Important Jargons you need to know before raising venture fund

Raising your first investment from angel investors or institutional venture capitalists can be a tricky process. In this blog we have tried to cover some of the terms which as a first time entrepreneur you may not be familiar with.

  • Barrier to Entry: These are the factors that makes it difficult for a startup to enter your line of business. It can be typically, technical knowledge, IP, govt. regulations, access to material etc.
  • Baseline: A starting or a past or future reference point which shows the situation at that particular point of time which is used in future to compare the progress of startup.
  • Beachhead Market: A market which is smaller in size than your primary market. e.g. Singapore is a Beachhead Market for Asia.
  • Convertible Debt: When a company is at its earliest stage it can be difficult to value it. Convertible debt or convertible notes allows startups to raise money from investors while delaying valuation until the company is mature enough.
  • Customer Acquisition Cost (CAC): It requires money to acquire customers even if you do not do paid advertising. CAC typically includes all the expenses on Sales and Marketing in your startup in a given period by the number of customers acquired in that period.
  • Exit Strategy: A plan which describes how will your investors or founders can leave the business (read as gain money by selling the shares). Basic Exit Strategies are around IPO or Acquisition.
  • Gross Merchandise Value (GMV): This metrics is typically used in Marketplace model, where even if the sale happens on your platform, you do not get the whole share. GMV is the total value of sales (not revenue) done on your platform. It’s used to measure the size the spending of consumer side.
  • Life Time Value (LTV): Is the expected money you can earn from a customer during the time they are associated with your company. For this you need to first know  the period for which the customer is going to use your product and how much he will be paying you. It is typically compared with the customer acquisition cost to make decisions.
  • TAM, SAM, SOM: Total Available Market, Serviceable Available Market (within your targeted graphical reach), Serviceable Obtainable Market (subset of SAM what you are gonna capture)
  • Liquidation Preference: The sum of money which business needs to pay to Preferred Share Holders in case the business gets liquefied.
  • Option Pool: Its a pool of common stocks you keep in your startup which can be issued in future to employees, directors, advisors, consultants etc.
  • Preferred Shareholder: Shareholders who have the first right to business assets. This is typically used by investors to ensure that if the business doesn’t do good they get the money back from your assets.
  • Pre and Post Money Valuation: Net worth (value) of your company before and after you raise funding. Post MV is the sum of PreMV and the amount of new equity. This gives angel investors and venture capitalists an understanding of what amount or percentage of shares they will get for the amount of investments they make.
  • Syndicate Investment Funding: If the funding requirement is too large or risky for a single investor, a joint investment is done by the participation of multiple investors.
  • Internal Rate of Return (IRR): IRR is the interest rate of return to measure the effectiveness of investing in the project. If the IRR meets or exceeds the desired return rate of investor, typically deal is on, obviously considering a lot of other parameters 🙂

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