This section contains a list of words and terms used in the Investment Ready Guide and an explanation of what they mean.
Angel
A wealthy individual who invests in entrepreneurial firms. Although angels perform many functions as venture capitalists, they invest their own capital rather than that of institutional or other individual investors.
Break-even analysis
A financial tool to establish if the gross profit of a business will exceed the fixed costs.
Burn rate
The rate at which a company requires additional cash to keep going. Usually measured in monthly expenses less turnover. An example is "company xyz has a burn rate of $45,000 a month".
Capital employed
Capital employed is the sum of equity and long-term debt used by a company to purchase long-term assets and for working capital.
Capital gain
The amount realised on exit less the amount invested.
Capital structure
The composition of a company’s source of funds, especially long-term funds.
Collateral
A physical asset that a borrower owns and puts forward as security in case they default on their loan.
Common shares
The equity typically held by management and founders. Typically, at the time of an initial public offering, all equity is converted into common stock.
Corporate venture capital
An initiative by a corporation to invest either in young firms outside the corporation or units formerly part of the corporation. These are often organised as corporate subsidiaries, not as limited partnerships.
Cost of goods sold
Accounting term defined by the equation: opening stock plus purchases plus expenses related to purchases less closing stock.
Deal flow
Venture capital term used to describe the number of proposals being received by a venture capital fund on some calendar basis such as three deals a week.
Debt
Capital supplied for which there is a fixed income, fixed repayment period, and fixed repayment schedule.
Development capital
Capital required by an established company to fund the expansion of the business.
Dilution of equity
A stock market term used to describe the situation whereby the issue of new shares results in the original shareholders owning a smaller share of the company.
Dividend yield
A stock market term which expresses, as percentage return, the annual dividend per share divided by the latest market price.
Due diligence
The process of researching a business and its management to determine whether to proceeding with a venture capital deal.
Early stage capital
Finance for companies to initiate commercial manufacturing and sales.
EBIT
Earnings before interest and tax.
Equity
The proportion of a company that shareholders own. Sometimes described as shareholders’ funds.
Exit mechanism
Venture capital term used to describe the method by which a venture capitalist will eventually sell out of an investment.
Expansion financing
This is capital provided for growth and expansion of an established company. Funds may be used to finance increased production capacity, market or product development and/or provide additional working capital. Capital provided for turnaround situations is also included in this category, as is the refinancing of bank debt.
Factoring
When a company either purchases your accounts receivable or loans you funds against your accounts receivable. This can improve your company’s liquidity.
Financing gap
Venture capital term used in leveraged buy-outs to describe the difference between the purchase price of a company and the debt raised on the assets and cashflow of the company.
Fund
A pool of capital raised periodically by a venture capital organisation. Usually in the form of limited partnerships, venture capital funds typically have a ten-year life, though extensions of several years are often possible.
Gearing, debt /equity or leverage
Is the amount of debt financing compared to equity financing in a company. If the company has low levels of debt compared to equity it has a low gearing ratio. Conversely, a high debt to equity ratio would be a highly geared company. Gearing can also be referred to as financial leverage.
Gross profit
Sales less cost of goods sold.
Implementation plan
Plan defining steps and activities required to achieve goals.
Initial Public Offering (IPO)
Is the selling of securities, or shares, in your company to the general public. This is normally done through an investment bank (an underwriter). An IPO is the first fund-raising done from the general public.
Intangible assets
Assets owned or generated by a company that are not easily sold, except with the company as a whole, and that are usually not easily measurable.
Intellectual property (IP)
Legal term used to describe the patents, licences, copyrights, trademarks and designs owned by a company.
Joint ventures
An agreement involving two or more organisations that arrange to produce a product or service jointly.
Letter of intent
Document that is not legally binding but given by one party to another to show good faith and which describes the main agreed points of transaction.
Liquidity
Refers to the ability of an organisation to meet its liabilities. One liquidity ratio is ‘net working capital’, which is the difference between current assets and current liabilities. This ratio roughly measures a company’s potential
reservoir of cash.
Management buy-in
Usually a leveraged buy-out organised by new managers or a management team.
Management buy-out
Usually a leveraged buy-out organised by the existing management of the company.
Management fee
The fee, typically a percentage of committed capital or net asset value that is paid by a venture capital fund to the general partners to cover salaries and expenses.
Market capitalisation
Value of a company calculated by multiplying the number of shares on issue by the last sale price.
Net profit
Sales, less all expenses, which may or may not include corporate tax.
Net tangible assets
The difference between tangible assets (eg stock, debtors, land, etc.) and liabilities in the balance sheet.
Net worth
The difference between the assets and liabilities of a company on its balance sheet. Net worth is equal to shareholders’ funds.
Ordinary shares
These are equity shares that are entitled to all income and capital after the rights of all other classes of capital and creditors have been satisfied. Ordinary shares have votes. In a venture capital deal these are the shares typically held by the management and family shareholders rather than
the venture capital firm.
Owner’s equity
The residual of assets less external liabilities.
P/E ratio, price/earnings ratio
The ratio of share price to earnings (net profit after tax) per share.
Portfolio diversification
Investment strategy where the portfolio manager spreads investments across many industries and thus tries to diminish the risk of a single industry depression reducing the portfolio return.
Positioning strategy
Marketing term used to define a strategy where a company tries to distinguish itself from its competitors by focusing on some market segment.
Private equity
Private equity includes organisations devoted to venture capital, leveraged buy-outs, consolidations, mezzanine and distressed debt investments, and a variety of hybrids such as venture leasing and venture factoring.
Product differentiation
Marketing term used to describe strategy of defining new or current product features or benefits that distinguish it from the competition.
Prospectus
A condensed, widely disseminated version of the registration statement. The prospectus provides a wide variety of summary data about the firm.
Ratchets
A structure whereby the eventual equity allocations between the groups of shareholders depend on either the future performance of the company or the rate of return achieved by the venture capital firm. This allows management shareholders to increase their stake if the company performs particularly well.
Refinancing
The purchase of the venture capital investors’ or others’ shareholdings by another investment institution.
Rights issue
An issue of new shares on a proportional basis to existing shareholders usually at a discount to market price to raise additional shareholders’ funds. The shareholder may allow the offer to lapse or if the issue is renounceable sell or transfer the rights to another party.
Secured debt
A loan where the lender, in the event of a failure to meet either an interest or principal payment, gains title to an asset.
Secured lending
Making loans only to parties who can provide an asset as security in the event of non-payment of interest or principal.
Seed capital
Financing allowing the development of a business concept.
Start-up capital
Financing allowing product development and initial marketing.
Suppliers’ credit
Often overlooked form of financing provided by creditors when they offer extended payment terms.
Syndication
Where an investment is made by a number of investors. This decreases risks for those involved and increases chances of success.
Tranching
Investment made in stages; each stage being dependent on achievement of targets.
Turnaround
Company converted from making losses to profits. A turnaround situation is a company that is still making losses but which an investor believes has sufficient turnover to make potential profits.
Undercapitalisation
Situation for a company where insufficient equity has been supplied by the shareholders or retained in the company to support the activities of the business.
Unsecured lending
Lending where the borrower has not provided any assets in the event of non-payment of interest or principal.
Venture capital
Risk investment in unlisted companies with high growth potential. Venture capital can be broadly subdivided into seed or start-up capital, second round finance for young companies (used to expand the range of products) and
development finance for established companies (used to develop an alternative product or expand through acquisition).
Working capital
Capital a company employs to fund the excess of current assets (stock, debtors etc) over current liabilities (creditors, leave provisions, bank overdraft etc).
Yield
Income payable by an investee to an investor.
For more definitions of financial terms and phrases used in the investment industry visit www.nzvca.co.nz/glossaryofterms.aspx.
