Encyclopedia

Investment Stages

Seed

Financing provided to research, assess and develop an initial concept before a business has reached the start-up phase.

Start-up

Financing for product development and initial marketing. Companies have not sold their product commercially and are in the process of being set up.

Early Growth

Financing for the expansion of an operating company. Later-stage venture tends to finance companies already backed by venture capital firms.

Growth

A type of private equity investment – most often a minority investment  – in relatively mature companies that are looking for capital to expand into new markets or restructure operations.

Buyout

Financing to acquire a company. It may use a significant amount of borrowed money to meet the cost of acquisition.

A

Acquisition

The acquisition is the process through which one company takes over the controlling interest of another company. The acquisition includes obtaining supplies or services by contract or purchase order with appropriated or non-appropriated funds, for the use of Federal agencies through purchase or lease.


AIF - Alternative Investment Fund

Under the AIFMD, an AIF (Alternative Investment Fund) is a ‘collective investment undertaking’ that is not otherwise subject to the UCITS (Undertakings for Collective Investment in Transferable Securities) regime, which raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors. Both open-ended and closed-ended vehicles and listed and unlisted vehicles can be AIFs for the purposes of the AIFMD. The definition captures a large breadth of vehicles that would be regarded as “funds”, including all non-UCITS investment funds, wherever established and regardless of their legal structure (including limited partnerships, limited liability partnerships and limited liability corporations). AIFs include hedge funds, private equity funds, retail investment funds, investment companies and real estate funds. Single investor vehicles are generally not viewed as AIFs as they would not be seen as collective investment undertakings. 

AIFM

Under the AIFMD, an AIFM is defined as an entity that provides, at a minimum, portfolio management and risk management services to one or more AIFs as its regular business irrespective of where the AIFs are located or what legal form the AIFM takes. The AIFM can either be an external manager appointed by or on behalf of the AIF, or the AIF itself (any delegate managing assets should not therefore be an AIFM). The Directive applies to: EU AIFMs managing one or more EU AIFs/non-EU AIFs (irrespective of whether or not they are marketed in the EU);  Non-EU AIFMs managing one or more EU AIFs (irrespective of whether or not they are marketed in the EU); Non-EU AIFMs marketing EU AIFs/non-EU AIFs in the EU.

AIFMD

The Alternative Investment Fund Managers Directive (AIFMD) entered into force on 22 July 2011 following its publication in the Official Journal of the European Union on 1 July 2011. The Directive had to be transposed by EU Member States into statutory laws by 22 July 2013, the date that the AIFMD took effect in national law across the EU. And since 22 July 2014 – which marked the end of a one-year transition period – managers falling within the scope of the Directive are obliged to be authorised by their national competent authorities. The AIFMD is a piece of EU legislation aimed at increasing investor protection and reducing systemic risk by establishing a harmonised EU framework for regulating alternative investment funds (“AIFs”) and their managers (“AIFMs”)

Angel Investor

Angel or Angel Investor is an individual who provides capital to one or more startup companies. Unlike a partner, the angel investor is rarely involved in management. Angel investors can usually add value through their contacts and expertise.

B

Balanced Fund

A venture capital fund focused on both early-stage and development, with no particular concentration on either.

Benchmark

Benchmarks are performance goals against which a company's success is measured. Benchmarks are often used by investors to help determine whether a company should receive additional funding or whether management should receive extra stock.


Blind pool

Blind pool is a form of limited partnership that doesn't specify what investment opportunities the general partner plans to pursue.

Bridge loans

Bridge loan is a short-term loan that is used until a person or company can arrange a more comprehensive longer-term financing. The need for a bridge loan arises when a company runs out of cash before it can obtain more capital investment through long-term debt or equity. 

Buyout

Buyout is defined as the purchase of a company or a controlling interest of a corporation's shares or product line or some business. A leveraged buyout is accomplished with borrowed money or by issuing more stock.

Buyout fund

A fund whose strategy is predominantly to acquire controlling stakes in established companies.

C

Capital gain

Capital Gain is the gain to investor from selling a stock, bond or mutual fund at a higher price than the purchase price. The capital gain is usually the amount realized (net sales price) less your investment (adjusted tax basis) in the property. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.

Carried interest

A share of the gains realised from a Fund’s underlying investments. The GP is required to invest in the Fund in order to be entitled to receive Carried Interest. Carried Interest is generally regarded as the main incentive to the GP and is a key mechanism for aligning the GP and LP interests in a Fund. Carried Interest is typically 20 percent of the Fund’s net gains and is payable to the GP only once LPs have been repaid an amount equal to their drawn down Commitments plus a “preferred return”. Depending on the jurisdiction, the GP may be required to make a significant investment alongside the LPs in the Fund to obtain the right to receive Carried Interest. Carried Interest is sometimes referred to as “carry”.

Clawback

GP Clawback is the repayment of any excess Carried Interest received. It is designed to protect LPs and requires those who receive Carried Interest to return amounts received in excess of the amount they should have received. The mechanisms used to achieve such repayment include a combination of the use of escrow arrangements (where a certain portion of the Carried Interest is put into an escrow account to secure clawback obligations) and periodic or annual true-up mechanisms. Note that a “true-up” is a calculation to determine how much Carried Interest is due to the GP based on all cash flows to the date of calculation. An “interim true-up” is one that is calculated during the life of the Fund and takes into account the value of unrealised investments. A “final true-up” takes place at the end of the life of the Fund, when all proceeds have been distributed. If the amount of Carried Interest due to the GP, based on the true-up calculation, is less than the amount the GP has actually received, then the excess amount is required to be returned to the Fund. LP Clawback is a mechanism that requires LPs to return Distributions to cover potential Fund liabilities including indemnification obligations and can be payable after the end of the life of the Fund. 

Capital under management

Capital under management is the amount of capital available to a management team for venture investments. 


Closing

Closing is the final event to complete the investment, at which time all the legal documents are signed and the funds are transferred. 

Code

The Invest Europe Code of Conduct, which is as follows: 1. Act with integrity 2. Keep your promises 3. Disclose conflicts of interest 4. Act in fairness 5. Maintain confidentiality 6. Do no harm to the industry Compliance with the Code is mandatory for all Invest Europe members and it is expected that the member procures that its affiliates working with it will also adhere to the Code.

Co-investment

In relation to an LP Co-investment, this is a Co-investment by an LP in a Portfolio Company alongside a Fund, where the LP is an investor in such Fund. The term Co-investment may also be used to refer to external syndication of a Private Equity financing round. In contrast, the terms “consortium deal” or “club deal” are typically used to describe a situation where two or more Funds with different GPs club together to acquire a majority stake in a Portfolio Company. 

Commitment(s)/capital commitment(s)

An LP’s contractual commitment to provide capital to a fund up to the amount subscribed by the LP and recorded in the fund documents, also known as such LP’s fund interest. This is periodically drawn down by the GP in order to make investments in portfolio companies and to cover the fees and expenses of the fund.  

Corporate venture capital

Corporate venture capital is a subsidiary of a large corporation that makes venture capital investments. 

Corporate venturing

Corporate Venturing is a practice of a large company, taking a minority equity position in a smaller company in a related field. 

D

Deal flow

Deal flow (dealflow) is the rate at which investment offers are presented to funding institutions. 

Debt financing

Debt Financing means when a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay principal and interest on the debt. 

Direct financing

Direct financing is financing without the use of underwriting. Direct financing is often done by investment bankers. 

Drive-by deal

Drive-By Deal is a slang often use when referring to a deal in which a venture capitalist invests in a startup with the goal of a quick exit strategy. The VC takes little to no role in the management and monitoring of the startup. 

Dry powder

Dry powder refers to cash reserves kept on hand to cover future obligations or purchase assets, if conditions are favorable. Securities considered to be dry powder could be Treasuries, or other fixed income investments, and can be liquidated on short notice, in order to provide emergency operational funding or allow an investor to purchase assets.

Distribution(s)

All amounts returned by the fund to the LPs. This can be in cash, or in shares or securities (in the latter case known as “distribution(s) in-specie”). 

Due diligence

Due diligence is the process of investigation and evaluation, performed by investors, into the details of a potential investment, such as an examination of operations and management and the verification of material facts. 

E

Early-stage fund 

A venture capital fund focused on investing in companies in their primary development stage.

Equity financing

Equity financing is a term used for a company's issuance of shares of common or preferred stock to raise money. Equity financing is commonly done when its per-share prices are high-the most money that can be raised for the smallest number of shares. 

Equity offerings

Equity Offerings is raising funds by offering ownership in a corporation through the issuing of shares of a corporation's common or preferred stock. 

Exit

The exit is the sale or exchange of a significant amount of company ownership for cash, debt, or equity of another company. 

Exit route

Exit Route is the method by which an investor would realize an investment. 

Exit strategy

Exit Strategy is the way in which a venture capitalist or business owner intends to use to get out of an investment that he/she has made. Exit Strategy is also called liquidity event. 

F

Financier

A financier is a person or financial institution engaged in the lending and management of money and makes a living participating in commercial financing activities.

First-round financing

First-round financing is the first investment in a company made by external investors. 

First stage capital

First Stage Capital is the money provided to an entrepreneur who has a proven product, to start commercial production and marketing, not covering market expansion, de-risking, acquisition costs. 

Follow-on

Follow-On is a subsequent investment made by an investor who has made a previous investment in the company, generally a later stage investment in comparison to the initial investment.

Full ratchet

Full ratchet is an investor protection provision which specifies that options and convertible securities may be exercised relative to the lowest price at which securities were issued since the issuance of the option or convertible security. The full ratchet guarantee prevents dilution since the proportionate ownership would stay the same as when the investment was initially made. 

Fund of funds

Fund of Funds is a mutual fund that invests in other mutual funds. Fund of Funds is an investment vehicle designed to invest in a diversified group of investment funds. 

G

Generalist fund 

A fund with either a stated focus of investing in all stages of venture capital and private equity investment, or with a broad area of investment activity.

Ground floor

Ground floor is a term used for the first stage of a new venture or investment opportunity. 

Growth fund 

Funds whose strategy is to invest in relatively mature companies that are looking for capital to expand or restructure operations.

I

Incubator

An incubator is a company or facility designed to foster entrepreneurship and help startup companies, usually technology-related, to grow through the use of shared resources, management expertise and intellectual capital. 

Institutional investors

Institutional Investors refers mainly to insurance companies, pension funds and investment companies collecting savings and supplying funds to markets but also to other types of institutional wealth like endowment funds, foundations, etc.

Investment banks

 Investment Bank is a financial intermediary that performs a variety of services which includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients. 

Invisible venture capital

Invisible venture capital is a venture capital from angel investors. 

IPO

Initial public offering: Initial Public Offering or IPO is the first sale of stock by a private company to the public. IPOs are often smaller, younger companies seeking capital to expand their business. 

IRR

Internal Rate of Return or IRR is often used in capital budgeting, it's the interest rate that makes net present value of all cash flow equal zero. Essentially, IRR is the return that a company would earn if they expanded or invested in themselves, rather than investing that money abroad. 

L

Later-stage fund 

A venture capital fund focused on investing in later-stage companies in need of expansion capital.

Lead investor

The lead investor is a company's principal provider of capital, such as the entity which originates and structures a syndicated deal. 

Leveraged buy-out

LBO: Leveraged Buy-out or LBO is an acquisition of a business using mostly debt and a small amount of equity. The debt is secured by the assets of the business. In LBO, the acquiring company uses its own assets as collateral for the loan in hopes that the future cash flows will cover the loan payments.

Limited partnership

A limited partnership is a business organization with one or more general partners, who manage the business and assume legal debts and obligations and one or more limited partners, who are liable only to the extent of their investments. A limited partnership is the legal structure used by most venture and private equity funds. Limited partners also enjoy rights to the partnership's cash flow, but are not liable for company obligations. 

Liquidation

Liquidation is the sale of the assets of a portfolio company to one or more acquirers when venture capital investors receive some of the proceeds of the sale. 

Liquidation preference

Liquidity preference is the right to receive a specific value for the stock if the business is liquidated.

Liquidity event

A liquidity event is the way in which an investor plans to close out an investment. Liquidity event is also known as an exit strategy. 

Lock-up period

The lock-Up Period is the period an investor must wait before selling or trading company shares subsequent to an exit, usually in an initial public offering the lock-up period is determined by the underwriters. 

M

Management buy-in

MBI: Management Buy-in or MBI is the purchase of a business by an outside team of managers who have found financial backers and plan to manage the business actively themselves.

Management buy-out

MBO: Management Buy-out or MBO is the term used for the funds provided to enable operating management to acquire a product line or business, which may be at any stage of development, from either a public or private company.

Master limited partnership

Master limited partnership or MLP is a limited partnership that is publicly traded. MLP combines the tax benefits of a limited partnership with the liquidity of publicly traded securities. 

Mezzanine debt

Mezzanine debts are debts that incorporate equity-based options, such as warrants, with a lower-priority debt. Mezzanine debt is actually closer to equity than debt, in that the debt is usually only of importance in the event of bankruptcy. Mezzanine debt is often used to finance acquisitions and buyouts, where it can be used to prioritize new owners ahead of existing owners in the event that a bankruptcy occurs. 

Mezzanine financing

Mezzanine Financing is a late-stage venture capital, usually the final round of financing prior to an IPO. Mezzanine Financing is for a company expecting to go public usually within 6 to 12 months, usually so structured to be repaid from proceeds of public offerings, or to establish floor price for public offer.

Mezzanine fund 

A fund that provides (generally subordinated) debt to facilitate the financing of buyouts, frequently alongside a right to some of the equity upside.

Mezzanine level

Mezzanine level is a term used to describe a company that is somewhere between startup and IPO. Venture capital committed at mezzanine level usually has less risk but less potential appreciation than at the startup level, and more risk but more potential appreciation than in an IPO. 

Minority enterprise small business investment companies

MESBICS: Minority Enterprise Small Business Investment Companies or MESBICS are government-chartered venture firms that can invest only in companies that are at least 51 percent owned by members of a minority group or persons recognized by the rules that govern MESBICs to be "economically.

O

Owner-employee

Owner-employee is a sole proprietor or any individual who has ownership of at least one-fifth of the capital and/or profits associated with a given venture.

P

Pari-passu

A Latin phrase meaning "equal footing" describes situations where two or more assets, securities, creditors, or obligations are equally managed without any display of preference. An example of pari-passu occurs during bankruptcy proceedings when a verdict is reached, all creditors can be regarded equally, and will be repaid at the same time and at the same fractional amount as all other creditors. Treating all parties the same means they are pari-passu.

PIPE or Private Investment in Public Equity

PIPE or Private Investment in Public Equity is a term used when a private investment or mutual fund buys common stock for a company at a discount to the current market value per share. 

Pipeline

Pipeline is the flow of upcoming underwriting deals. 

Pitch

Pitch is the set of activities intended to persuade someone to buy a product or take a specific course of action.

Portfolio company

A portfolio company is a company or entity in which a venture capital firm or buyout firm invests. All of the companies currently backed by a private equity firm can be spoken of as the firm's portfolio. 

Private equity

Private equities are equity securities of unlisted companies. Private equities are generally illiquid and thought of as a long-term investment. Private equity investments are not subject to the same high level of government regulation as stock offerings to the general public. Private equity is also far less liquid than publicly traded stock. 

Private limited partnership

Private limited partnership is a limited partnership having no more than 35 limited partners and thus able to avoid SEC registration. 

Private placement

Private placement is a term used specifically to denote a private investment in a company that is publicly held. Private equity firms that invest in publicly traded companies sometimes use the acronym PIPEs to describe the activity. Private placements do not have to be registered with organizations such as the SEC because no public offering is involved. 

R

Raising capital

Raising Capital refers to obtaining capital from investors or venture capital sources. 

Recapitalization

Recapitalization is a financing technique used by companies to defend against hostile takeovers. By recapitalization, a company restructures it's debt and equity mixture without affecting the total amount of balance sheet equity. 

Repayment of principal loans 

If a private equity firm provided loans or purchased preference shares in the company at the time of the investment, then their repaymement according to the amortisation schedule represents a decrease of the financial claim of the firm into the company, and hence a divestment.

Repayment of silent partnership

A silent partnership is a type of mezzanine financing instrument. It is similar to a long-term bank loan but, in contrast to a loan, a silent partnership is subject to a subordination clause, so that in the event of insolvency all other creditors are paid before the silent partner. The company has to repay the partnership and has to pay interest and possibly a profit-related compensation. The subordination clause gives the capital the status of equity despite its loan character. This financing instrument is frequently used in Germany. 

Re-syndication limited partnership

Re-syndication Limited Partnership is a limited partnership in which existing properties are sold to new limited partners so that they can receive the tax advantages that are no longer available to the old partners. 

Return on investment

ROI: Return On Investment or ROI is the profit or loss resulting from an investment transaction, usually expressed as an annual percentage return. ROI is a return ratio that compares the net benefits of a project versus its total costs.

Risk

Risk is the quantifiable likelihood of loss or less-than-expected returns. Risk includes the possibility of losing some or all of the original investment. Risk is usually measured using the historical returns or average returns for a specific investment. 

Risk capital

Risk capital funds are funds made available for startup firms and small businesses with exceptional growth potential. 

Round of funding 

Round of funding is the stage of financing a start-up company is in. The usual progression is from startup to first round to mezzanine to pre-IPO. 

S

Sale of quoted equity 

The sale of quoted shares only if connected to a former private equity investment, e.g. sale of quoted shares after a lock-up period.

Sale to another private equity firm 

The sale of company shares to another direct private equity firm. 

Sale to a financial institution 

The sale of company shares to banks, insurance companies, pension funds, endowments, foundations and other asset managers other than private equity firms. 

Small business investment companies

SBIC: Small Business Investment Companies or SBIC are lending and investment firms that are licensed and regulated by the Small Business Administration. The licensing enables them to borrow from the federal government to supplement the private funds of their investors. SBICs prefer investments between $100,000 to $250,000 and have much more generous underwriting guidelines than a venture capital firm. 

Secondary public offering

Secondary Public Offering refers to a public offering subsequent to an initial public offering. A secondary public offering can be either an issuer offering or an offering by a group that has purchased the issuer's securities in the public markets. 

Secondary purchase

Secondary Purchase is the purchase of stock in a company from a shareholder rather than purchasing stock directly from the company. 

Second stage capital

Second Stage Capital is the capital provided to expand marketing and meet the growing working capital need of an enterprise that has commenced production but does not have positive cash flows sufficient to take care of its growing needs. 

Seed capital

Seed Capital is the money used to purchase equity-based interest in a new or existing company. This seed capital is usually quite small because the venture is still in the idea or conceptual stage. 

Series a preferred stock

Series A Preferred Stock is the first round of stock offered during the seed or early-stage round by a portfolio company to the venture capitalist. Series A preferred stock is convertible into common stock in certain cases such as an IPO or the sale of the company. Later rounds of preferred stock in a private company are called Series B, Series C and so on.

Silent partner

An individual whose involvement in a partnership is limited to providing capital to the business. A silent partner is seldom involved in the partnership's daily operations and does not generally participate in management meetings. A silent partner is also known as a “limited partner" since his or her liability is typically limited to the amount invested in the partnership. Apart from providing capital, an effective silent partner can benefit the enterprise by giving guidance when solicited, providing business contacts to develop the business, and stepping in for mediation when a dispute arises between the other partners.

Startup

A startup is a new business venture in its earliest stage of development. 

Syndication

Syndication is the process whereby a group of venture capitalists will each put in a portion of the amount of money needed to finance a small business. 

T

Term sheet

A term sheet is a non-binding agreement setting forth the basic terms and conditions under which an investment will be made. The term sheet is a template that is used to develop more detailed legal documents. 

Third stage capital

Third Stage Capital is the capital provided to an enterprise that has established commercial production and basic marketing set-up, typically for market expansion, acquisitions, product development, etc. 

Trade sale 

The sale of company shares to industrial investors. 

Turnaround

Turnaround is the term used when the poor performance of a company or the business experiences a positive reversal. 

U

Underwriter

An underwriter is an investment banking firm committing successful distribution of a public issue, failing which the firm would take the securities being offered into its own books. An underwriter may also be a company that backs the issue of a contract, agreeing to accept responsibility for fulfilling the contract in return for a premium. 

V

Venture

Venture is often used to refer to a risky start-up or enterprise company. 

Venture capital

Venture Capital is the money and resources made available to startup firms and small businesses with exceptional growth potential. Most venture capital money comes from an organized group of wealthy investors. 

Venture capital firm

Venture Capital Firm is an investment company that invests its shareholders' money in startups and other risky but potentially very profitable ventures. 

Venture capital funds

Venture capital funds pool and manage money from investors seeking private equity stakes in small and medium-sized enterprises with strong growth potential. 

Venture capitalist

Venture Capitalist is a term used for an investor who provides capital to either start-up ventures or supports small companies who wish to expand but do not have access to public funding. 

Venture capital limited partnership

Venture Capital Limited Partnership is a limited partnership that is formed to invest in small startup businesses with exceptional growth potential.

Vulture capitalist

Vulture Capitalist is a slang word for a venture capitalist who deprives an inventor of control over their own innovations and most of the money they should have made from the invention. 

W

Write-off 

The total or partial write-down of a portfolio company’s value to zero or a symbolic amount (sale for a nominal amount) with the consequent exit from the company or reduction of the shares owned. The value of the investment is eliminated and the return to investors is a full or partial loss.

Abbreviations

ABS Asset-Backed Securities
BCBS Basel Committee on Banking Supervision
COP Corporate Operational Plan
COSME Competitiveness for SMEs
DVI Dutch Venture Initiative
EAF European Angel Funds
EAFRD European Agricultural Fund for Rural Development
EaSI European Union Programme for Employment and Social Innovation
EBA European Bank Authority
EC European Commission
ECB European Central Bank
EFG Equity Facility for Growth
EFSI European Fund for Strategic Investments
EREM EIB Group Risk Enhancement Mandate
ERP European Recovery Programme
ESIFESIF EU Structural and Investment Fund
EU European Union
FoF Funds of Funds
GFGF Guarantee Facility
G&S Guarantees & Securitisation – EIF Service
IOSCO International Organisation of Securities Commissions
IPE Investment Plan for Europe
JEREMIE JEREMIE Joint European Resources for Micro to Medium Enterprises
LGF Loan Guarantee Facility
LMM Lower Mid-Market
MCIF Mezzanine Co-Investment Facility
MFF Multi-Annual Financial Framework
MDD Mezzanine Dachfonds fur Deutschland
NPI National Promotional Institutions
PE Private Equity
PI Promotional Institution
RCR Risk Capital Resources
ROE Return On average Equity
RSI Risk Sharing Instrument
SIA Social Impact Accelerator
SME Small and Medium-sized Enterprise
SMEi Initiative
SMEG SME Guarantee Facility
STS Single Transparent and Standardised 
TGIF Turkish Growth and Innovation Fund
VC Venture Capital








Cover photo: Patrik Goethe