Entrepreneurs have to know, well, everything. In the beginning, you’re likely bootstrapping, doing nearly everything on your own. It might be a real “fake it ’til you make it” situation for a while. Even so, one of the best ways to seem like you’ve got everything under control is by learning and speaking the startup language. If you weren’t exposed to some of the key concepts before launching your business, now’s the time to start learning.
In order to talk the talk, entrepreneurs must be familiar with the acronyms widely used in conversations with investors. Being fluent in these acronyms will help you better pitch your business and understand what the heck those VCs are talking about.
Below are the most important acronyms and terms you’ll need to know to provide the best information you can during your pitch meetings and answer all the questions potential investors throw at you.
Read more: Landing meetings with VCs
TAM — Total Addressable Market
TAM is basically the revenue opportunity available for your business if you achieve 100% of the market.
It’s a very important slide to have in your pitch deck, but early-stage investor Jared Sleeper says it’s one that’s frequently mis-executed. If you’re pitching VCs, they want to know how big you can grow, so be sure to calculate this correctly.
Think of TAM as the universe. Your total addressable market should be as big as the universe, and your company could grow to be as big as the universe.
CAC — Customer Acquisition Cost
Basically, CAC is calculated by dividing all costs spent on customer acquisition (essentially, sales and marketing expenses) by the amount of customers you acquired during that period. So, if you spent $100 on marketing and acquired 100 customers, your CAC is $1.
MRR / ARR — Monthly / Annual Recurring Revenue
MRR is the revenue a business can count on receiving every month. It’s predictable. You can calculate MRR by multiplying your total number of users (or customers, etc) by the average revenue per customer (or ARPU, which is next on the list).
Similarly, ARR is the revenue generated by users over a calendar year. There are a few different equations people use to get their ARR, but basically, it’s your MRR times 12.
ARPU — Average Revenue Per Unit (or customer)
ARPU is the average revenue you get per user or customer. To calculate, you can take your annual revenue and divide by your total number of customers.
Churn rate is simply the rate that customers cancel their subscription or end their relationship with your company. To calculate churn, divide the total number of customers that cancel in a given year by the total number of customers. So if you have 20 customers that canceled out of a total of 100, then your churn rate is 20%.
LTV — Lifetime Value (of a customer)
LTV, or CLV (customer lifetime value), is the total amount of money a customer is expected to spend on your products over the course of your relationship. Remember, it costs less to keep existing customers than it is to acquire new ones. To calculate the LTV of your average customer, you need to know how long your average customer is with you. For example, if your churn rate is 20% per year, that means your average customer is with you for 5 years (1 / 0.2 = 5). Now let’s assume your ARPU is $100 per customer per year. In that scenario, your LTV = 5 years x $100 = $500.
Of course, there are many more acronyms out there, but these are the basics. If you want to learn more about calculating these metrics, our very own Hamid gave this presentation a few years ago.