Five VC Terms and What They Mean (2/2) 👀
VCs use lot of terms that might seem like gibberish to the average person. It isn't rocket science. Here are 10 top terms and what they mean and how they are used in simple conversation
Hi, and welcome to AfroFounder where I share fundraising, operating and scaling tips with founders building high growth technology businesses in Africa. I’m Maria and this is the 19th issue. If you’re new - you join hundreds of incredible AfroFounders on their entrepreneurial journey.
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List of Pre-Seed / Seed Investors Investing In Africa
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This is a continuation of an initial post HERE, if you haven’t catch up on that, and then continue reading below;
Valuation: Valuation is the process of determining the worth or value of a startup. It is typically expressed as a pre-money or post-money valuation. Pre-money valuation refers to the value of the startup before an investment, while post-money valuation includes the value of the investment.
Pro Tip 💡: Example; We are raising a $1m round at a $5m pre-money valuation. Means that the post-money valuation is $6m ($5m + $1m). If you raise a $2m instead of $1m, the valuation will be $7m ($5m + $2m). If you raise less, say $500k, the post-money valuation is $5.5m ($5m + $500k)
Pre/Post Money Valuation: Pre-money valuation refers to the estimated worth of a company before any external funding or investments are obtained. It represents the company's value solely based on its existing assets, intellectual property, market position, and potential. For instance, if a startup is valued at $5 million before securing a $2 million investment, its pre-money valuation would be $5 million. To calculate its post-money valuation you add the valuation before the investment and the investment. In the example above, the post-money valuation will be $5m + $2m = $7m
Pro Tip 💡: Example; We are raising a $1m round at a $5m pre-money valuation. Means that the post-money valuation is $6m ($5m + $1m). If you raise a $2m instead of $1m, the valuation will be $7m ($5m + $2m). If you raise less, say $500k, the post-money valuation is $5.5m ($5m + $500k)
Funding Round: Pre-seed → Seed → Series A → B → C
Series A, B, and C+ funding refer to the different rounds of financing that a startup goes through as it progresses. Pre-seed is usually the first funding round, typically filled by friends and family and angels with maybe pre-seed institutional investors.
At pre-seed the startups are usually not yet revenue generating and there is no product market fit.
At seed, there is some expectation of revenue and initial signs of strong market pull and product market fit. At Series A funding there is expectation of high growth and recurring revenue with strong retention and repeatability that can be supercharged with capital, perhaps some expansion.
Series B and C rounds follow, each involving larger investments as the startup achieves growth milestones.
Pro Tip 💡: This is a critical number to keep track of. When investors ask this they essentially want to know how much longer you have to keep you alive. Ensure to not have less than 6 months runway before you start fundraising especially given the market.
Recurring Revenue: Annual Recurring Revenue (ARR) is the predictable, annual revenue a company expects to generate from its subscription-based customers. For instance, if you have 100 customers paying $50 per month, your monthly revenue is $5,000. Multiply this by 12 months, and your ARR is $60,000. ARR provides an understanding of the company's future revenue and is a crucial metric for evaluating growth and attracting investors.
Pro Tip 💡: It is important to remember that before a revenue can be called recurring it has to be predictable with evidence e.g., annual subscription. Taking monthly revenue x 12 does NOT make it recurring.
Unicorns: Unicorns are startups that have achieved a valuation of $1 billion or more. This term represents the rare and exceptional nature of such companies, and being labeled a unicorn is seen as a significant achievement in the startup world.
Go-To-Market Strategy (GTM):
Think of a go-to-market (GTM) strategy as your game plan for getting your product or service into the hands of your first set of customers. It’s one thing to have identified a problem and built a solution, it’s an entirely different thing for you to find your customers and get them to use your product.
GTM is like a roadmap that helps you figure out who your target customers are, how to reach them, and how to convince them to buy what you're offering. It's all about finding the best channels to promote and sell your product, so you can build awareness, attract customers, and grow your business.
Pro Tip 💡: “We’ll run google ads”is NOT a great go-to-market strategy. Make it detailed, clever, data driven, with a multi-channel approach that shows you’ve thought three levels deep about how to acquire your customers.
I hope this helps, if you have questions or need advice on your fundraising journey - send them over to afropitchprep@gmail.com and we’ll answer them.
Till next time.
Maria
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