In part one, we covered some essential terms to help you speak and investor’s language with confidence. But there’s more to the world of startup financing than pre-money valuation and MVPs. As you dive deeper into funding discussions, understanding the variety of investment structures, metrics, and financial jargon is crucial for holding your own in investor conversations. Whether you’re exploring alternative funding options or fine-tuning your business model, these additional terms will help you stay at the top of your game.
Here are 10 more terms to level up your understanding of investor-lingo:
Investor’s Language #1: Debt Funding
Not every investor will want to take an equity stake in your business. Some might prefer debt funding, a method where you borrow money from an investor and agree to pay it back over time with interest. The benefit here? You don’t have to give up any ownership in your company because you don’t sell shares (equity). However, you’ll need to ensure your business generates enough cash flow to cover the repayments. Debt funding can be an attractive option for startups that prefer to maintain control over their company while still securing capital for growth.
Investor’s Language #2: Equity Investment
In contrast to debt funding, equity investment involves selling a portion of your business (in the form of shares) to investors in exchange for capital. This is where your pre-money and post-money valuation become important, as they help determine how much of your company an investor will own. Equity investors take on more risk than most debt investors because they only make a return if your company grows and becomes profitable. However, they can provide valuable resources beyond just money, like industry expertise, mentorship, and connections, so they can be very useful investors, especially for early-stage businesses.
Investor’s Language #3: Grant
Unlike debt or equity investments, a grant is a sum of money provided by a government agency, non-profit organisation, or private foundation to support your business without the expectation of repayment. Grants are highly competitive, and you’ll typically need to demonstrate that your company aligns with specific criteria or societal goals, such as innovation, sustainability, or job creation. The best part? Grants don’t require giving up equity or taking on debt, but they often come with strict conditions and require regular reporting which can take time to prepare.
Investor’s Language #4: SAFE (Simple Agreement for Future Equity)
A SAFE is a popular investment instrument for early-stage startups. It’s similar to a convertible note, but without the loan aspect. With a SAFE, an investor gives you money now in exchange for the right to purchase equity in the future, typically when you raise your next funding round. This allows startups to secure funding quickly without the pressure of negotiating a full equity round right away. SAFEs are especially useful when the valuation of a company is still uncertain, giving both parties flexibility.
Investor’s Language #5: CAC (Customer Acquisition Cost) or CPA (Cost Per Acquisition)
Understanding your CAC (Customer Acquisition Cost) (sometimes also called Cost Per Acquisition (CPA) is critical when speaking to investors.. Your CAC focuses on the marketing cost associated with acquiring one customer through channels, such as paid ads, email marketing or trade shows. This number can help you evaluate the efficiency of your marketing efforts. Investors pay close attention to CAC, especially when evaluating your business’s scalability. If your CAC is low and your CLV (Customer Lifetime Value) is high, your business is in a strong position to grow profitably.
Investor’s Language #6: CLV (Customer Lifetime Value)
As mentioned in part one, CLV measures the total revenue your business can expect from a single customer over the duration of their relationship with your company. Investors care about CLV because it shows the long-term potential of your customer base. A high CLV means that once customers start using your product or service, they’re likely to stick around and keep spending. The goal is to ensure that your CLV far exceeds your CAC (or CPA), signalling a sustainable and profitable business model.
Investor’s Language #7: Ticket Size
In investor lingo, the term “ticket size” refers to the amount of money an individual investor or fund is willing to invest in a single startup or deal. Ticket sizes can vary dramatically depending on the depth of an investor’s pocket, their attitude to riskand the stage of development (or growth) your business has reached. For example, an angel investor might have a smaller ticket size than a large venture capital fund. Understanding an investor’s typical ticket size can help you gauge whether they’re a good fit with your funding needs.
Investor’s Language #8: Fund Size
The size of a venture capital (VC) fund or investment fund matters because it influences the type of companies they’ll invest in and the size of their investments. Larger funds often seek more established startups with proven traction and may make bigger investments, while smaller funds might focus on early-stage companies with higher growth potential. As a founder, it’s essential to research an investor’s fund size to ensure you are a good fit with the fund. No one wants to waste time talking to the wrong people!
Investor’s Language #9: Unit Metrics
Unit metrics are key data points that help investors understand the performance and scalability of your business on a per-unit basis. This can include things like the cost to produce a single product, the profit generated per sale, or the revenue generated per customer. Unit metrics are crucial for understanding how efficiently your business operates and how well it can scale. Investors will use these metrics to assess whether your business model is viable in the long term and how it can be improved to drive profitability.
Investor’s Language #10: Burn Rate and Runway
Burnrate is the amount of money your business spends each month, on average. It is often used by investors with another metric, Runway. Runaway is an estimate of how long your business can continue to operate based on your monthly costs (Burn Rate) and the amount of cash currently held in the business’ bank account. You Burn Rate is usually based on 3, 6 or 12 months historical data and is . Your Runway is calculated by dividing the cash you have in the business bank account by the amount of money you spend each month (ie your Burn Rate). Another – very sobering – way of describing your Runway is your “Time To Death”, which recognises that once a business has run out of cash it will have to close. Investors use Burn Rate and Runway to understand how quickly you need to raise investment, and how long any investment they make will last. Next Steps: Using In These Terms in Your Funding Journey
Having a strong grasp of the language investors use, puts you on the front foot in your conversations with investors. Whether you’re seeking debt funding, securing a grant, or negotiating a SAFE agreement, understanding how these concepts apply to your business helps you make informed decisions in the way you run your business but also helps you present a clear and accurate picture to investors. Plus, knowing your unit metrics and keeping a close eye on your Runway will demonstrate to investors that you’re not just focused on short-term gains but are committed to long-term growth and success.
If you’re preparing for a funding round or need more clarity on how to structure your deal, why not join our next Funding Strategy Workshop. You’ll hear insights about what it takes to raise equity investment in the current funding climate, and you can bring any questions you have to make sure you’re fully equipped for your next investor meeting!
- How to Speak an Investor’s Language: Part 2- More Terms You Need to Know - December 19, 2024
- Balancing The Books: How To Present Multiple Income Streams To An Investor - December 9, 2024
- 10 Resources For Finding Grant Funding In The UK - November 27, 2024
