Episode 4 – Angel terminology

In this episode, we discuss some of the terminology that investors use to talk about companies and the investment process.

Don’t get flummoxed by the bafflegab!

Transcript:

This is by no means a comprehensive list, and we’ll likely encounter some new terms you’re not familiar with later on in the series. Feel free to leave a comment on an episode post if you’d like anything clarified.

Let’s start with some terms that describe the features of a company.

• business model – explains how your business creates value, delivers it to customers, and generates revenue. You can capture this on a Lean Canvas or Business model canvas. Classes include B2B, B2C, B2B2C, double-sided market, etc.
• revenue model – how you make money.
• unit economics – show how you profit from every sale you make, including itemised cost and revenue components
• GTM (Go To Market) – How you’ll overcome obscurity and launch your product in your chosen markets
• channels – Intermediaries that get your product in front of customers, and in many cases sell it as part of a larger value offering that they provide
• distribution – how you use your channels and other methods such as direct marketing to sell your product.
• product-led growth – your product’s ability to drive growth on its own by attracting new customers, and/or increasing per-customer revenue through the product itself, without additional sales effort. An example is an in-app referral discount, where you get a reward for bringing a friend onto the app.
• validation (customer, market) – experiments or tests you run to show whether or not your assumptions or hypotheses are true. A great example of validation is a smoke test, where you run an ad for a product or feature that doesn’t exist yet. If people click on the ad, you know they’re interested in the feature.
• intellectual property – Ideas, knowledge, and know-how that you control that enable your business to function and give you an advantage over your competition. Can include patents, trademarks, trade secrets, and so on.
• moat – is the collection of aspects of your business which give you an sustainable competitive advantage over potential competition. Can include intellectual property, brand, cost advantages, switching costs, etc.
• freedom to operate – your ability to perform your business without infringing the intellectual property rights of others. Nobody wants to get sued for IP infringement!

• options – agreements to issue shares to a person if specific conditions are met in the future. Often used to retain and motivate key staff.
• vesting agreement – an agreement that ensures that if a key person leaves the company early, they must give up some or all of their shares in the company.

• liquidity event – a point in time where shareholders have an opportunity to sell their shares and turn them into cash, sometimes available at a capital raise, and always at an exit.
• acquisition – an event when a company is bought by another company, for cash, equity in the purchaser, or a combination.
• IPO – Initial Public Offering, when a company lists on a stock exchange or otherwise offers its shares to the public.
• exit – when a shareholder disposes of their shares, through a share sale, acquisition, IPO
• lifestyle company – a company that has failed to achieve an exit, but provides income for its founders and associates
• zombie (walking dead) – a company that has failed to achieve an exit, but to which is difficult to liquidate

Terms about angel investment

• angel investor – a high net worth individual who invests in early stage, privately held companies. They need to certify that they meet the wealth and/or experience threshholds specified in the Financial Markets Conduct Act (FMCA)
• angel club (or network) – an group of angel investors that work together
• club manager (network manager) – the person who organises an angel club
• screening – the process of considering applicants for angel funding, and accepting or rejecting them for pitching to the angel club
• pitch event – a meeting where companies seeking investment will pitch their companies to angel investors
• investment round stages:
  • FFF – Friends, Family, and Fools – the earliest round
  • pre-seed – pre-revenue funding to get product to market
  • seed – post-revenue to prove ability to grow
  • Series A, B, C, etc – fuelling high growth, likely to involve institutional money
• due diligence (DD) – the process where investors will closely look at all aspects of a potential investee to determine risks inherent in the company’s plan, the quality of the founder, team, and product; and determine the valuation of the company and any conditions for investment.
• cap table – a spreadsheet showing the history of who has invested or otherwise acquired an ownership stake in the company, and who owns how much of the company.
• pre-money valuation – how much money the company is worth prior to investment
  
  pre-money valuation = (investment amount / investor ownership fraction) – investment amount
  
  So for example, if I invest $100k in your company for 10% of the company, the pre-money valuation is $900k.

Whew, that’s a lot!

And we’ll have another dollop of terminology when we talk about the actual investment process itself later in the series, including a bunch of really exciting legal terms.

The pithy quote for this episode is: Know your terminology, and don’t get flummoxed by the bafflegab.

Your homework is to pick a few terms you’re not familiar with, and do some Internet research on them. I’d start with pre-money valuation as it’s a question you’ll certainly get asked by investors early on.

Our next episode is an introductory journey through the angel investment process, from you thinking you’d like investment through to money in the bank. How hard can it be? There are a lot of moving parts, and it can take 3-6 months all things going well. But you should have an inkling of what you’re getting into before you start.

Until then, ka kite!