Startup and VC jargon founders should understand.
Do you speak investor? If you're a startup founder who may one day raise capital to fund accelerated growth, it's worth reading and re-reading these terms, and making them part of your vernacular.
Do you speak startup investors' language? How many of these terms are you not familiar with? I bet there's at least one. Be honest...
Useful startup terminology
- TAM/SAM/SOM: total addressable market/serviceable addressable market/serviceable obtainable market. How much of the market can realistically be captured.
- MVP: minimum viable product. The simplest version of your product that helps users solve the problem.
- Burn rate: gross burn is the company’s total expenses in a given period. Net burn is how much cash is actually being spent (after income).
- Runway: how many months your business can keep operating before it runs out of money.
- MRR: monthly recurring revenue. The company’s total monthly subscription revenue.
- ARR: annual recurring revenue.
- TTM: trailing twelve months revenue. How much revenue your startup produced in the previous 12 months.
- ARPU: average revenue per user. It costs money to add users, how much is each one worth?
- CAC: customer acquisition cost. How much does it cost to gain a paying user?
- LTV: lifetime value. In total, how much revenue does each user bring before churning?
- TCV: total contract value. The combined value of a customer, including up-front and recurring fees.
- ACV: annual contract value. How much a customer us worth to you over 1 year.
- Deferred revenue: money received for goods / services that have not yet been produced/delivered,
- Total billings: actual revenue plus deferred revenue.
- MAU/WAU/DAU: monthly / weekly / daily active users. The number of people who engage with your product.
- Conversion rate: in SaaS, the percentage of users that upgrade from your free tier to a paid tier.
- CMGR: compound monthly growth rate. Often just called month-on-month growth rate.
- CAGR: compound annual growth rate. Same as above but annualised. CAGR (%) = (Ending Value ÷ Beginning Value) ^ (1 ÷ Number of Periods) – 1.
- Retention: the percentage of users or customers which return to your service or use your product within a defined time period.
- Gross churn: literally “gross monthly recurring revenue churn rate” - the percentage of revenue lost due to cancellation or downgrades.
- Net churn: the percentage of revenue lost from existing customers minus “expansion revenue” from upgrades or add-ons.
- Negative churn: when expansion revenue is greater than revenue lost through gross churn.
- Zero marginal cost: where an additional unit can be produced and sold without any increase in the total cost of production, as with software and media.
- R+K>1: a metric for tracking growth powered by retention (R) and virality (K) and not just paid marketing.
Credit to Peng Ong for #24.
Useful venture-capital terminology
If you're planning to raise money, you need to understand how investors think. No exceptions.
Do you speak 'investor'?
- Cap table: shows the capital structure of a company, incl. each investor's ownership level.
- Dilution: as additional equity is issued to new investors, existing investors own a smaller proportion of the company.
- ESOP: employee share option pool, reserved for future employees as part of their compensation.
- Vesting period and cliff: options often vest monthly over 4 years. A 1-year cliff means no options vest until 12 months after granting.
- Pre-money: company value before investment (i.e. current share price * number of shares).
- Post-money: company value after investment (i.e. pre-money valuation plus the amount invested).
- GP: general partners manage VC funds and invest LPs’ capital.
- LP: limited partners are the fund's investors.
- Fund of funds: invest primarily in PE or VC funds and not directly in startups.
- Capital call: LPs pay their money to VCs via an agreed schedule of capital calls or “drawdowns”.
- Subscription: the money an investor commits to a startup / fund.
- Follow-on: when existing investors choose to invest in a subsequent round.
- Carry: carried interest is the percentage of fund profits paid to GPs as an incentive. Market standard is a 2% annual management fee plus 20% carry.
- DPI: distributions to paid-in capital is a ratio of capital that has been repaid to LPs relative to the amount they paid in.
- MOIC: the multiple on invested capital. Similar to DPI except the denominator is the amount of money invested in startups, not the amount invested by LPs.
- TVPI: total value to paid-in capital reflects the total value of the fund’s investments, realised and unrealised, relative to paid-in capital.
- IRR: internal rate of return is the anticipated annual growth rate of any investment (useful because it allows comparison between VC and other asset classes).
- SAFE: simple agreement for future equity. Grants investors the rights to purchase stock in a future equity round, usually with a valuation cap and/or discount.
- Convertible note: a loan where capital and interest converts into shares at an agreed valuation cap or discount at a future date or event.
- Liquidation preference: defines the order in which investors receive payment upon liquidation.
- Anti-dilution / ratchet: retrospectively adjusts the share price paid by earlier investors should a subsequent investor pay a lower price.
- Pay-to-play: requires all investors to invest their pro rata in subsequent funding rounds or lose certain rights.
- Drag along: allows a percentage of shareholders to compel others to sell, thus preventing a minority from blocking.
- Tag along: ensures minority shareholders receive the same price and conditions as majority shareholders when selling.
If you're a startup founder who may one day raise capital to fund accelerated growth, it's worth reading and re-reading these terms, and making them part of your vernacular. They come up a lot. Good luck!
Image credit
– Featured image Petra from Pixabay.