Startup and VC jargon founders should understand.

by | Oct 2023 | Early-Stage Capital

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

  1. TAM/SAM/SOM: total addressable market/serviceable addressable market/serviceable obtainable market. How much of the market can realistically be captured.
  2. MVP: minimum viable product. The simplest version of your product that helps users solve the problem.
  3. 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).
  4. Runway: how many months your business can keep operating before it runs out of money.
  5. MRR: monthly recurring revenue. The company’s total monthly subscription revenue.
  6. ARR: annual recurring revenue.
  7. TTM: trailing twelve months revenue. How much revenue your startup produced in the previous 12 months.
  8. ARPU: average revenue per user. It costs money to add users, how much is each one worth?
  9. CAC: customer acquisition cost. How much does it cost to gain a paying user?
  10. LTV: lifetime value. In total, how much revenue does each user bring before churning?
  11. TCV: total contract value. The combined value of a customer, including up-front and recurring fees.
  12. ACV: annual contract value. How much a customer us worth to you over 1 year.
  13. Deferred revenue: money received for goods / services that have not yet been produced/delivered,
  14. Total billings: actual revenue plus deferred revenue.
  15. MAU/WAU/DAU: monthly / weekly / daily active users. The number of people who engage with your product.
  16. Conversion rate: in SaaS, the percentage of users that upgrade from your free tier to a paid tier.
  17. CMGR: compound monthly growth rate. Often just called month-on-month growth rate.
  18. CAGR: compound annual growth rate. Same as above but annualised. CAGR (%) = (Ending Value ÷ Beginning Value) ^ (1 ÷ Number of Periods) – 1.
  19. Retention: the percentage of users or customers which return to your service or use your product within a defined time period.
  20. Gross churn: literally “gross monthly recurring revenue churn rate” – the percentage of revenue lost due to cancellation or downgrades.
  21. Net churn: the percentage of revenue lost from existing customers minus “expansion revenue” from upgrades or add-ons.
  22. Negative churn: when expansion revenue is greater than revenue lost through gross churn.
  23. 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.
  24. 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.

Startup Terms You Need To Know.
Download our cheat sheet here:

 

Useful venture-capital terminology

If you’re planning to raise money, you need to understand how investors think. No exceptions.

Do you speak ‘investor’?

  1. Cap table: shows the capital structure of a company, incl. each investor’s ownership level.
  2. Dilution: as additional equity is issued to new investors, existing investors own a smaller proportion of the company.
  3. ESOP: employee share option pool, reserved for future employees as part of their compensation.
  4. Vesting period and cliff: options often vest monthly over 4 years. A 1-year cliff means no options vest until 12 months after granting.
  5. Pre-money: company value before investment (i.e. current share price * number of shares).
  6. Post-money: company value after investment (i.e. pre-money valuation plus the amount invested).
  7. GP: general partners manage VC funds and invest LPs’ capital.
  8. LP: limited partners are the fund’s investors.
  9. Fund of funds: invest primarily in PE or VC funds and not directly in startups.
  10. Capital call: LPs pay their money to VCs via an agreed schedule of capital calls or “drawdowns”.
  11. Subscription: the money an investor commits to a startup / fund.
  12. Follow-on: when existing investors choose to invest in a subsequent round.
  13. 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.
  14. DPI: distributions to paid-in capital is a ratio of capital that has been repaid to LPs relative to the amount they paid in.
  15. 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.
  16. TVPI: total value to paid-in capital reflects the total value of the fund’s investments, realised and unrealised, relative to paid-in capital.
  17. 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).
  18. 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.
  19. Convertible note: a loan where capital and interest converts into shares at an agreed valuation cap or discount at a future date or event.
  20. Liquidation preference: defines the order in which investors receive payment upon liquidation.
  21. Anti-dilution / ratchet: retrospectively adjusts the share price paid by earlier investors should a subsequent investor pay a lower price.
  22. Pay-to-play: requires all investors to invest their pro rata in subsequent funding rounds or lose certain rights.
  23. Drag along: allows a percentage of shareholders to compel others to sell, thus preventing a minority from blocking.
  24. Tag along: ensures minority shareholders receive the same price and conditions as majority shareholders when selling.
Do You Speak Investor?
Download the VC terms cheat sheet:

 
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!


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– Featured image Petra from Pixabay.

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