Have you ever tried to communicate with someone that speaks another language? Then you might be familiar with the confusion and frustration that cultivates from the absence of a common ground. Although investors do not speak a different language per se, they frequently use abbreviations and phrases that make little sense to even the most seasoned entrepreneur.
If you are an entrepreneur about to enter the world of angel investors and venture capitalists, it may be worth preparing some common jargon to appear as a ‘local’. Too often, entrepreneurs are unable to convince potential investors simply because they lack the right vocabulary – impeding the chances for networking and most importantly, fundraising. Recently, Elon Musk declared a war on acronyms, forbidding his employees to use such jargon, as he claims it impedes conversation. However, if you are to attend investment summits and fundraising events it is bound to come up in a conversation. Thus, unless your name is Elon Musk, I suggest you continue reading to learn the most important lingo when talking to an investor.
Seed Round: the initial fundraising round, its purpose is to support the startup before it can generate cash flows of its own.
Series A: the fundraising round after seed capital has been raised. This round is typically funded by venture capitalists. Series B and C follow this round to raise further funds at subsequent stages.
Bootstrapping: occurs when an entrepreneur relies on personal finances or the operating revenue of the firm, as opposed to outside investments. When possible, this ensures that lending costs are reduced – an effective way to ensure positive cash flows.
Angel investor: an investor who invests their own capital in a startup, typically providing more favourable lending terms compared to other sources of funding.
VC: venture capitalist, an investor providing third-party financing to startups through private equity.
Convertible note: a short-term debt, resulting from a loan in the seed round, which is converted into equity for the investor after the initial funding rounds. The reason it is not converted into equity initially, is that the valuation of the firm is unknown. If you want further details on the topic, have a look at this article on Both Sides of the Table.
IPO: initial public offering, when a startup becomes a public company by offering shares of stock to the general public for the first time.
Vesting: aligning investor and founders interest by giving the founders ‘sweat equity’ – equity based on value creation for the company. Typically, it takes 4 years until the founders obtain all their equity. This means that if a founder decides to leave earlier, say after 2 years they are only entitled to half of the equity. For further insights into the importance of enforcing vesting, read this article on Techcrunch.
Burn Rate: the rate at which a startup spends its capital, signaling the urgency of raising funds and the amount of funding needed.
ROI: return on investment, a profitability ratio used to evaluate the efficiency of an investment. Calculated by dividing profits by the cost of investment.
KPI: key performance indicators, a set of numbers displaying how effectively a company is achieving its most important business objectives (e.g. net revenue, customer loyalty metric, etc.).
MRR: monthly recurring revenue, the most important metric if you run a subscription-based business model. It shows predictable revenue stream based on renewals of subscriptions, new subscriptions, upgrades and revenue churn (see below for definition).
ARR: annual recurring revenue, simply the MRR times 12.
Churn rate: the percentage of customers who terminate the relationship with your company by canceling their subscription to your services, also known as the rate of attrition.
Retention: the actions which are taken to reduce customer defections, to decrease the churn rate. These actions are typically marketing-based to enhance customer loyalty. For a list of 20 strategies to increase retention, see this.
CAC: customer acquisition cost, used by investors to analyze profitability and future scalability by evaluating the difference between how much money can be extracted from customers and the cost of extracting it.
Conversion rate: the proportion of potential customers that become customers. In online marketing, this is measured as the proportion of visitors to a website who take action to interact with the company further divided by the total number of visitors.
MVP: minimum viable product, a rapidly built version of the product with the minimum features required to demonstrate the concept to examine customers’ interactions and perceptions of the product. In software terms, this is the beta test that will be upgraded with extra features.
Exit: when the investors get their money back. Exits typically result from one of two options: the startup gets acquired by a larger company or the startup grows enough to sell shares to the public. An investor will expect you to have an exit strategy prepared.
Now that you can discern some meaning from the investment-related jargon, why don’t you put it into practice and attend our latest edition of the Lisbon Investment Summit? Just remember, ‘Practise makes the master’ – P. Rothfuss.