Walking into a room full of investors can feel a bit nerve-wracking, especially when they start tossing around phrases like “pre-money valuation” and “burn rate.” But don’t worry, we’ve got your back! You don’t need a finance degree to understand investor terminology. With just a basic understanding of some key terms, you’ll be ready to shine in those funding discussions.
Whether you’re gearing up for your first pitch or just want to be prepared for investors questions, here are 10 must-know terms to get you started:
1. Pre-Money Valuation
Before any investment lands in your account, there’s always a discussion about valuation. Investor’s could use one of two terms to discuss valuation. The first of these is pre-money valuation. This is what your company is worth before you receive new investment. Investors want to know this because it helps them figure out how much equity (ownership) they’ll get in exchange for their cash. It’s a big deal, it sets the stage for the “how much of my company do I give away?” conversation
2. Post-Money Valuation
The second term that comes up when discussing valuation is post-money valuation. This is the value of your company after the new investment comes in. The formula is simple: Pre-money valuation + investment = post-money valuation. This is the number investors use to figure out their slice of the pie after funding. Knowing both pre- and post-money numbers keeps everyone on the same page and helps avoid any confusion.
3. MVP (Minimum Viable Product)
You’ve probably heard this one thrown around a lot. MVP stands for Minimum Viable Product. It’s basically the simplest version of your product that you can release into the market. It may not have all bells and whistles yet (that’s why it’s called “Minimum Viable”, but an MVP should work well enough to solve a problem for your customer and so helps you attract those all important early users. Investors love to see an MVP because it proves you can build a product (or service)and that you have tested your idea out in the real world.
4. Traction
Traction is all about showing that people actually want your product – and that you can sell it! Whether it’s about the speed at which sales are growing , a surge in user numbers, or the length of time customers spend using your product/service, traction shows that your business has momentum. The more traction you have, the more investors are likely to jump on board. Numbers don’t lie, if people are buying or signing up, it’s a sign that you’re onto something good!
5. CAC (Customer Acquisition Cost)
Customer Acquisition Cost (or CAC) is basically how much it costs you to gain onea new customer. This could include marketing spend, sales efforts, you name it. Knowing your CAC is important for investors because it tells them how efficiently you’re growing your customer base. If your CAC is high, it could raise a red flag, but not always. CAC is often read in conjunction with another key metric: Customer Lifetime Value (CLV). This shows how much a customer spends with your business over their “lifetime” (we don’t literally mean their human life, instead we’re talking about the amount of money they spend with your company over time). Provided customers spend more with your business then you spend acquiring a customer, then investors can see that – once you scale – the business will be profitable. CAC and CLV are two numbers all investors will want to know about so it’s best to start measuring and tracking this data early on.
6. Burn Rate
Speaking of measuring numbers, burn rate is the amount of money your business spends each month, and it’s another key metric to measure and track. It’s the opposite of profit, but don’t worry, it’s totally normal for startups to have a high burn rate while they’re growing. Investors are super interested in this number because it helps them gauge how quickly you’re burning through resources and might run out of cash. And that helps them predict when you might need more funding (which brings us to the next term!).
7. Runway
Your runway is how long your company can operate before it runs out of money, based on your burn rate. I heard it described very graphically as “your time til death”! For example, if you’ve got £500,000 in the bank and a burn rate of £50,000 a month, you’ve got a 10-month runway until the cash runs out and the business might have to close. Investors want to know if you have enough runway to hit your next big milestone without draining all your cash. If you can achieve key milestones with your existing cash reserves, it’s more likely you will either then have sufficient revenue to support the business or you will be in a good position to raise more funding. No one likes a short runway so managing your cash burn to maximise your runway is the name of the game in a tough funding market!
8. Convertible Note
A convertible note is a type of short-term loan that “converts” into equity down the line, usually when you raise your next funding round. So, instead of getting paid back in cash, the investor gets a piece of your company later, often at a discounted rate. It’s a popular way for investors to jump in early and snag a better deal when your business really takes off.
9. Term Sheet
A term sheet is like a blueprint for your funding deal. It’s a non-binding agreement between you and the investor that outlines the key details, how much they’re investing, what your company is valued at, what rights they get, and more. It’s not the final contract, but it sets the stage for a formal agreement and makes sure everyone’s on the same page before moving forward. Once agreed, the terms in a term sheet will be used to create the Shareholders’ Agreement, which is a legally binding document.
10. Due Diligence
Before a term sheet is signed, there is usually a period of due diligence. This is when investors do a deep dive into your business, verifying your financials, checking out your customer data, analysing market size, and more. It’s their way of making sure everything checks out before they hand over the cash. It can feel like the final hurdle before you secure investment, but give investors the information they need and you’ll be building strong understanding and relationships which will stand you in good stead down the line.
Now You Know These Terms, You Can Speak Confidently to Angel Investors
Mastering these terms will not only help you look like a pro in front of investors but also give you a real confidence boost as you navigate the whole funding process. Every term you understand is another step toward having more control over those crucial investor negotiations. And don’t worry, investors don’t expect you to be a financial or legal whiz. But, if you can speak their language you’re more likely to engage as equals and strike a deal that works for everyone.
Now that you feel more confident talking to investors, this blog will help you actually find investors to speak to.
Are you about to launch a funding round, about to pitch to investors or wondering if you have everything you need? Why not book a free (online) Funding Strategy Workshop to make sure you’ve got everything you need for success? You can also bring any questions you have and we’ll answer them for you.
What does pre-money valuation mean in startup funding?
Pre-money valuation is the value of your startup before any new investment is added. Investors use it to calculate how much equity they’ll receive in exchange for their money.
What is the difference between pre-money and post-money valuation?
Pre-money valuation is your company’s value before investment, while post-money valuation is the value after the investment has been added. The formula is simple: pre-money valuation + investment = post-money valuation.
What is an MVP in a startup pitch?
MVP stands for Minimum Viable Product. It’s the simplest version of your product that solves a problem for customers. Having an MVP shows investors you can build and test your idea in the real world.
What does traction mean to investors?
Traction is proof that your product or service is gaining momentum. This could be sales growth, rising user numbers, or strong customer engagement. The more traction you show, the more attractive your startup is to investors.
What is CAC in startups?
CAC means Customer Acquisition Cost. It’s the total cost of bringing in one new customer, including marketing and sales expenses. Investors often compare CAC with Customer Lifetime Value (CLV) to see if your business model is sustainable.
What is burn rate in startup funding?
Burn rate is the amount of money your startup spends each month. It helps investors understand how quickly you are using your cash and when you may need additional funding.
What does runway mean for startups?
Runway is the length of time your startup can operate before running out of money, based on your burn rate. For example, £500,000 in the bank with a £50,000 monthly burn rate equals a 10-month runway.
What is a convertible note in startup investment?
A convertible note is a short-term loan that converts into equity during a future funding round. Instead of cash repayment, the investor gets shares, often at a discounted price.
What is a term sheet in startup funding?
A term sheet is a non-binding document that outlines the key details of an investment deal, such as the amount invested, valuation, and investor rights. It acts as the blueprint for the final legal agreement.
What does due diligence mean in startup investment?
Due diligence is when investors check your business thoroughly before investing. They review financials, customer data, contracts, and market size to confirm that your startup is a safe investment.
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