This section assumes no prior knowledge of finance or business, and it is deliberately the longest and most detailed section. Everything that follows (funds, valuations, key terms, the investment process) depends on being comfortable with these basics, so it is worth taking the time to go through them slowly, ideally with a pen and paper to redo the small calculations.

To make things concrete, this section follows a single example throughout: a fictional company called BrightDesk, which sells desk-booking software to offices on a monthly subscription.

1.1 What is a company, and why does it need money?

A company is an organization that produces or sells a product or service in order to make money. Someone starts a company because they believe they can offer something (a product, a service, an idea) that people or other businesses will pay for, and that the money it brings in will eventually be more than the money it costs to make and sell it.

Most companies need money before they can make money. Building a product, hiring people, renting office space, buying equipment, and marketing all cost money upfront, often long before a company has enough paying customers to cover those costs on its own. This gap, between needing money to grow and making enough money to fund its own growth, is why companies look for outside funding: a bank loan, savings from the founder, or, for companies with high growth potential, investment from firms like Nextalia. Investors provide that money in exchange for a stake in the company's future success.

The general term for money used to start, run, or grow a business is capital. This word appears constantly in this industry, in phrases like “raising capital,” “capital increase,” or “invested capital.” It simply means money put to work in a business or an investment.

1.2 Customers: B2B and B2C

Companies typically sell either to other businesses, known as B2B (business-to-business), or directly to individual consumers, known as B2C (business-to-consumer). A company selling accounting software to law firms is B2B; a company selling running shoes to individual shoppers is B2C. Nextalia Ventures focuses specifically on B2B software and services, meaning the companies it invests in sell mainly to other businesses rather than to individual consumers. This distinction matters because B2B and B2C companies tend to behave differently: B2B companies often have fewer, larger customers and longer sales processes, while B2C companies often have many small customers and rely more heavily on marketing and brand.

1.3 Revenue

Revenue (also called turnover or sales) is the total amount of money a company brings in from selling its product or service, before any costs are subtracted. It is not the same as profit: a company can have high revenue and still lose money, if its costs are even higher.

For example, BrightDesk has 500 customers, each paying €200 per month for its software. That means BrightDesk brings in 500 × €200 = €100,000 a month from subscriptions, or €1,200,000 a year. The rest of this section uses annual figures throughout, since that is how companies most commonly report and compare their finances.

1.4 Common ways companies earn revenue

Not all companies earn money the same way. A few common models:

One-time sales: a customer pays once for a product, for example buying a laptop.
Recurring / subscription revenue: a customer pays a regular fee to keep using a product, for example a monthly software subscription. This is the model used by most of the B2B software companies Nextalia Ventures invests in, because predictable, recurring revenue is easier to forecast and to value than one-off sales.
Transaction / take-rate revenue: a company earns a percentage of transactions that flow through its platform, for example a marketplace charging a commission on each sale.

1.5 Costs: fixed vs. variable, and what “OPEX” means

Companies spend money to generate revenue. It is useful to split costs into two types:

Fixed costs: costs that stay roughly the same regardless of how much the company sells, such as office rent or salaries.
Variable costs: costs that rise and fall with sales volume, such as the cost of hosting servers for each additional customer, or shipping for each additional product sold.

The costs directly tied to delivering the product or service are often called COGS (Cost of Goods Sold). For BrightDesk, this is mainly the cost of running its software (cloud hosting, customer support). Say this comes to €240,000 a year.

Everything else a company spends to run the business, that is not COGS, is usually bundled under the label OPEX (Operating Expenses). Typical OPEX categories include salaries and benefits for staff not directly delivering the product, sales and marketing, office rent and utilities, software tools used internally, professional services like legal and accounting, and travel. For BrightDesk, say OPEX comes to €600,000 a year.

1.6 Reading percentages and growth rates

Much of finance is expressed in percentages and growth rates, so it is worth being comfortable with a few basic ideas before going further.

A percentage change compares a new value to an old one. If revenue grows from €100,000 to €120,000, that is a 20% increase, because the €20,000 increase is 20% of the original €100,000.

A CAGR (Compound Annual Growth Rate) is the steady yearly growth rate that would take a starting value to an ending value over several years, accounting for the fact that growth compounds (each year's growth builds on the year before, not on the original starting number). For example, a market that grows from €100 million to €133 million over three years has grown by 33% in total, but its CAGR is approximately 10% per year, because €100m × 1.10 × 1.10 × 1.10 is approximately €133m. CAGR shows up often when describing how fast a market, or a company's revenue, is growing.

1.7 Profit: gross profit, EBITDA, EBIT, and net income

“Profit” is not one single number. Companies typically report profit at several different stages, each subtracting a different set of costs from revenue. Continuing the BrightDesk example:

Gross profit = Revenue minus COGS. For BrightDesk: €1,200,000 minus €240,000 = €960,000 a year.
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) subtracts OPEX, the company's other operating expenses, from gross profit. For BrightDesk: €960,000 minus €600,000 (OPEX) = €360,000 a year. EBITDA is one of the most commonly used measures of how profitable the core business is, because it strips out financing decisions, tax situations, and accounting choices that can vary a lot between companies, providing a measure of operating earnings before those items. EBITDA is not cash flow: working-capital movements, capital expenditure, cash interest and cash taxes can materially change the cash outcome.
EBIT (Earnings Before Interest and Taxes) takes EBITDA and subtracts depreciation and amortization (see Section 1.9 below). For BrightDesk: €360,000 minus €24,000 (depreciation and amortization) = €336,000 a year. EBIT is also commonly called operating income or operating profit. Unlike EBITDA, it does account for the fact that a company's equipment, vehicles, or software slowly wear out or lose value, since depreciation and amortization are a real (if non-cash) cost of doing business. Like EBITDA, it still excludes interest and taxes, because those depend on how a company happens to be financed and where it is based, not on how well its core business is actually performing.
Net income (the “bottom line”) takes EBIT and subtracts interest on any debt and taxes. For BrightDesk, say these come to €36,000 (interest) and €96,000 (taxes). Net income is then €336,000 minus €36,000 minus €96,000 = €204,000 a year.

EBITDA and EBIT measure very similar things, and it is easy to confuse them. The difference is exactly one line: EBITDA minus depreciation and amortization equals EBIT. In venture capital and growth equity, EBITDA is the more commonly quoted figure, because young, fast-growing companies often have relatively little in the way of physical equipment to depreciate, so the gap between the two is small, and EBITDA is used as an operating-performance comparison. It must be reconciled to cash generation, especially when growth consumes working capital or software development is capitalized. EBIT and net income tend to matter more in asset-heavy or more traditional industries, where depreciation and amortization are large enough to meaningfully change the picture.

Laid out as a “waterfall,” from revenue down to net income, BrightDesk's annual numbers look like this:

Line item	Annual amount
Revenue	€1,200,000
Minus: Cost of Goods Sold (COGS)	(€240,000)
= Gross profit	€960,000
Minus: Operating expenses (OPEX)	(€600,000)
= EBITDA	€360,000
Minus: Depreciation & amortization	(€24,000)
= EBIT	€336,000
Minus: Interest	(€36,000)
Minus: Taxes	(€96,000)
= Net income	€204,000

1.8 Margins: profit as a percentage of revenue

Investors rarely compare companies using euro profit figures alone, because a small company and a large company are not directly comparable in absolute terms. Instead, profit is usually expressed as a percentage of revenue, called a margin.

Gross margin = Gross profit ÷ Revenue. For BrightDesk: €960,000 ÷ €1,200,000 = 80%.
EBITDA margin = EBITDA ÷ Revenue. For BrightDesk: €360,000 ÷ €1,200,000 = 30%.
EBIT margin = EBIT ÷ Revenue. For BrightDesk: €336,000 ÷ €1,200,000 = 28%.
Net margin = Net income ÷ Revenue. For BrightDesk: €204,000 ÷ €1,200,000 = 17%.

Typical margins vary enormously by industry. Software companies like BrightDesk often have high gross margins, commonly 70 to 90%, because delivering an additional copy of software to one more customer costs very little. A retailer or a manufacturer often has lower gross margins, because each additional unit sold carries real physical production or purchasing costs. This is one reason software businesses are attractive to venture capital investors: high gross margins mean that as revenue grows, a larger share of each new euro can flow down toward profit.

1.9 Depreciation and amortization, explained

When a company buys something that will be useful for several years (a building, machinery, a vehicle, or a laptop), accounting rules do not allow it to count the full cost as an expense in the month it was bought. Instead, the cost is spread out, or “depreciated,” over the years the asset is expected to remain useful. Depreciation applies to physical (“tangible”) assets like equipment. Amortization is the same idea applied to non-physical (“intangible”) assets, such as internally developed software or a patent.

For example, if BrightDesk buys €60,000 of office equipment expected to last 5 years, it might record €12,000 of depreciation expense per year (€60,000 ÷ 5), even though the full €60,000 in cash was spent all at once when the equipment was purchased. This is why depreciation and amortization are sometimes called “non-cash” expenses: they reduce reported profit without any cash actually leaving the company in that period. This is exactly the difference between EBITDA and EBIT described in Section 1.7: EBITDA excludes depreciation and amortization entirely, without implying that asset consumption or replacement spending is economically costless, while EBIT includes them, treating the gradual wearing-out of a company's assets as a genuine (if non-cash) expense of doing business.

1.10 Interest and the cost of borrowing

Interest is the price of borrowing money, usually expressed as a percentage of the amount borrowed per year, called an interest rate. If a company borrows €100,000 from a bank at a 6% annual interest rate, it owes €6,000 in interest for that year, on top of eventually repaying the €100,000 itself. Interest rates are also a useful reference point more broadly: money invested anywhere is implicitly being compared to what it could otherwise have earned, safely, in something like a bank deposit or government bond.

Simple and compound interest

Principal is the original amount of money borrowed or invested, before any interest is added. In the example below, the principal is €10,000.

Simple interest is calculated only on the original principal. Compound interest is calculated on the principal plus interest already added to the balance: interest earns interest.

Suppose €10,000 earns a fixed 5% a year for 20 years, with no deposits, withdrawals, fees or taxes. Simple interest adds €500 each year. With annual compounding, the second year earns 5% of €10,500, or €525.

Simple final balance = Principal × (1 + rate × years)
Compound final balance = Principal × (1 + rate)^years
Use 0.05 for a 5% rate; these formulas assume annual periods.

— Compound┄ Simple

Year	Simple balance	Compound balance
0	€10,000.00	€10,000.00
5	€12,500.00	€12,762.82
10	€15,000.00	€16,288.95
15	€17,500.00	€20,789.28
20	€20,000.00	€26,532.98

After 20 years, the balance is €20,000.00 with simple interest and €26,532.98 with annual compounding: a difference of €6,532.98. The widening gap reflects interest earned on earlier interest, even though the rate stays at 5%. Balances are rounded to cents for display; calculations use unrounded values.

For a nominal annual rate r compounded n times a year, the final balance is P × (1 + r/n)^{n × years}. More frequent compounding increases the effective annual rate when r is positive. Compare products using consistent rate conventions.

For borrowing, unpaid interest may itself accrue interest if the loan terms allow it. A loan whose interest is paid as it falls due does not automatically compound. Repayments and changing balances require a cash-flow schedule. CAGR describes an equivalent compounded growth rate; actual annual returns need not be constant.

1.11 Taxes

Companies pay corporate tax on their profits, in the same way individuals pay income tax on their salary. Tax rates and rules vary significantly by country. This is one of the deductions between EBITDA and net income described in Section 1.7 above.

1.12 The three financial statements

Companies summarize their finances in three main financial statements, prepared annually and, where applicable, quarterly or half-yearly. Monthly management accounts may also be prepared for internal use. The three statements are:

Income statement (or Profit & Loss / P&L): shows revenue, costs, and profit over a period of time (for example, a quarter or a year). This is where the figures above (revenue, EBITDA, net income) come from.
Balance sheet: a snapshot, at a single point in time, of what a company owns (assets), what it owes (liabilities), and the difference between the two (equity, meaning what belongs to the owners). It always follows the equation: Assets = Liabilities + Equity.
Cash flow statement: tracks how much actual cash moved in and out of the company over a period, split into cash from operations (running the business), investing (buying or selling equipment, for example), and financing (raising or repaying money).

1.13 Assets, liabilities, and equity, in more depth

Assets and liabilities are each usually split into two categories, based on timing:

Current assets: things a company expects to turn into cash within about a year, such as cash itself, unpaid customer invoices it is owed (called accounts receivable), and inventory.
Non-current (or fixed) assets: things held for longer, such as equipment, buildings, or long-term investments.
Current liabilities: debts due within about a year, such as an unpaid bill owed to a supplier (called accounts payable).
Non-current liabilities: debts due further in the future, such as a long-term bank loan.

Working capital is current assets minus current liabilities: a rough measure of whether a company has enough short-term resources on hand to cover its short-term obligations.

A simplified balance sheet for BrightDesk, at a point where it has been operating profitably for a while (so its cash and equity reflect accumulated past profit, not just the most recent period), might look like this:

Assets

Item	Amount
Cash	€150,000
Accounts receivable	€40,000
Equipment (net of depreciation)	€58,000

Total assets€248,000

Liabilities & equity

Item	Amount
Accounts payable	€15,000
Bank loan	€100,000
Total liabilities	€115,000
Owners' equity	€133,000

Total liabilities & equity€248,000

Notice that total assets (€248,000) exactly equal total liabilities plus equity (€115,000 + €133,000). This is not a coincidence: a balance sheet is built so the two sides always match, since equity is defined as whatever is left over once liabilities are subtracted from assets.

1.14 Why profit and cash are not the same thing

A company can be profitable on paper and still run out of cash. This is one of the most common, and most misunderstood, issues in business. Companies generally use accrual accounting, which records revenue when it is earned and costs when they are incurred, not necessarily when the cash actually changes hands (this is standard practice, as opposed to simple “cash accounting,” which only records money when it physically arrives or leaves).

For example, if many of BrightDesk's customers are large companies that pay their invoices 60 days late, BrightDesk might report a healthy profit for the year on its income statement, while actually having very little cash in the bank, because the money has not arrived yet, it is still sitting as accounts receivable. This is why investors look closely at the cash flow statement, not just the income statement, when judging how healthy a company really is.

Worked example: EBITDA to cash

Positive operating earnings do not guarantee positive cash generation. This additional BrightDesk scenario starts with the guide’s €360,000 EBITDA. The working-capital and investment figures below are new teaching assumptions, not another historical period or the balance-sheet example.

Bridge component	Annual amount
EBITDA	€360,000
Increase in operating working capital	(€120,000)
Cash interest	(€36,000)
Cash taxes	(€96,000)
Cash generated after working capital, interest and tax	€108,000
Capital expenditure	(€180,000)
Net cash movement before new financing	(€72,000)

The €120,000 working-capital increase ties up cash in items such as receivables, net of operating liabilities; it excludes cash balances and financing debt. The €180,000 capex is cash spent on long-lived assets. Neither deduction is captured in EBITDA. Depreciation is not deducted again because EBITDA already excludes it.

Assuming €150,000 opening cash, no other cash movements and no new financing, closing cash is €78,000. This simplified management bridge is not a complete statutory cash flow statement; other non-cash adjustments and cash-flow classifications may apply.

1.15 Ownership, shares, and valuation

When a company is created, its founders typically divide ownership into shares (sometimes called stock or equity). If a company issues 1,000,000 shares and a founder holds all of them, that founder owns 100% of the company. Owning shares means owning a proportional slice of the company's value and, usually, a say in certain decisions.

A company's valuation is simply an estimate of what the whole company is worth. One common way this gets set is through a fundraising round: if an investor agrees to pay €2,000,000 for a 20% stake in BrightDesk, that implies the whole company is valued at €10,000,000, because €2,000,000 ÷ 20% = €10,000,000. For a public company (see below), the equivalent figure is called market capitalization: the current share price multiplied by the total number of shares.

1.16 Public vs. private companies, and the stock market

A private company's shares are owned by a small number of people (founders, employees, and investors such as venture capital or private equity firms) and are not available for the general public to buy. A public company has sold shares to the general public through a stock exchange (such as the Borsa Italiana in Milan, or the New York Stock Exchange), where anyone can buy or sell them.

Going from private to public, through an IPO (see the glossary in Section 5), is one of the main ways private equity and venture capital investors eventually sell their stake and realize a return, since publicly traded shares are far easier to buy and sell than private ones. All of Nextalia's current investments, including its full Ventures portfolio, are private companies.

1.17 Debt vs. equity financing

There are two basic ways a company can raise money:

Debt: borrowing money (for example, a bank loan) that must be repaid over time with interest, regardless of how the company performs. The lender does not get any ownership in the company.
Equity: selling a share of ownership in the company in exchange for capital. There is no obligation to repay it, but the investor now owns part of the company and shares in its future gains or losses. Venture capital is a form of equity financing.

1.18 Enterprise value vs. equity value: bridging the two

Section 1.15 introduced valuation as an estimate of what a company is worth, but in practice there are two related, and commonly confused, ways to describe that worth: equity value and enterprise value. The difference matters because the two figures can differ substantially, especially for a company that carries meaningful debt or holds a large cash balance.

Equity value is the value of the ownership stake alone: the piece that belongs to shareholders once every other claim on the company, mainly debt, is set aside. It is what an investor buying 100% of a company’s shares would actually pay. For a private company, this is usually what people mean when they talk about a company’s “valuation” (see Section 1.15); for a public company, it equals market capitalization.

Enterprise value (EV) is the value of the whole operating business, regardless of how it happens to be financed, meaning it makes no difference whether the company was built using mostly debt, mostly equity, or a mix of both. It answers a related but different question: what would it cost, in total, to acquire the entire business, taking on its ownership and its debts, net of any cash already sitting on its balance sheet? EV is the figure most often used when comparing companies to one another or applying valuation multiples (see “Multiple” in Section 5), because it strips out differences caused simply by how similar companies happen to be financed.

The two are connected by a simple formula, sometimes called the EV bridge: Enterprise value = Equity value + Net debt, where net debt is total debt minus cash and cash equivalents. Rearranged, Equity value = Enterprise value minus Net debt. The intuition: if a company has debt, an acquirer buying its equity would also have to take on, or repay, that debt, so the true cost of acquiring the business is higher than the equity price alone. Conversely, any cash sitting in the company effectively reduces that cost, since the acquirer gets that cash back immediately.

For example, say BrightDesk has an equity value of €10,000,000 (following on from the example in Section 1.15), €2,000,000 of bank debt, and €500,000 of cash on its balance sheet:

Line item	Amount
Equity value	€10,000,000
Plus: Total debt	€2,000,000
Minus: Cash and cash equivalents	(€500,000)
= Net debt	€1,500,000
= Enterprise value (equity value + net debt)	€11,500,000

A simple way to remember the direction of the bridge: debt is added, cash is subtracted, when moving from equity value to enterprise value (and the reverse when moving from enterprise value back to equity value). This is also why a heavily indebted company can have a much larger enterprise value than its equity value might suggest, and why a company sitting on a large cash pile, common among some fast-growing but not yet profitable start-ups, can have an enterprise value noticeably lower than its equity value.