Terms and Definitions

Angel Investor:
A high net worth individual who invests in early-stage businesses from their personal fortune. In certain countries, tax breaks are used to encourage angel investor activity.

Beta Testing:
Once a company's 'prototype' is functioning successfully, it is tested by a number of experts before the product is placed on the commercial market.

Bridge Financing:
A limited amount of equity or short-term debt financing typically raised within six to 18 months of an anticipated public offering or private placement. Its intended purpose is to "bridge" a company to the next round of financing.

Captive Funds:
A venture capital firm owned by a larger financial institution, such as a bank.

Due Diligence:
The process of in-depth investigation where a VC firm conducts research before it makes a final decision about going forward.

Early Stage:
A company which typically has completed its seed stage and has a founding or core senior management team, has proven its concept or completed its beta test, but which has minimal revenues and no positive earnings or cash flows.

Exit Strategy:
A VC fund's intended method for liquidating its holdings while achieving the maximum possible return. The strategy depends on the exit climate, including market conditions and industry trends. Exit strategies can include selling or distributing the portfolio company's shares after an initial public offering (IPO), a sale of the portfolio company or a recapitalisation.

Fund Size:
The total amount of capital committed by the investors of a venture capital fund.

General Partner (GP):
The partner in a limited partnership responsible for all management decisions of the partnership. The GP has a fiduciary responsibility to act for the benefit of the limited partners (LPs) and is fully liable for its actions.

Hurdle Rate:
The internal rate of return that a fund must achieve before its general partners or managers may receive an increased interest in the proceeds of the fund. Often, if the expected rate of return on an investment is below the hurdle rate, the project is not undertaken.

Incubator:
An entity designed to nurture business concepts or new technologies to the point that they become attractive to venture capitalists. An incubator typically provides both physical space and some or all of the services - legal, managerial and/or technical - needed for a business concept to be developed. Incubators are often backed by venture capital firms, which use them to generate early-stage investment opportunities.

IRR (Internal Rate of Return):
A typical measure of how VC Funds measure performance. IRR is technically a discount rate - the rate at which the present value of a series of investments is equal to the present value of the returns on those investments.

Later Stage:
A fund investment strategy involving financing for the expansion of a company that is producing, shipping and increasing its sales volume.

Limited Partner (LP):
An investor in a limited partnership that has no voice in the management of the partnership. LP's have limited liability and usually have priority over GP's upon liquidation of the partnership.

Management Buy-Out (MBO):
A venture capital or private equity firm will often provide funding to enable current operating management to acquire or to buy at least 50 percent of the business they manage. In return, the private equity firm usually receives a stake in the business.

Management Fee:
Compensation for the management of a venture capital fund's activities, paid from the fund to the general partner or investment advisor. This compensation generally includes an annual management fee.

NDA (Non-disclosure agreement):
An agreement issued by entrepreneurs to potential investors to protect the confidentiality of their ideas when disclosing those ideas to third parties.

Private Equity:
Equity securities of companies that have not "gone public", i.e. are not listed on a public exchange. Private equities are generally illiquid and viewed as a long-term investment. As they are not listed on an exchange, any investor wishing to sell securities in private companies must find a buyer in the absence of a marketplace. In South Africa, venture capital falls under the wider industry term, private equity.

Seed Money:
The first round of capital for a start-up business. Seed money usually takes the structure of a loan or an investment in preferred shares or convertible bonds, although sometimes it is ordinary shares. Seed money provides startup companies with the capital required for their initial development and growth. Angel investors and early-stage venture capital funds often provide seed money.

Syndication:
A number of investors offering funds together as a group on a particular deal. A lead investor often coordinates such deals and represents the group's members. Within the last few years, syndication among angel investors (an angel alliance) has become more common, enabling them to fund larger deals closer to those typifying a small venture capital fund.

Venture Capital Financing:
An investment in a start-up business that is perceived to have excellent growth prospects but does not have access to external capital.