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     terms and concepts

This page highlights key innovation funding and investment terms and concepts.

Particular IPO and private equity terms are dealt with here and here.

     Angel investment - financial support from an individual for a start-up company, usually less than $1 million and often for a longer term than that from a venture capital fund. | detail

     Benchmarking - measurement of performance (typically against what is identified as best practice) to set goals for business processes or policy development

     Bootstrapping - financing an enterprise without raising equity from investors or borrowing money directly from a bank, eg use of personal resources or through acquisition of another entity

     Bridge Loan - short-term financing that funds an enterprise's operations until it can arrange more comprehensive longer-term financing. The loan is often needed if an enterprise runs out of cash before it can obtain capital through equity or long-term borrowing.

     Burn rate - rate at which a new enterprise (or project) spends funds. Many new enterprises burn all available funds before they become sustainable.

     Business angel - an individual who invests in start-up enterprises, generally regarding markets/technologies with which he/she is familiar. | detail

     Business Plan - a strategic planning document that is usually required by VC managers, underpinned by a market study and encompassing detailed costings (inc cash flow projections that allow tracking of burn rate), critical path analyses, timetables and projected outcomes. The Plan provides a map of where the enterprise wants to go and how it aims to get there. It also demonstrates the credibility of the enterprise's managers to potential investors.

     Capital asset price model (CAPM) - identifies the rate of financial return on an asset as derived from two components - the pure time value of money and the risk premium reflecting the sensitivity of the asset to changes in market returns.

     Capital Under Management - aggregate funds available to a fund manager for venture or other investments

     Cluster - a geographically bounded concentration of similar or complementary enterprises that share infrastructure, labour markets and services. Many centre on particular research institutions and leverage hard/soft networks. Large-scale clusters include Silicon Valley and the North Carolina Research Triangle in the US. Small-scale clusters include the biotechnology precinct in Melbourne.

     Covenant - a formal undertaking to the investors by the enterprise (and sometimes by its founders or key figures) not to do or to do certain things.

     Critical Path Analysis (CPA) - project management tool identifying the sequence and time in which activities must be completed

     Dealflow - the turnover of investment opportunities for venture capital fund managers.

     Dilution - the process by which an investor's percentage of shares in an enterprise is reduced by the issue of new securities

     Discounted cash flow (DCF) - analysis that identifies the present value of an individual asset or portfolio of assets as equal to the discounted value of expected net future cash flows, with the discount reflecting the cost of waiting (ie the pure time value of money), risk and expected future inflation. DCF analysis is applied to investment project appraisal and corporate valuation.

     Dividend discount model (DDM) - identifies the market value of an enterprise's equity as equivalent to the present value of expected future dividends, assuming that dividend growth will be at a constant rate or that payments are fixed.

     Due Diligence - investigation and evaluation of an enterprise (including its finances, liabilities, assets and management) prior to investment by another entity, licensing or sale

     EBIT/EBITDA - two financial measures often used in valuing an enterprise are earnings before interest & taxes (EBIT) and earnings before interest, taxes, depreciation & amortisation (EBITDA).

     Employee share option plan (ESOP) - a scheme to enable employees to acquire shares in the enterprise.

     Equity - investors in start-up enterprises generally demand substantial equity in that enterprise (eg ) as the price of support. The extent of equity varies by nation, market, technology sector and perceived future of the enterprise; some VC funds will for example demand 80% of shares in IT start-ups.

     Equivalence proposition - an enterprise's market value can be measured by three theoretically-equivalent methods: the current market value of debt and equity, the current value of expected future free cash flows (cash flows generated by operating activities net of taxes and asset purchases/sales) and the current 'going-concern' value of its assets.

     Exclusivity Agreement - an agreed period of exclusivity during which an enterprise and/or its current shareholders cannot negotiate with others for investment into that enterprise, a mechanism that is often negotiated by a syndicate of investors.

     Exit - point at which a business angel, venture capital manager or incubator receives a return on investment (eg through an Initial Public Offering). Those investors will seek an exit strategy that maximises their return.

     Flip - taking an enterprise or other asset private (eg through an LBO by a private equity fund) and floating it shortly thereafter.

     Hard Network - typically physical infrastructure such as a building, communications facilities and a contact database.

     Hedge Fund - fund that aims to generate return for investors by short term trading in currency, bond or other financial markets. | detail

     Incubatee - an enterprise that has received support from an incubator, including seed funding and services.

     Incubator - a commercial or not-for-profit mechanism to accelerate the growth and success of new enterprises through business support services and resources. An incubator's primary goal is to produce successful firms that will be viable when they leave the incubator (eg have necessary skills and capital). | detail

     Independent or Outside Director - a non-executive member of an enterprise's Board of Directors who is not an employee of the enterprise or affiliated with a controlling stockholder. The definition of 'independent' and responsibilities varies across different countries and markets.

     Information rights - a contractual right to receive ongoing information about an enterprise's operation (and in some instances to attend board meetings) that is typically required by venture capital fund managers investing in privately held enterprises.

     Initial Public Offering - the offering (aka IPO) of shares to the public for the first time, usually with a prospectus that details the investment offer and often described as flotation, going public or listing. Prior to an IPO enterprises that sell shares to investors are considered to be privately held. | detail

     Institutional Investor - an insurance company, superannuation funds or investment fund (inc charitable trusts and some academic entities) that supplies capital

     Intellectual Property - intangibles, subject to protection under industrial property (eg patents, designs and trademarks) and copyright law. The IP is often a start-up's main asset. | detail

     Junk Bond - corporate financial instrument that offers higher rate of interest (typically 150 to 300% of standard rate) to reflect perceive risk of non-performance. Often used by leveraged fund in MBOs

     Key man insurance - insurance obtained by an enterprise on the lives of key employees, usually the chief executive and those ultimately responsible for continuing to develop its technology

     Lead Investor - the investor who leads a group of investors into an investment (thus often receiving special privileges). With large-scale investments one VC fund will often serve as lead investor with smaller stakes being provided by other VC funds and individuals.

     Lock-Up Period - the time an investor must wait before selling/trading shares at an exit such as an initial public offering. In an IPO the lock-up period is generally determined by the underwriters and is typically 180 days after listing.

     Management Buy-out (MBO) - funds provided for an enterprise's management to acquire the organisation (or specific asset or product line). The rarer Management Buy-in (MBI) involves acquisition of an enterprise by an external group of managers and financiers who plan to manage the business themselves. Funds are sometimes provided by private equity funds. | detail

     Mezzanine Financing - short-term financing for an enterprise that expects to go public usually within six to 12 months, usually repaid through an IPO or setting the floor price for that offer.

     Milestone - contractual target that must be met by an enterprise, often used by investors as a condition for releasing further financing.

     Physical incubator - an incubator whose incubatees are physically co-located with the incubator team, often in a technology park.

     Pre-emption right - the right of an investor to participate in financing to the extent necessary to ensure that (if exercised) its percentage ownership of the enterprise will remain the same after the financing as it was before. Sometimes also used as a term for a right of first refusal on shares of other investors.

     Private equity fund - fund managed by specialist for generation of revenue through acquisition and sale of assets (eg through LBO) in mid term. | detail

     Proof of concept - development of a prototype product, service or process that demonstrates feasibility. Typically it provides a basis for further development and for raising additional investment capital.

     Ratings Agency - a commercial services (such as S&P, Moodys, Fitch IBCA or R&I) that assesses the riskiness of lending to a government or major enterprise. | detail

     Recapitalisation - reorganisation of an enterprise's capital structure through infusion of new cash and/or replacement of current shareholders by new ones. Recapitalisation may be an alternative exit strategy for venture fund managers.

     Return on capital employed (ROCE) - financial ratio that measures profit before interest & tax as a return on capital employed (ie debt and equity). It encompasses two constituent ratios: net profit margin (measure of operating cost efficiency with which profits are earned from sales revenue) and asset turnover (measure of marketing efficiency with which sales revenue is generated from the enterprise's asset base)

     Reverse leveraged buyout (RLBO) - offering new shares in a company or part of a company that had been taken private in an initial leveraged buyout

     Risk - many start-ups do not get to market; others are not commercially viable in the long term. Investor assessments of risk (including loss of their investment and sub-optimal returns on provision of capital and expertise) are reflected in the size and shape of the returns they seek from new enterprises, eg gaining the majority of equity as the price for providing funds

     Seed Funding - initial capital investment in a new enterprise, prior to venture capital investment. It is typically used for costs associated with start up (eg incorporation), protection of intellectual property, prototyping and market testing

     Service Provider - some government innovation and commercialisation support programs have deployed specialist service providers, ie individuals and organisations that provide training and advice to new enterprises on a commercial basis

     Soft network - informal (and often 'invisible') links between people, important for example as a means for a start-up to find capital and expertise. | detail

     Sponsor - sponsors usually make a contribution during incubator feasibility, start-up and/or operation. Contributions may involve cash, in-kind services, equipment and personnel.

     Start-up - a newly formed enterprise.

     Sweat Equity - equity held by founders or key employees of an enterprise in recognition of their intellectual property or work to build that business, rather than in recognition of their contribution of capital.

     Systemic model of innovation - a 'real world' view of commercialisation based on understanding of dynamic and complex interaction between individuals, organisations and markets. It differs from monocausal explanations that concentrate on access to capital or on research rather than a multi-stage innovation chain.

     Term Sheet - non-binding agreement that identifies basic terms and conditions under which an investment will be made. The Term Sheet provides the basis for development of more detailed legal documents.

     Venture Capital - high risk and accordingly high return capital investment in new enterprises. VC funding comes from individuals and organisations (eg superannuation funds) and is typically managed by professional managers who are also participants in the fund. It is directed towards new enterprises, typically between two and five years old, judged as have very good prospects of rapid growth and high rates of return. Venture capital involves investment of the VC manager's skills, time and cash, with the manager exercising some control over the enterprise's direction. | detail

     Virtual incubator - an incubator whose incubatees are not physically co-located with the incubator team.

     Weighted average cost of capital (WACC) - overall cost of an enterprise's financing calculated as the average of the after-tax interest rate on its debt and required rate of return on its equity weighted by the proportion of debt and equity in its capital structure.  The WACC represents the capital market's overall assessment of the rate of return that should be earned to cover risk, the pure time value of money and expected future inflation. 

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