SAFE, PnL and LTV. 21 investment terms you need to know before talking to VCs
For a novice entrepreneur, raising money can be the hell of a task. It’s a totally new world with its own rules. And just like knowing a little Italian is helpful when you are Rome, knowing a little “Venturecapitalian” can help you navigate in the venture industry.
To aid you with the new “language,” here’s a beginner’s list of VC terms that investors will most probably use during your first call with them.
A customer journey is a sum of experiences a client goes through when communicating with a company. It documents the full experience of being a customer during all stages of the consumption process including pre-purchase, consumption, and post-purchase stages.
Both terms mean the same and describe a company’s ability to protect its market share from rivals. In other words, it’s how your startup differentiates itself from competitors and raises entrance barriers that prevent others from entering the market easily.
An initial public offering (IPO) is when a private company sells its shares to the public. In this case, the shares start to trade on a stock exchange, for example, Nasdaq or NYSE. This way they become available to a broader pool of potential investors – not only to angels and VCs.
An IPO allows early investors in the company to cash out; it lets companies raise additional capital otherwise unavailable; it can also provide a huge amount of publicity.
M&A, or mergers and acquisitions, describes a process when two companies become one.
A merger occurs when two companies create a joint organization. An acquisition is when one company buys the other one.
North Star metric
A North Star metric is the key metric of a startup that also encapsulates its ultimate business goal.
A KPI isn’t the same as a North Star metric. Example: if you work on a mobile app, your KPIs can include new users per month, ARPPU, LTV, monthly revenue growth rate – or all of them. But your North Star metric would be LTV/CAC ratio or retention rate.
PnL (also P&L or PNL) stands for “profit and loss statement.” It is a financial statement that shows a company's revenues and expenses over a given time period.
A financial model shows your company’s performance so far and — based on the current metrics and realistic assumptions — forecasts its future expenses and revenue. Sometimes, if a startup is at pre-revenue stage, the financial model only shows forecast revenues, expenses, and investments.
Burn rate shows how quickly a startup spends its capital. It’s usually expressed in the amount of money lost per month. Burn rate is a synonym for negative cash flow.
A startup runway is the amount of time a company can operate before it runs out of money.
If your net burn rate is $1,000 a month and you have $10,000, your runway is 10 months.
A capitalization table, or captable, is a document that shows who owns the company. The document must detail ownership (in % and number of shares), listing all the securities, options or shares and who they belong to.
CAC stands for “customer acquisition cost” and is the cost of attracting one paying client.
It includes the cost of sales and marketing efforts used to convince someone new to buy your service or product.
Customer lifetime value (LTV) is how much one user will pay us for the whole time of using the product or service. If your client subscribed to your service, pays $10 a month for a year, and then cancels the subscription, her LTV is $120.
Customer retention is a metric that measures customer loyalty over time. It calculates the percentage of users who continue using your services over a given time frame.
To calculate, a) take the number of customers you have at the end of a given period (week, month); b) subtract new customers you’ve acquired over that time; c) divide by the number of customers you had at the beginning of that period; d) multiply that by one hundred.
Acquisition Channel is any place a person meets your brand for the first time and becomes a customer. It can be on social media, through organic search or an ad, or after an offline meeting.
A term sheet is a non-binding agreement that details the basic terms of an investment.
It’s often a bullet-point document, outlining the basic terms and conditions under which an investment will be made. Signing a term sheet doesn’t mean closing a deal!
Commitments in the round
A commitment is a VC's verbal agreement to invest a certain amount of money on certain terms. This agreement can also be made via email or other means.
SAFE stands for Simple Agreement for Future Equity. It is a type of financial contract that startups can use to secure financing during early-stage rounds.
When VCs invest via SAFE, they don’t get shares in the company right away. Instead, they secure the terms, at which their investment will convert into shares in the future round.
Valuation Cap is a term that is usually used in SAFEs or Convertible Loan Agreements. It determines the maximum valuation at which early-stage investors will convert their investment into equity in the future.
Conversion usually happens in two cases: when a convertible loan reaches maturity or when a startup raises an equity round.
Valuation is how much a startup is worth at a given point in time.
Valuation can be either pre-money or post-money. Pre-money valuation is how much a startup is worth before the investment in the current round. Post-money valuation is pre-money valuation plus the investment sum.
Convertible Loan Agreement (CLA)
Convertible Loan is a loan that will either be repaid or converted into equity in the future, when it reaches maturity or when a startup raises a qualified round. In other words, it’s a document that its holder can convert into a specified number of shares or cash of equal value. Until it’s converted, it pays interests to the investor.
Normally, investors choose to convert the CLA into shares rather than get their cash back.
A lead investor is the VC who invests the biggest amount in the round and sets the terms of the round for other investors.
Usually, lead investors help find other investors who will participate in the round and may take up an intermediary role between the startup and other VCs.