WEBVTT 00:00:10.000 --> 00:00:15.200 Kia ora koutou. Hello and welcome to episode 4 of insetangels.com, a guide to raising 00:00:15.200 --> 00:00:20.360 angel investment in Aotearoa, New Zealand. I'm Dave Moskowitz, one of New Zealand's 00:00:20.360 --> 00:00:26.060 most experienced angel investors. In this episode, we'll discuss some of the terminology 00:00:26.060 --> 00:00:30.939 that investors use to talk about companies and the investment process. I'm going to 00:00:30.939 --> 00:00:35.540 go through each term and its definition quickly, and if you'd like to see them in print, just 00:00:35.540 --> 00:00:43.140 point your browser at the episode post on nzangels.com. This is episode 4, terminology. Know your 00:00:43.140 --> 00:00:49.860 terminology and don't get flummoxed by the bafflegab. This is by no means a comprehensive 00:00:49.860 --> 00:00:54.060 list and will likely encounter some new terms you're not familiar with later on in the 00:00:54.060 --> 00:01:00.660 series. Feel free to leave a comment on an episode post if you'd like anything clarified. 00:01:00.660 --> 00:01:05.660 Let's start with some terms that describe the features of a company. Your business model 00:01:05.660 --> 00:01:10.700 explains how your business creates value, delivers it to customers, and generates revenue. 00:01:10.700 --> 00:01:16.940 You can capture this on a lean canvas or business model canvas. Classes of business model include 00:01:16.940 --> 00:01:23.060 business to business, B2B, business to customer, B2C, business to business to customer, B2B 00:01:23.060 --> 00:01:28.700 B2C, double-sided market, and so on. There are quite a few of them. Your revenue model 00:01:28.700 --> 00:01:33.100 describes how you make money and forms an important part of your business model. Do 00:01:33.100 --> 00:01:37.620 you clip the ticket on each transaction? Do you charge a subscription fee? How do you 00:01:37.620 --> 00:01:45.020 actually make that money? Unit economics show how you profit from every sale you make, including 00:01:45.020 --> 00:01:49.900 itemised costs and revenue components. So if you sell a thing, your unit economics will 00:01:49.900 --> 00:01:55.060 show you all the costs that went into that thing and all the revenue components that 00:01:55.060 --> 00:02:00.500 came out of selling that thing. It's really important to understand that when you're talking 00:02:00.500 --> 00:02:07.060 to investors. Your go-to-market strategy describes how you'll overcome obscurity and launch your 00:02:07.060 --> 00:02:12.820 product in chosen markets. Spoiler alert, "we'll just go viral" is not a very good 00:02:12.820 --> 00:02:19.820 go-to-market strategy. Channels are the intermediaries that get your product in front of customers 00:02:19.820 --> 00:02:26.820 and in many cases sell it as part of a larger value offering that they provide. And distribution 00:02:26.820 --> 00:02:33.579 is how you use your channels and other methods, such as direct marketing, to sell your product. 00:02:33.579 --> 00:02:37.820 Product-led growth is your product's ability to drive growth on its own by attracting new 00:02:37.820 --> 00:02:43.019 customers and or increasing customer revenue through the product itself without additional 00:02:43.019 --> 00:02:48.260 sales effort. So for example, your app may have a referral discount where you get a reward 00:02:48.260 --> 00:02:55.140 for bringing a friend onto the app. The app sold that product through a new customer all by itself. 00:02:55.140 --> 00:03:01.500 Customer and market validation are experiments or tests that you run to show whether or not your 00:03:01.500 --> 00:03:07.579 hypotheses and assumptions are true. A great example of a validation test is a smoke test, 00:03:07.579 --> 00:03:12.780 where you run an ad for a product or feature that doesn't exist yet. If people click on the ad, 00:03:12.780 --> 00:03:19.340 you know they're interested in the feature. Intellectual property describes ideas, knowledge, 00:03:19.340 --> 00:03:24.660 and know-how that you control that enable your business to function and give you an advantage 00:03:24.660 --> 00:03:31.740 over your competition. This can include patents, trademarks, trade secrets, and the like. A moat 00:03:31.740 --> 00:03:37.460 is a collection of aspects of your business which give you a sustainable competitive advantage 00:03:37.460 --> 00:03:44.100 over potential competition. This can include intellectual property, brand, cost advantages, 00:03:44.100 --> 00:03:50.140 switching costs, and so on. Your freedom to operate is your ability to perform your business 00:03:50.140 --> 00:03:54.900 without infringing the intellectual property rights of others. Nobody wants to get sued for 00:03:54.900 --> 00:04:01.860 IP infringement. Options are agreements to issue shares to a person if specific conditions are met 00:04:01.860 --> 00:04:09.060 in the future, and these are often used to retain and motivate key staff. A best-in-agreement is an 00:04:09.060 --> 00:04:14.420 agreement that ensures that if a key person leaves the company early, they must give up some or all 00:04:14.420 --> 00:04:20.900 of their shares in the company, kind of like a negative options agreement. A liquidity event is 00:04:20.900 --> 00:04:25.260 a point in time where shareholders have an opportunity to sell their shares and turn them 00:04:25.260 --> 00:04:33.580 into cash, sometimes available to capital raise and usually at an exit. An acquisition is an event 00:04:33.580 --> 00:04:39.219 when a company is bought by another company for cash equity in that purchaser or a combination of 00:04:39.219 --> 00:04:46.340 the two. An IPO is an initial public offering when a company lists on a stock exchange or otherwise 00:04:46.340 --> 00:04:52.980 offers its shares to the public. An exit is when a shareholder disposes of their shares through a 00:04:52.980 --> 00:05:00.100 share sale, acquisition, or IPO. A lifestyle company is a company that has failed to achieve an exit, 00:05:00.100 --> 00:05:06.620 but provides income for its founders and associates on an ongoing basis, unlikely to provide a return 00:05:06.620 --> 00:05:13.340 for investors. A zombie or walking dead company is a company that has failed to achieve an exit, 00:05:13.340 --> 00:05:19.660 but which is difficult to liquidate for some reason. Okay, let's move on to terms about angel 00:05:20.140 --> 00:05:26.340 investment. An angel investor is a high net worth individual who invests in early stage privately 00:05:26.340 --> 00:05:31.860 held companies. They need to certify that they meet the wealth and or experience threshold 00:05:31.860 --> 00:05:38.780 specified in the Financial Markets Conduct Act, the FMCA. So not anyone can be an angel investor, 00:05:38.780 --> 00:05:44.220 you need to show and certify that you have the wealth and or experience in order to do that. 00:05:44.220 --> 00:05:51.100 An angel club or network is a group of angel investors that work together. A club manager 00:05:51.100 --> 00:05:57.580 or network manager is a person who organizes that angel club. Screening is a process of considering 00:05:57.580 --> 00:06:03.140 applicants for angel funding and accepting or rejecting them for pitching to the club. And a 00:06:03.140 --> 00:06:08.140 pitch event is a meeting where companies seeking investment will pitch their companies to angel 00:06:08.140 --> 00:06:16.780 investors. Now there are different stages of investment rounds. And they start with friends, 00:06:16.780 --> 00:06:22.180 family and fools, the three F's. This is generally the earliest round, you may or may not 00:06:22.180 --> 00:06:26.860 have an angel investor involved at this stage. But that's the initial lot of cash that will help you 00:06:26.860 --> 00:06:33.539 go from idea to doing something if you need external funding to do that. Your pre seed round 00:06:33.540 --> 00:06:38.980 is an investment round that you run before you've actually sold anything when you're pre revenue. 00:06:38.980 --> 00:06:46.620 The seed round is when you already have some revenue, your post revenue and is investment 00:06:46.620 --> 00:06:54.620 capital to help you prove your ability to grow. And your series A, B, C and so on are investment 00:06:54.620 --> 00:07:02.340 rounds which may or may not involve VCs, which are for fueling high growth. Due diligence or 00:07:02.340 --> 00:07:07.900 DD is the process where investors will closely look at all aspects of a potential investee to 00:07:07.900 --> 00:07:13.539 determine the risks inherent in the company's plan, the quality of the founder, team and product, 00:07:13.539 --> 00:07:20.700 and to determine the valuation of the company in any conditions for investment. A cap table is a 00:07:20.700 --> 00:07:25.340 spreadsheet showing the history of who is invested or otherwise acquired an ownership stake in the 00:07:25.340 --> 00:07:32.580 company and who owns how much of the company. And your pre money valuation is how much money the 00:07:32.580 --> 00:07:37.979 company is worth prior to investment. I've got the formula here on the screen. It's the investment 00:07:37.979 --> 00:07:45.260 amount divided by the investor ownership fraction minus the investment amount. So for example, if I 00:07:45.260 --> 00:07:52.539 invest 100K in your company for 10% of the company, the pre money valuation is 900K. Investors rarely 00:07:52.540 --> 00:07:57.340 talk about how much money for what percentage of the company, we generally talk about pre money 00:07:57.340 --> 00:08:04.020 valuation. Well, that's a lot of terminology, isn't it? And we'll have another big dollop of 00:08:04.020 --> 00:08:08.780 terminology when we talk about the actual investment process itself later in the series, 00:08:08.780 --> 00:08:14.900 including a bunch of really exciting legal terms. The pithy quote for this episode is, 00:08:14.900 --> 00:08:22.380 know your terminology and don't get flummoxed by the bafflegab. Your homework is to pick a few 00:08:22.380 --> 00:08:27.539 terms you're not familiar with and do some internet research on them. I'd start with pre money 00:08:27.539 --> 00:08:33.819 valuation, as it's a question you'll certainly get asked by investors early on. And newbie founders 00:08:33.819 --> 00:08:39.939 sometimes find it confusing. Our next episode is an introductory journey through the angel 00:08:39.940 --> 00:08:46.020 investment process from you thinking you'd like investment through to money in the bank. How hard 00:08:46.020 --> 00:08:51.580 can it be? Well, there are a lot of moving parts, and it can take three to six months, all things 00:08:51.580 --> 00:08:57.500 going well. But you should really have an inkling of what you're getting into before you start. So 00:08:57.500 --> 00:09:01.020 until then, ka kite. We'll see you later.