management team, messaging, customers, and a lot more has changed over time.
• Patent Search: USPTO Patent search.
• HireRight: Inexpensive, pay as you go, background checks. Checkr is newer alternative.
• Google patents: surprise, it’s a very useful tool to search patents

Internet Traffic/Mobile App Download Tools:

• SimilarWeb: compare traffic stats for websites.
• SensorTower: Data for mobile app ecosystem
• AppFollow: Data on mobile app stores

Paid Databases/Reports (many available through Booth):

• Harmonic. Paid startup database, complete with filters, lists, API/MCP access. Good for sourcing.
• S&P Capital IQ. Great for information about funds and their portfolios.
• Preqin. Includes information about LPs.
• Pitchbook. Good for information about portfolio companies and funds’ portfolios. One of the few that has valuation data/estimates, and has a good engine to evaluate competitors.
• Bloomberg
• D&B Hoovers. Good to get competitors and industry financial data.
• Investment bank research. Usually requires that you get to know analysts and show some credibility in the industry. Great for comps and competitive data.
• CB Insights
• SecondMeasure (Bloomberg). Provides extrapolated data on consumer spending on credit cards. Great to get a sense of revenue of B2C companies.

Background Reading and Videos:

• Private Equity Primer. Very good overview of industry told from an institutional LP perspective (via State of Nevada). The content is from 2011, so some is outdated but the underlying framework remains sound.
• Venture Capital Glossary. Good reference on industry lingo (via CB Insights)
• Capital Structure of an LBO. Good high-level overview of the various tranches/flavors of debt and their role in an LBO.
• Raising venture capital for a startup. Excellent overview of the mechanics of a venture deal for those with little or no experience (video via Khan Academy).
• Getting a seed round from a VC. Excellent overview of the mechanics of a seed deal for those with little or no experience (video via Khan Academy)
• Board of Directors: Roles and Responsibilities. Thoughtful post from Fred Wilson that is helpful for those who have not held a board seat.

How to Raise Venture Capital:

• How to Raise Money. Incredibly detailed and sage advice for entrepreneurs on how to raise venture money by super angel Paul Graham. However it is also extremely useful for aspiring VCs as it points out what makes a VC attractive or unattractive. It exposes some venture capitalists’ strategies on negotiation and getting into deals. Long post but worth the time to read it.

How to Raise a Fund:

• Angelist announcement of rolling funds and a competing opinion by LP Winter Mead.
• How to Raise a Venture Capital Fund: The Essential Guide on Fundraising and Understanding Limited Partners: There are few resources to guide GPs raising a VC fund. Thankfully, Winter Mead has written a book that is a step-by-step guide.
• Super interesting survey of prevalent terms found in SPVs.

Diversity, Equity, and Inclusion:

• AllRaise: Aims to increase the number of women and nonbinary decision-makers in venture. Runs VC cohorts, local events, and an annual VC Summit.
• BLCK VC: Aims to increase the number of Black VC investors.
• Chicago:Blend: Aims to increase diversity in the Chicago VC and tech ecosystem. It also has a list of great resources related to DEI in this sweet Airtable.
• First Close Partners: Fund of funds LP backing underrepresented VC fund managers.
• HBCU.vc: An effort from historically Black colleges and universities to provide fellowships and mentorship to increase the number of Black venture capital investors.
• The Board List: List of diverse talent prepared to serve on boards of directors.
• Techrise: P33's pitch competition awarding non-dilutive grants.
• Somos: An association of LatinX venture investors.
• Dear Investors: So You Want to Take Diversity Seriously: A series of blog posts by the Kapor Institute about how to take diversity seriously as VCs.
• PEWIN: Private Equity Women’s Investor Network is for women in senior positions in private equity.
• WAVE: Women’s Association of Venture and Equity was founded in 2003 and is focused on the advancement of women in VC and PE careers.

Business Models:

• How an Internet/SaaS business works. Exceptional overview of the metrics that drive an Internet business (via For Entrepreneurs blog). You can also read the original post.
• SaaS Survey. Knowing what a SaaS metric means is the first step. This post goes further to help understand what numbers are good and which are bad so can better calibrate the health of a SaaS business. One word of caution– the survey includes successful and not successful companies, so use with a grain of salt.
• a16z’s startup metrics vol 1 and vol 2
• 10 Factors to Consider when Evaluating Digital Marketplaces: classic post from Bill Gurley of Benchmark
• Marketplace Calculator. A template to evaluate marketplace business models.
• Famous startup pitch decks: actual decks from successful companies
• Eight ways to go Viral. Distilled hierarchy of how to make a product viral from Uzi Shmilovici (’11) (via Techcrunch).
• What’s the shrewdest, smartest maneuver you’ve seen in business? Ridiculously enjoyable and insightful responses to this question on Quora.

Books:

Anecdotes/War Stories:

• The Masters of Private Equity and Venture Capital. Series of anecdotes/profiles covering deals and building PE/VC firms from respected investors.
• Done Deals. A little dated, but a series of deal anecdotes from some esteemed VCs.

History/Industry Emergence/Decline:

• The New Financial Capitalists: Kohlberg Kravis Roberts and the Creation of Corporate Value
• Creative Capital: Georges Doriot and the Birth of Venture Capital. Historical account of Georges Doriot, the French immigrant who became an American General in the army and later is credited with starting modern VC business. His firm was eventually shut down by the SEC.
• King of Capital: The Remarkable Rise, Fall and Rise Again of Steve Schwarzman and Blackstone. Blackstone was one of the first PE funds to go public.
• VC: An American History: From Whaling to Silicon Valley.

Reference/Textbooks:

• Venture Deals. Written for entrepreneurs, this is a good guide to provide a basic understanding of the various terms in an early stage termsheet and how early stage deals get negotiated.
• Venture Capital and Private Equity: A Casebook. Very good introductory (and brief) history of VC and PE by Josh Lerner. Includes “Notes” we use in class and many other cases.
• Valuation:Measuring and Managing the Value of Companies. The “McKinsey Valuation Book”, espouses an valuation approach of isolating sources of value creation within a company. Becoming more important as leverage and structure are commoditized and not sources of value creation anymore.
• Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions: Includes several sections on LBOs. A good reference textbook.
• Secrets of Sandhill Road: Written by Scott Kupor, a managing partner of a16z. Walks through how VCs select an nurture startups.
• Structuring Venture Capital Transactions: Seminal legal volume on legal structuring of BOTH PE and VC transactions. Reads more interesting than you might suspect. By U of C law professor and Kirkland & Ellis partner Jack Levin. Make sure to read his bio in the book for a good laugh.

Narrative Non-fiction:

• Barbarians at the Gate. Novel about KKR’s buyout of RJR Nabisco, considered the epitome of the mega buyout boom of the 1980s. Believe it or not, also a movie with James Garner.
• Bad Blood: An in-depth account of the startup Theranos, which raised a lot of VC and was a spectacular failure.
• Super Pumped: The history and battle for Uber.
• Billion Dollar Loser: The Epic Rise and Spectacular Fall of Adam Neumann and WeWork. The name says it all.

Documentaries:

• General Magic. Chronicles the startup General Magic, started by the Apple Macintosh team which conceived of the smart phone in the early 1990s.
• Something Ventured. Stories from the original VCs in Silicon Valley.
• The Inventor: Out For Blood In Silicon Valley. Documents the trials and tribulations of the biotech startup Theranos, which is accused of a wide-scale fraud.
• Fyre. Follows the development and catastrophic launch of an ambitious music festival.
• Startup.com. A look into the dot-com era by following a startup’s progress.

Recruiting Advice:

• John Gannon’s blog includes collect of VC jobs and resources, including his email list. He also does an annual salary survey and publishes a newsletter called Venture5
• Upfront Ventures Excited to add Sam Rosen to Its Ranks. How Did He Get the Role? Hustle. Here’s the Story. (Mark Suster). Great post on what it takes to break into VC.
• Venture Evolved: Category of VC posts from Professor Heltzer, many of which on getting a job in venture capital.
• Getting Started With No Experience: A product of Going VC focused on ways to break into the industry if you have no experience.
• @venturerecruiting on Twitter
• How to get a job in VC Part I: Mostly good advice here (via Seth Levine).
• How to get a job in VC Part II. These are the most common methods, but does not preclude others.
• How to get a PE job in 2550 words. We do not agree with the “recruiters only” approach, but otherwise useful content.
• 2025 Compensation Survey from Heidrick & Struggles. Includes cash and equity comp. PE and VC combined.
• Venture University: An accelerator for VC, PE and angel investing.
• Going VC: Paid program to learn how to transition to VC careers.
• Ali Rohde Jobs: a blog/newsletter that posts tech and VC job openings

Deals and Terms:

• Example deal memos: Bessemer has made public its internal investment memos on Pinterest, Shopify, Yelp and others. They give insight on how to build an argument to an investment committee and how Bessemer weighed upside and downside.
• Venture Dealr Dilution Illustrated: A great visual example of the effect of dilution over time
• Cooley deal trends: an interactive graph of current deal terms. Excellent resource to know “what’s market”
• Fenwick and West VC Terms market survey: also a good source for “Market” for venture terms. Includes some definitions but not as extensive as my VC glossary.
• Y-Combinator Startup documents. More founder-friendly and “lighter” and more common in seed deals.
• NVCA model legal documents. If you are familiar with term sheets, consider reading through these legal documents to see how term sheets get fleshed out and get a deep understanding of mechanics of deals and capital structures.
• Letter of Intent Series. Series of blog entries that go into depth on various terms in an LOI. Told from the seller’s perspective but very useful for buyers.

Fundraising/LPs:

• Preqin Investor Outlook: Private Equity Outlook: The opinions of 430+ leading LPs on the Market and their plans for the next 12 months
• Cambridge Associates PE and VC benchmarks: Published quarterly by Cambridge Associates, a respected gatekeeper to many institutional LPs.
• Example Private Placement Memoranda (PPMs) for VC funds: PPMs are essentially business plans for funds. Here’s a google search that finds PPMs mistakenly exposed on the Internet!
• Institutional Limited Partners Association (ILPA): Industry association for large LPs.
• ILPA “principles”: This is a set of terms suggested by LPs for GPs to consider for their funds.
• Template fund fundraising deck: This was assembled by Carta and Kauffman.

Reporting:

• ILPA reporting guidelines. Consider this a wish list from LPs. Also includes several helpful templates.
• ASC 820: Carta overview of the standard that guides valuations in GAAP financial reporting.
• Form ADV. SEC form required for exempt funds and those funds subject to full reporting requirements.
• Form PF. SEC form required for larger funds.

Geographic-specific Resources:

Chicago:

• Chicago Tech Scene Navigator: a comprehensive listing of Chicago events, affinity groups, VCs, angels, founder resources, etc.
• Built in Chicago: Job advertising/matching site, plus event listing aggregator for the entrepreneurial ecosystem in Chicago.
• Landon’s Loop: Landon Campbell of Drive Capital has a comprehensive list of events and news for the tech ecosystem via this newsletter/blog.
• 1871: An organization that promotes and helps grow Chicago companies, mostly startups.
• mHub: a physical co-working space for hard tech companies
• Bizjournals: Chicago Inno: Covers startup scene in Chicago (and also city-specific publishing in other cities)
• Association for Corporate Growth (ACG) (also in other cities): Focused on conferences and events for middle-market growth companies and investors
• Crains Chicago: Local business newspaper published weekly.
• Illinois Venture Capital Association: The professional association for VC and PE in Illinois

NYC:

• Built in NYC: Job platform and event listing aggregator for the entrepreneurial ecosystem in New York
• AlleyWatch: newspaper that publishes mostly New York specific startup funding news and interviews with VC along with a daily newsletter
• This is going to be Big: weekly newsletter of NYC tech events and commentary

San Francisco:

• SiliconANGLE: news website focused on enterprise and emerging tech
• SF Business Journal: Includes a lot of silicon valley news
• BuiltInSF: a site focused on covering technology ecosystems, and a good place to find and post jobs

Los Angeles:

• BuiltInLA: a site focused on covering technology ecosystems, and a good place to find and post jobs.
• Techstars Starburst Accelerator: The space-focused Techstars affiliate in LA.
• Los Angeles Venture Capital Directory: An extensive directory of VC funds, angel investors in LA and Orange County
• Los Angeles Venture Association (LAVA): The professional association of venture investors in LA

Boston:

• NEVCA: The New England Venture Capital Association is the trade association for VCs in the Boston and surrounding region
• Startup Boston: A hub for curated lists of New England startups by industry, regional event calendars, and helpful newsletters
• Built in Boston: Like the affiliates in other cities, a useful site focused on the tech ecosystem and a good place to post/find jobs

Resources for those interested in venture capital and private equity was originally published in Venture Evolved on Medium, where people are continuing the conversation by highlighting and responding to this story.

Working with startups is not all glory and fame. While we are not taking nearly the risk of entrepreneurs performing high wire acts with no nets, we ride through the ups and downs of companies’ fortunes alongside founders. The founder of modern venture capital, General Georges Doriot, warned, “if you want a peaceful life, don’t go into venture capital.” Another favorite quote of his sums up the challenges of startups:

“Too many bankers and counselors have forgotten the history of the early years of our industrial giants of today. The first fifteen years of companies and of human beings are very much alike: hope, measles, failures, mumps, reorganizations, scarlet fever, executive troubles, whooping cough, etc. are parts of one’s daily life. Hopes, disillusions, hard work, are all necessary, particularly during the first ten or fifteen years before a stable and healthy body or corporation can begin to exist.”

Since General Doriot said that, a startup’s average time from initial funding to exit has compressed to 7–8 years. That’s still a long feedback cycle, usually filled with difficulty and periodic misery, so venture investors and founders alike thirst for interim milestones that provide emotional and intellectual reinforcement. I got to experience one of these milestones earlier this month when Tovala was on QVC for the first time.

Tovala’s Journey from Seed to Screen

Tovala is a smart countertop steam oven that is paired with meal service. Its genius is that users don’t have to prep, cook, or clean. Fresh food arrives prepared at customers’ doorsteps, who scan the meals and toss them in the Tovala oven which cooks them to perfection using a combination of steam, convection baking, and broiling. The food is restaurant quality because professional chefs control every variable and customize the cook cycles. The oven also scans and cooks many frozen items from your local grocery store (including almost every frozen item from Trader Joe’s), and functions as a premium toaster oven for everything else.

Because Tovala solves the meal problem and saves time without compromising the quality of the food, its customer retention is 3x leading meal kit companies.

Origin invested in Tovala in 2015 when it had a single founder and the oven was a hacked humidifier (this is a generous description). Last week, co-founder David Rabie was on QVC for an hour, showcasing the endless features of the oven and the meal service. At that moment, Tovala became a very real company. Yes, it has scaled to thousands of customers and will shortly be on pace to serve a million meals a year. Yes, my family has depended on Tovala for meals for several years now. But for some reason, neither is as tangible for me as seeing the product on TV. See for yourself in this QVC clip of Tovala’s appearance on In the Kitchen with Mary.

What made this moment emotional for me was that I was watching QVC at Tovala’s office, surrounded by the team that created the product and service. The hardware engineers, software designers, chefs, marketers, and finance people who made this happen were all cheering on David. They all took a risk, believed in David and his co-founder Bryan, and pulled off something remarkable that has the potential to fundamentally change how people eat.

Much work remains to build Tovala to a successful financial outcome, and the company’s success on QVC is a mere waypoint. But that does not dim moments like this that pull investors through the the struggles. It’s precisely the relentless setbacks experienced by a startup portfolio that makes experiences like Tovala’s moment in the spotlight glorious. It’s why they feel like triumphs.

It’s also an important reminder of why we deeply believe it’s a privilege to do this work.

Tovala to the TV: From Seed to Screen was originally published in Venture Evolved on Medium, where people are continuing the conversation by highlighting and responding to this story.

One of my more popular stories was a discussion of macro factors shaping the VC business. It was published in Hackernoon.

The Future of the Venture Capital Business was originally published in Venture Evolved on Medium, where people are continuing the conversation by highlighting and responding to this story.

The Start

In 2014, Nick Kokonas wrote a manifesto highlighting that if restaurants used tickets instead of free reservations, restaurants could dramatically reduce no-shows, optimize their supply chains, improve working capital, and eliminate staff answering the phones to take reservations. It made so much sense — the world SHOULD work that way, but it does not. It prompted the question: why are consumers willing to buy a ticket for a performance but not for a restaurant? Are consumers willing to change this behavior? Could Tock help restaurants — notoriously difficult businesses — dramatically improve operations and financial results?

Chicago restaurant Next, was the first to implement Nick’s ticketing approach. By all measures, both Next and the new ticketing system were smashing successes. After perfecting ticketing with world-renowned restaurant Alinea, Nick set out to provide this system to other restaurants, and Tock was born. Nick was beginning to demonstrate that he could reinvent yet another aspect of dining.

Around this time Brian Fitzpatrick (aka “Fitz”) joined up with Nick. Fitz was the first engineer in the Chicago Google office and is one of the most respected technologists and tech team builders in the Midwest. Leaving a comfortable, high-profile job at Google, Fitz joined Nick to build out Tock for scale.

From Primordial to Product

Over time, the product expanded to include dynamic pricing, deposits, private dining, non-prepaid reservations, special events and prix fixe menus — features not offered by OpenTable and demanded by restaurants in the “middle” which are constantly battling no-shows and attempting to fill tables on slower nights. This was crucial to prove that the company has serious scale and was not limited to those lucky restaurants that are flooded with patrons. Tock landed many of these middle-market restaurants as customers, and they are now a majority of Tock’s revenue.

Tock makes money by charging a subscription fee to restaurants, differentiating itself from Opentable which charges restaurants per person seated. With Tock, restaurants have an incentive to encourage patrons to use it for all times, events, and menu types, creating a partnership between Tock and its restaurant customers.

The Investment Decision

I met Nick initially in 2013, and we quickly discovered we had a shared interest in documentaries. We kept in touch over the years, and I made sure to watch two documentaries, Spinning Plates and Chef’s Table, to learn more about his partnership with world renowned chef, Grant Achatz, and to learn the stories behind Alinea and Next. It’s the first time my diligence/reference process involved watching feature films.

It’s no surprise that I followed the seed funding of Tock with a great deal of interest. Nick had simultaneously become a global legend in the restaurant world and was sought out for his unconventional thinking on not only tickets but on topics such as the end of tipping/including service in prices. I admired that his thinking was unshackled from the norm — an ingredient common among the best entrepreneurs with whom I’ve worked.

From the moment we began to explore the possibility of leading an investment in Tock, we were very impressed with the progress.Tock was processing millions of dollars of transactions per week and had grown the number of restaurants dramatically with little marketing. Indeed, consumers were flocking to use Tock and restaurants were signing up from eight countries. Tock, with a limited sales team, was able to sell efficiently over the phone. We knew from Grubhub that the market is enormous. Seeing the initial empirical evidence that Tock’s subscriptions could be sold globally using inside sales, combined with the features that appealed to restaurants of various kinds, convinced us that there was a lot of opportunity to scale the company. Consumers, in the hundreds of thousands, were embracing Tock.

The other factor in our decision to lead the round was the team. Nick is an outlier in many ways. Along with his partner Grant Achatz, he made huge innovations in the crowded and slow-to-adopt restaurant industry, where many people doubted their approach (“what? they are going to completely change the type of cuisine every four months???”). Nick has a mix of intelligence, irreverence for the status quo, confidence, deep industry expertise and unmatched will. Fitz has built an incredible technology team — one of the hardest things to pull off in this talent market — and a product that can handle Ticketmaster-selling-Hamilton-tickets type scale from the beginning. Fitz’s skills nicely complement Nick’s, including Fitz’s even temperament which balances Nick’s natural passion and enthusiasm. Perhaps most importantly, the strength of their partnership rests on mutual respect, and in many ways emulates the successful partnership that Nick and Grant have enjoyed over the last 12 years.

Like any deal, Tock has a lot of work ahead of it, and much is far from proven. It’s operating in a huge market that is in dire need of a better approach, with a team that has demonstrated many times it can transform how businesses operate. The company’s underlying thesis seems inevitable, and now it’s time to help them execute. We look forward to working with Nick and Fitz to do whatever we can to make Tock the huge success we all believe it will become.

Why Origin Invested in Tock was originally published in Venture Evolved on Medium, where people are continuing the conversation by highlighting and responding to this story.

I’ve been through two severe market declines, both in 2001 and 2009. Public market volatility at the beginning of 2016 gave birth to a lot of “doom and gloom” posts on VC blogs. The public markets have recovered, but the scare earlier this year seems to have resulted in more conservative cash planning within early stage companies. Investors and founders alike are paying closer attention to multiples. It also got VCs like me thinking more about structure.

There is a large wave of companies that raised capital in the last 18–24 months that will come to market for capital soon or have recently done so. The key obstacle for these companies is that they likely raised capital at a valuation higher than they could retrieve in the markets today. These companies might have made substantial progress in their businesses, thereby reducing the risk, and therefore increasing the valuation….or so the argument goes. The issue, however, is that the price for unit of risk has gone down. In other words, there is a generation of companies that need to accomplish significant traction just to earn their most recent valuation. I’ve heard several people recently proclaim “flat is the new up round.”

This mismatch between a company’s expectations and those of the market is exacerbated by anchoring and the endowment effect.

Here’s the thing: one can’t go to the NYSE and say IBM should be worth more than what they paid for it because IBM grew a lot since they bought it. The market doesn’t work that way. The market prices as of *now* and not relative to “ancient” history. The willingness of the market to pay for a unit of growth, earnings, revenue, etc. fluctuates based on future expectations.

As more companies inevitably struggle to climb back to their prior valuations, companies can face a downround. Existing investors and founders don’t like downrounds. They are painful financially, psychologically, and administratively. In a lot of these cases, downrounds are appropriate because of where the market trades. In other words, they are “fair”. To avoid the discomfort of such a round, companies can maintain their valuation but change the liquidation preference/structure, opting for participating preferred (uncapped), participating preferred with a cap (such as 3–4x) or multiple liquidation preferences (with “either/or” straight prefered), versus enduring a downround. None of these structures are “market” nowadays, but that might change. These structures can help the market to operate as parties trade downside and upside potential to arrive at a deal.

Investors should consider is that getting liquidation preference in exchange for valuation isn’t a 1 for 1 trade. Consider that often liquidation preferences are haircut in later rounds as new investors reduce the layers of sediment above a management team payout. When these discussions occur, the management team has an incentive to align with a new investor suggesting this change, because the team stands to benefit from this reduction in liquidation preference. It makes common more valuable. A downround, however, is a different circumstance. All existing shareholders (investors, founders and employees alike) are aligned to resist the lower valuation since each is uniformly affected.

So when making this trade, one should assign some probability the liquidation preference will matter. You have to examine downside scenarios, whether a cap will be exceeded and the long term capital requirements that might foretell a future haircut. From time to time, management teams get a carve out senior to the liquidation preference — yet another way the liquidation preference is worth less. There are also upside scenarios where liquidation preferences aren’t paid, primarily (a) in straight preferred when the exit proceeds are greater as-if converted to common and (b) in an IPO of sufficient size.

With the company’s longer term welfare in mind, artificially propping up the valuation of the business has consequences. The company still has to catch up to a now perpetuated artificially high valuation, which can make it hard to raise the next round. That valuation can also mean that employees are further out of the money in their options, depending on how the increased liquidation preference is incorporated into the calculation of the strike price. With the number of flat rounds or continuation rounds being done recently, this is a real risk. Sometimes a way to keep the valuation flat and avoid a downround is to sweeten the liquidation preference structure for investors. So we may see participating preferred more frequently than we have in recent years.

You might also find investors who are more concerned than in the past to have structural downside protection. In recent years, this has been less of a concern as the goal was to capture upside potential, and with exit markets frothy, trading upside for downside seemed silly. But it’s an important tool to help markets clear, so long as investors consider the expected value rather than the notional value of the liquidation preference.

Originally posted on www.ventureevolved.com

The Melting Liquidation Preference was originally published in Venture Evolved on Medium, where people are continuing the conversation by highlighting and responding to this story.

Since Steve Miller and Bruce Barron founded Origin Ventures in 1999, one piece of feedback we get consistently is that the Origin

With every incremental partner, senior associate, platform lead, and intern, maintaining this unspoken doctrine gets more difficult. Expressing the essence of our firm to entrepreneurs becomes more challenging. As Origin approaches its 20th anniversary, it was time to articulate these values and share them with our larger community.

Below are our four core values. Together, these guiding principles encapsulate both our mission as a firm and our precepts for external interactions. We also created a set of internal values that govern intra-firm relationships, communications, and attitudes which we believe will sustain our firm for the next 20 years.

We’ve seen firsthand how scaling without cultural values in place can sink a startup’s morale, culture, and productivity. As venture capitalists, we prefer to invest in startups that not only articulate their core values publicly, but uphold them. Despite few venture firms expressing values externally, we felt we should hold ourselves to the same standards as we hold our companies, and by sharing these values with you, we hope you will hold us accountable should any of us stray from them.

We now share with you Origin Venture’s values:

We have your back

• If our portfolio companies succeed, we succeed.
• We don’t “flip” businesses.
• We do not invest in competitors of our portfolio companies.
• Maintaining our reputation depends on us always doing the right thing.

Genuine partnership

• It is a privilege to work alongside entrepreneurs.
• As former operators and engineers, we know what the other side of the table is like.
• We are responsive to entrepreneurs before and after investment.
• We only invest in companies to which we believe we can add significant value.

People first

• We listen more than we talk.
• We give candid, constructive feedback to companies and each other.
• Entrepreneurs we back, regardless of our success together, are our best references.
• We maintain inclusive and safe workplaces free of discrimination and harassment within Origin Ventures, our portfolio companies, and the broader entrepreneurial ecosystem. We embrace diversity on every dimension.

Together we win

• We align ourselves with our LPs by investing a meaningful amount of our own capital in every fund.
• We syndicate because we do not have all the answers and value the additional resources co-investors bring.
• We value the opinions of all of Origin’s team members, regardless of seniority.
• Our team works together on every investment and our compensation is never deal-specific.

this story originally appeared in Origin Ventures’ blog.

Keeping our Center: Defining Origin’s Values was originally published in Venture Evolved on Medium, where people are continuing the conversation by highlighting and responding to this story.