Investor Terminology For Each Stage of Business: Ideation Stage

Every business begins with a good idea, which is usually inspired by a particular need or problem in society that the business aims to address. In this first stage, you’ll need to refine your business idea, find your target market, and come up with products or services to serve your market. Here are common terms to know when conceptualizing your startup idea.

“In this first stage, you’ll need to refine your business idea, find your target market, and come up with products or services to serve your market.” 

1. Ideation

Ideation is the process of generating ideas and solutions through sessions such as brainstorming, prototyping, and sketching. The purpose is to come up with numerous ideas, which your team can then narrow down.

Define a problem that you’re aiming to solve, and determine how your product or service will solve that problem.

2. Target Market

A cornerstone of your business, the target market is the group of consumers which your product or service is aimed at. Much of your sales and marketing efforts will be focused on your target market, so it’s important to identify and define this.

Customers in your target market will share similar characteristics, such as demographics, geolocation, income, and lifestyles.

3. Startup Capital

Startup capital or capital is the money you need to start a new company, which is used to cover required expenses such as equipment, licenses, inventory, and product development.

Startup capital can come from various sources, including your own savings, friends and family, loans, or investments.

4. Venture Capitalist (VC)

A venture capitalist is an investor who provides venture capital funding to startups with growth potential in exchange for a stake in the company, known as equity. VCs invest in startups and nurture them in hopes that they’ll receive big returns as the company expands.

Due to the 90% startup failure rate, VCs tend to be picky about their investment choices since they’re making risky business investments that they may not get returns on.

5. Minimum Viable Product (MVP)

An MVP is a basic version of your product with the necessary features that can be used for testing to gauge customer interest in the product.

Entrepreneur Eric Ries said the purpose of an MVP is to “collect the maximum amount of validated learning about customers with the least effort.”

6. Lean Startup

Lean Startup is a business approach first coined by Eric Ries. It involves engaging in a build-measure-learn feedback loop by building an MVP to solve a problem, doing tests and analyses, and making adjustments or pivots based on data.

7. Key Performance Indicator (KPI)

A key performance indicator is a way to measure your progress when working toward a certain objective. Using KPIs involves setting targets — the desired level of performance — and tracking progress against that target, according to KPI.org.

By outlining a manageable number of key indicators, KPIs can also be used to facilitate decision-making. Common startup KPIs include customer conversion rates, organic traffic, and the number of active users.

8. Business Model

A business model is the plan for a company to make a profit. It describes the products or services offered to the target market, and the resources and costs required to create them.

A business model is an important asset for attracting investment, guiding business operations, and developing relationships with suppliers and customers.

9. Software as a Service (SaaS)

A business model where software is hosted on a cloud infrastructure and licensed to businesses on a subscription basis.

10. Profit Margin

Profit margin is a ratio or percentage that measures profitability relative to business costs and expenses — the higher the number, the more profitable the business.

The general formula for calculating profit margin is: ((Sales – Total Expenses) / Revenue) x 100

11. Business Plan

A business plan is essentially a roadmap for your startup, which describes your objectives and how you plan to achieve them. It addresses topics like your business’s finances, market strategies, and management plan. It’s also a good way to ensure your business is moving in the right direction in meeting your targets going forward.

A business plan is also used to attract investors during the early stages before your company has established a proven track record.

12. Churn Rate

This refers to customers lost after the acquisition stage in a subscription-based business model.

13. Proof of Concept (POC)

This is the process of determining the feasibility and viability of a business or design idea through experimentation or testing.

14. Product-Market Fit

Startup coach Marc Andreessen, who first coined the term, said it best: “Product/market fit means being in a good market with a product that can satisfy that market.”

This means creating a product or service that will provide enough value to customers that they’ll use it and spread the word about it.

15. Incubators

An incubator is a non-profit or for-profit organization that helps startups develop their business idea into a self-sufficient business. Incubators often provide services such as office space, mentoring, and access to investors.

An incubator provides entrepreneurs opportunities to build and test prototypes to find the right product-market fit.

16. Pivot

A buzzword in the business world, the term simply means to change course in your business based on findings in user testing and market analysis.

17. Cash Flow

Cash flow is the amount of money flowing in and out of your business at a given time. Being cash flow positive means there’s more cash inflow, or money going into your company, than coming out. Conversely, a negative cash flow is when the cash outflow, the amount of money going out of your business, exceeds how much you’re making.

Having negative cash flow doesn’t mean you’ll go out of business, but it could spell trouble if it becomes a recurring pattern.

18. Burn Rate

This refers to the rate at which your company spends money, typically expressed as dollars per month. There are two types of burn rate: gross burn rate refers to how much you spend each month, and net burn rate refers to the difference between cash inflow and cash outflow.

This is an essential KPI to keep an eye on to ensure that your startup doesn’t run out of capital. You can reduce your burn rate by cutting unnecessary expenses.

Here’s how to calculate your monthly gross burn rate: (original cash balance – remaining cash balance) / time period.

Here’s how to calculate your monthly net burn rate: cash balance – gross burn rate.

19. Alpha Test

Alpha testing is the initial phase of testing whether a product meets business requirements and functions as expected. Alpha tests are carried out by the internal team before moving on to beta testing.

20. Beta Test

This is the final phase of testing in which the product is tested by users in a production environment to validate the product’s functionality, usability, and compatibility.

Feedback from users helps with debugging and making final adjustments before shipping the product.

21. Sales Funnel

This is a representation of the sales process, which is funnel-shaped because it starts with a large number of potential customers at the top, but only a fraction of those people end up making a purchase. The general stages of a sales funnel from top to bottom are: awareness, interest, consideration, and purchase.

To help solidify your understanding of these terms, let’s make up a startup called “Fly Buy,” which does drone deliveries for customized care packages featuring locally sourced products.

Through initial market research, the startup founders identified Millennials and Gen Z’ers as potential target markets. After beta testing the MVP — an early version of the drone — and getting positive user feedback, they decided to move forward with drafting a business plan, which features their proof of concept and a list of KPIs, one of which is a monthly net burn rate of $16,000.

To secure more capital to advance product development and figure out their business model, the founders decided to do a pre-seed fundraising round.