So you have a great idea for a business, but don’t know where to start.
While it may be tempting to start scouring the city for available storefronts, there’s a lot more knowledge you need to acquire first.
Part of this knowledge involves basic Shark Tank business terms. If you aren’t familiar with them, then it’s time to brush up on these business term definitions.
The importance of business terms is more than about sounding like you know what you’re talking about. This knowledge will help you navigate the financial world with ease and get your business off the ground.
So keep reading for a comprehensive list of Shark Tank business terms. Afterward, you’ll be ready to start looking for your angel investor.
Operations
1. Proof of Concept
This term refers to evidence that the project/business idea in question is actually feasible. Evidence is presented through a presentation that displays statistics, scientific evidence, etc that the concept can actually take off.
Not all big, great ideas are supported by contemporary modern technology. There’s also the risk that there’s not much of a market for the product/service. To prove otherwise, aspiring entrepreneurs must provide proof of concept.
2. Due Diligence
This refers to the general responsibility of a business to audit and investigate details for the matter at hand. While this could be in response to a rising issue, performing due diligence is common practice before a transaction with an outside party.
By doing so, businesses can assess the benefits and risks of working with that party. This can be done with publicly available information about the party.
They can also do this by performing background checks on employees or analyzing a product’s success. This way, they can analyze how
3. Franchise
When a franchisor and franchisee partner for a joint venture, they create a franchise. The original business is the franchisor. They sell the right to use their own name and concept.
The franchisee is the entity that buys that right. If they do, they can use the franchisor’s products/services with the franchisor’s trademark and business model.
4. Valuation
Valuation is the calculative process to assess a company’s/asset’s worth. To do this, an analyst will take a look at the way the business is composed and managed.
From there, they will look at the entity’s profit trends, market value, and more. The process generally looks the same across the board, but may vary especially depending on the entity’s industry.
Finance
1. Ramen Profitable
Ramen profitability refers to a business’s inability to produce more profit than is needed to cover the founders’ basic living expenses. Since instant ramen meals tend to be emblematic of low-cost living, this term emphasizes how important sizable profit is for adequate success.
While startups tend to have rocky beginnings, it’s not viable to only maintain “ramen profitability”. Instead, founders should strive to widen their profits for “traditional profitability”, when sales efforts pay off enough to accommodate comfortable, viable living for the founders.
2. Cash Flow
Cash flow refers to the net amount of monetary capital transferred to and from a business. Inflow refers to the cash businesses receive while outflow refers to the cash businesses spend.
This is important because the more positive cash flow present, the more value is afforded to shareholders. The ultimate goal is to create plenty of free cash flow, which refers to the measure of profitability beyond non-cash expenses. It also accounts for the amount businesses spend on utilities, equipment, etc.
3. Gross
This term refers to the total that is made before calculating any gross deductions. These deductions include tax liability, paychecks, union dues, retirement plans, etc.
4. Net
“Net” is also known as “net income” or “net earnings”. Either way, it’s determined as the sales amount minus the cost of operating expenses, interest, depreciation, etc.
This concept doesn’t only apply to Google searches of celebrities’ estimated yearly income. Investors like looking at these numbers because it tells them how well the business’s revenue accommodates its own expenses.
5. Margin
Margin refers to the amount of cash a broker borrows in order to buy an investment. Mathematically, it’s determined by the amount of the total value of investment minus the loan amount.
6. Capital
Capital is a very general term that doesn’t only apply to finances, at least not in a direct sense. “Capital” can refer to anything that offers value and can point to both tangible and intangible capital.
But for the purposes of business, “capital” refers to anything with monetary value. Obviously, this chiefly means cash. But it can also refer to factories, manufacturing parts, patents, etc.
This doesn’t mean that manufacturing facilities/technologies are to be sold and exchanged like cash, of course. But it’s capital that needs to be taken accounted for when calculating expenses that affect the business’s income.
7. Return
Also known as a financial return, a “return” refers to the cash made/lost on an investment over time. Percentage changes or price changes usually represent these value shifts.
8. Market Value
Market value is the value applied to a product/service from the market’s investors. For that reason, market value can fluctuate radically.
This value is calculated by multiplying the current share price with the number of outstanding shares. Changing market value is exactly why certain types of products might surge or dip in pricing.
9. Convertible Note
A convertible note refers to a temporary debt that will be converted into equity. This equity usually comes in the form of a stock’s shares.
This usually applies after investors lend money to a starting business. Instead of cash with interest, investors expect repayment in the form of shares.
10. Stake
Stake refers to a percentage of stock a stakeholder has in a company. They may not necessarily own stock, but stake ownership still means partial ownership of a company.
11. Perpetuity
Perpetuity is also known as endless annuity. It refers to an endless cash flow stream where payments are made indefinitely.
This is important in valuation for calculating a business’s expenses. Taking it into account helps analysts understand a company’s present and future value in terms of cash flow.
12. Overhead
Overhead encompasses business expenses not directly related to product/service creation production. This is important to consider for a business’s budgeting efforts.
By calculating overhead, businesses can understand how much they should charge for their products/services. That way, they can use the profit from the sale to pay for overhead expenses.
Expenses that count as overhead include rent, utilities, insurance, and more. All these expenses do not directly contribute to production, but are important to calculate as overhead expenses.
Funding
1. Proprietary Trading
Propriety trading (“prop trading”) is the practice of a financial institution investing in the market themselves rather than for their clients. While they may gain margin profit by trading on behalf of clients, prop trading allows them to enjoy bigger margins.
This can be very beneficial considering the resources of a business vs. a client. They have much more advantage and leverage in the market, and can enjoy more profitable returns.
2. Equity
This is also known as shareholders’ or owners’ equity. But no matter the term, equity means the money that shareholders would expect back after a company and its assets were completely liquidated.
To calculate equity, one must consider debt, depreciation, and any other liability. The resulting number is then distributed to all shareholders.
3. Advisory Shares
Advisory shares are stock options offered to company advisors and not employees. This is common especially after a startup is just kicking off. This way, founders have a viable alternative to immediate cash compensation.
Advisors can sell these shares like regular shares, but with a few potential restrictions. They are also given the option to buy the shares instead of just being gifted free ones. This way, there’s less chance of abusing these shares for profit.
4. Pre-Money
Pre-money value is determined before taking external funding or the latest funding into account. It simply means a startup’s funding before it obtains any investments.
This stripped-down valuation is important to determine the business’s original value. It’s also important to consider when calculating each share that’s issued and its value.
5. Post-Money
Post-money differs from pre-money by taking into account external funding and the latest funding. This includes investments, profits, etc.
So it’s crucial for analysts to distinguish between pre-money and post-money values. Post-money can only be determined after investments are made while pre-money does not consider investments at all.
6. Royalty
A royalty is a legally binding payment made by a third party owner to the original owner of a product. These products can include copyrighted works, franchises, intellectual property, etc.
In many cases, royalties are used to pay musical artists. That’s because their music might be licensed out for many other usages. Original owners of certain works can enjoy a steady stream of income, even if it’s too small of a stream to be considered anything more than passive income.
7. Seed Round
A seed round is a business’s initial financing round. This round can be crucial for founders to finally start their business and its production.
Usually, this involves a convertible note since it can be difficult to determine an exact valuation of a business’s expenses. But there are also many seed rounds that set a price to aspire to.
8. Share
An equity share (or simply a “share”) is a share the offers shareholders the right to equity. This equity pays shareholders back should a company’s assets be completely liquidated.
Not only is this important for shareholders’ profits, but it’s also helpful in determining a company’s clinical worth. Equity can be used as alternative compensation from cash.
9. Investor
Investors can finance a business even before it starts production. In fact, investments may be necessary for a very new business to operate. But in return, investors expect to receive much more profit.
Not everyone has vast out-of-pocket funds to pour into a venture. That’s why finding good investors is so important when starting a business. This way, businesses can start producing and selling while using investors’ funds on a good-faith basis.
10. Angel Investor
Not all investors are wealthy. Investors can invest anywhere from a single cent to a billion dollars. But investors with deep pockets are called angel investors.
That’s because while all investments help, there needs to be a considerable amount for a business to begin. A single investment from an angel investor might be sizable enough to do just that, plus much more.
This angel investor usually has personal connections to the entrepreneur. Having this relationship will pre-establish the investor’s trust in the entrepreneur’s ability to turn a profit.
11. Crowdfunding
Crowdfunding isn’t a conventional financing option. But when a startup needs a little extra cash to start production, they may start a crowdfunding campaign.
A crowdfunding campaign is meant to prompt a large number of potential customers to donate money to a venture. This way, they can continue production and put out the products/services they need to start earning profit.
This is done through the Internet. Although it’s not a business’s most ideal option, it can be a viable last resort if there simply aren’t enough investors for the project. There usually are incentives for high-paying donors, which can incentivize them to finance these campaigns.
Marketing
1. Soft Launch
Soft launches are done to “test the waters”. That’s because there are a lot of risks with a full launch, especially if marketing tactics are imperfect.
After the soft launch, businesses can gauge customer responses, the brand’s growth, and whether their marketing strategies actually work. Although this does mean the business grows more slowly at first, it could lead to more foolproof, long-term success.
2. Churn Rate
Churn rate is the rate at which customers stop using a business’s products/services. Instead of a gross number, this value is determined through a percentage.
This applies more readily to subscription-based products/services. Otherwise, it can be difficult to determine how many unique users actually continue/stop using a product/service.
Companies need to know this to understand their business’s longevity. Churn rate should never exceed customer growth rate in order to sustain success.
3. SEO
SEO stands for “search engine optimization”. It’s one of the pillars of modern marketing, considering that the Internet is one of the most frequently used modern tools.
No matter your business, understanding SEO is important. Despite your industry, your business’s success can be heavily impacted by its online presence.
This doesn’t necessarily refer to social media, though social media plays a huge part in SEO marketing. The main goal of SEO marketing is to get your business’s website/social media pages to the top of a search engine’s results.
4. Customer Acquisition
Customer acquisition refers to the act of acquiring customers. This is a broad term that can essentially encompass all marketing/promotional/brand awareness efforts.
This is different from pure marketing. Customer acquisition deals not only with initial customer attraction, but also with retainment. Even after the customer’s completed their first purchase, retaining that audience is a different story.
Agents in this department are integral to a business’s longevity. Without a loyal audience, a business’s future is a lot less likely to be longstanding.
5. Target Audience
“Target audience” indicates exactly what it sounds like in business terms. It is the type of audience that the business anticipates buying their product.
Knowing this is incredibly important for marketing purposes. By marketing selectively, businesses can target their promotions to the right potential consumers.
This can also be important in strategizing promotions themselves. Specifying messaging can make a brand’s marketing more engaging to the right customers. That way, the viewers of the marketing campaign are more likely to engage with the products/services more enthusiastically.
Sales
1. Retail Price
Retail price simply refers to the price customers pay for the product/service at retail stores. These prices can change depending on demand, supply, and more.
This is different from the manufacturer’s or distributor’s price. In free markets, retailers set the final retail price. The key is to set a price that’s profitable but reasonable enough to attract consumers.
2. Wholesale Price
Wholesale price is the price of products/services at very large volumes. While a product may typically be sold individually, wholesale quantities might sell 20-packs.
Products sold at wholesale prices tend to be a better “value”, at least in comparison to retail prices. Wholesale prices make it easier to sell the products at higher retail prices. Since the products are also sold in such high volumes, there’s even more incentive to get rid of stock.
3. Purchase Order
Purchase order, commonly abbreviated to PO, facilitates an agreement between a buyer and the seller of a product/service that they can use in the future. This agreement guarantees that the buyer will pay for the product/service upon its arrival.
Usually, this is done through a document. While buyers have more time to pay for the product, the sellers can use the buyer’s credit as leverage for payment. This offers advantages to both parties without an immediate purchase.
4. Line of Credit
Line of credit refers to a users’ borrowing limit for a certain product/service. They can use their credit without having to repay it back until the limit is reached. Once they pay off their limit, they can start using their line of credit again.
This is negotiated between the borrower and a financial institution, usually a bank. While this is very helpful for short-term convenience, this perk comes with its downsides.
They may have to pay high interest rates. Not only that, but there are steep financial penalties for late payment.
Legal
1. Intellectual Property
Intellectual property is any creative invention that the owner has rights over. With these rights, owners can trademark, patent, copyright, etc their invention whenever they wish to.
2. Patent
Patents are extremely important to lock down when they’re needed. That’s because they offer official rights to an invention from a governmental authority like the US Patent and Trademark Office. This gives the inventor sole right to the blueprinting and manufacturing of the invention.
But this right only lasts for a certain period of time. For most inventors, it’s enough time to make a name for their brand for a product consumers can’t get anywhere else.
It’s why there are so many can opener products from different brands. Although there is only one inventor of the first can opener, other brands were free to create their own version after the patent’s expiration.
3. Trademark
A trademark is a visual signifier that indicates a brand’s ownership over a specific product. This signifier can be expressed through insignia, word, symbol, etc.
It is also considered intellectual property and is usually registered. To use the legal protections associated with the trademark, the owner must use it when displaying or discussing their product.
4. Copyright
When someone has the right of legal ownership of intellectual property, it is called copyright. In simpler terms, copyright gives the owner the primary right to copy the work.
If anyone wants to copy the work, they must obtain permission from the copyright owner. Usually, this is done with repayment.
There are ways for parts of intellectual property to be used without the consent of the owner. Such conditions typically include fair use, which requires the copier to transform the content they are using.
Business terms on Shark Tank aren’t just Shark Tank terms. Learning these Shark Tank business terms will help you in all stages of your business, from conception to expansion.
Looking to start a business? Well, then you’ll need more than a lot of business terms. So take a look at these other Shark Tank-borne businesses to learn how they stay profitable!