If you’re a first time founder, or even if this isn’t your first rodeo, it can often seem that the startup and venture space is a minefield of insider phrases and acronyms that are like a mason’s secret handshake – only once you’ve been granted that secret knowledge and learned how they work can you get access to the club.

Well, as startup CFOs, we spend a lot of time here at EmergeONE simplifying the complex for the ventures we work with so we thought the least we could do would be to share some of that knowledge here too.

So here we go, 10 bits of VC terminology you need to know.

ARR

Annual Recurring Revenue – this is a metric that is used to infer the future revenue of a business based on its current monthly recurring revenue (MRR). It is calculated by taking the current MRR and multiplying it by 12. 

Easy right, so where’s the confusion? The confusion arises because many businesses shouldn’t be using this metric in the first place – it is very much valid for companies that have a recurring revenue model (i.e. SaaS or subscription) – but not if you are running an eCommerce business that relies on one off purchases.

Burn

A company’s Burn is the amount of cash that a company spends during the course of a month in order to keep running. What could be more simple!

But where we see founders tie themselves up in knots is by introducing complexity by qualifying Burn with terms like Gross Burn (Burn excluding cash in from revenue), Net Burn (Burn after taking into account cash from revenue) or Operating Burn (Burn excluding one off, so called, extraordinary items such as say a legal expense or fee paid to a broker for assistance with fundraising). Our advice? Keep it simple, Burn is the net change in your bank account excluding any investment or debt capital that is introduced into the business.

CAC

Customer Acquisition Cost is the average amount of money it costs to bring on one additional customer. Say you spend £1,000 on marketing and bring on 100 new customers, your CAC would be £10. So what’s the catch?

Basically the difficulty isn’t in understanding what it means, rather how to calculate it properly. A company that is serious about understanding how efficiently it is bringing on customers should be able to calculate their CAC per channel (e.g. Google ads vs Instagram vs Viral), only then will they be able to optimise for the best outcome.

Cap Table

The Cap Table (shorthand for capitalisation table) is a summary of a company’s ownership structure, if you want to gain a more in depth understanding, we suggest you read our previous explainer here. Whilst it may seem like an obvious one, we’ve heard founders call it a capex table (capex is shorthand for capital expenditure – i.e. investments in capital items like plant, equipment or property) and we’ve definitely seen them constructed poorly.

Dilution

Founders tend to learn this one pretty quickly but given its importance, it’s worth mentioning here. Dilution is the reduction in an investors’ proportional shareholding as a result of new investment having been taken into the company. For example, at startup, a founder would normally own 100% of the company – let’s say via ownership of 100 shares. Let’s say they then issue a further 25 shares to a new investor. In this instance, the founder has been diluted down by 20% as they now own 100 out of 125 shares which is equivalent to 80%.

Liquidity Event

A liquidity event is typically a milestone in a company’s lifecycle which results in capital being returned to investors. This could be via a sale of the company to a suitable acquirer, a listing on the public stock exchange (an Initial Public Offering or IPO) or even via a secondary round (see below). It is called a liquidity event because private company shares are typically not easy to sell as there isn’t an established market to be able to do this and it is the first time the founders, shareholders or employees receive cash in return for their investment.

LP

Just as a startup has investors, so do venture capital funds. These investors are known as Limited Partners or LPs because they have limited rights within the fund partnership structure. But it’s quite likely that in investing in a particular fund it is because they believe that fund can generate a suitable financial return for them, but also that they will likely invest in startups that fall within a them that the LPs wish to pursue.

LTV

Lifetime Value or LTV is the average value that a customer generates for the business over the lifetime that they interact with the business. For example, if you run an eCommerce business that sells candles for £10 that you purchase for £5 and ship for £1 and customers, on average, purchase 5 candles, you would say that the LTV of a customer is £20.

What many people get wrong is that value is not the same as revenue. In old accounting speak, we would equate value closely with the gross profit a customer drives to the business.

Preferred Shares

When you establish a company, you will normally issue Ordinary shares (in the US this would be called Common Stock) which have fairly standard rights on distribution, winding up and so on. However, as VCs are often deploying more cash and taking more risk, they will only invest in exchange for Preferred Shares. The terms of this class of shares will vary depending on what is agreed with the VC and, in every new round of financing you may end up with different classes of Preferred Shares as new investors come in. This can lead to a fair amount of complexity when the company finally gets to a liquidity event. 

Preferred Shares will typically give the investor the right to receive a multiple of their investment back before other shareholders receive anything.

Unit Economics

When VCs talk about unit economics, they are talking about the interplay between a business’ customer Lifetime Value and its acquisition costs and is often expressed as a ratio of x:1 where x describes LTV and 1 describes the CAC. So, for example, if our LTV is £20 and our CAC is £10, our LTV to CAC would be 2:1.

Typically VCs will look for a ratio that converges on 3:1, any less and it may mean that your company can’t scale efficiently (or may destroy value as customers become more costly to acquire) and, any more and it may be that the company could be deploying more cash to grow more quickly.

So there you go, 10 bits of VC terminology you need to know! If there are any terms, or phrases you’d like us to explain or expand on just drop us a comment and we’ll keep updating our list accordingly.