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Top 10 jargons - Shark Tank India - Season 3

Aspiring for some good investment deals for your business or startup. Here's an overview of the major business terms used in Shark Tank India - Season 3, every entrepreneur should be aware of.

Last Modified: 07th Mar, 2024

Shark Tank India - Season 3 is among the most trending reality shows. A stage for various aspiring  entrepreneurs in the country to pitch their business models to a panel of investors and win the funding.

If you are amongst them, planning a startup or wondering to invest, then here are 10 business terms that you should be well aware of:

  • Valuation

"Valuation" is a financial term for the process of determining the value of potential investment, asset or security. The whole purpose behind valuation is to determine the worth of an asset or company and compare that to the current market price. This then helps in onboarding investors, selling/buying companies, selling off assets or portions of business.

A common way to calculate valuation for a business is to determine the fair value of its assets, minus, all of its liabilities. This method is called asset-based valuation. Other methods include comparable company analysis, discounted cash-flow method and Precedent transactions method.

Unfortunately some methods are just straightforward while others involve more logistics and are thus complicated. Thus there is no one method suitable for every situation. Depending upon each stock, and considering the unique characteristics of every industry, one or more methods are required for the valuation of the business.

  • Cash Flow

As the term suggests, the net amount of cash that moves in and out of your business during a given period. Hence, it includes all the money the company makes and spends within a specific period.

A regular assessment of cash flow over specified periods, which could be monthly, quarterly or annually, gives a clear picture of the business finances, preparing a budget for the next set of goals and to show the company's growth to onboard investors. At any point of time a company's goal is to have a positive cash flow, which means the company is growing and making money.

While referring to cash flow, it could be any of the following types. A good understanding of each of them is needed to interpret which cash flow is being referred to in a particular situation.

  1. Operating Cash Flow (CFO)
  2. Cash Flow from Investing (CFI)
  3. Cash Flow from Financing
  • Market Value

This term can be defined as the financial worth of an asset or company in the market. This value is determined by the market participants and is used to assess the market capitalization of assets or companies.

This term is therefore sometimes also referred to as "market capitalization"of publicly traded companies. It is basically calculated by multiplying the number of outstanding shares of a company by its current share price.

The market value can be expressed in the form of ratios such as P/E ratio, EPS, Market value per share, book value per share, etc.

The market value fluctuates over a period of time and the dynamic nature depends on numerous factors including operating conditions, economic status of the market and fluctuations in demand and supply.

  • Convertible Note

This term is often used by seed investors who invest in startups. It is basically a short-term debt that an investor invests in a company. This can be later converted to an equity in the issuing company or cash of equal value.

Convertible notes are more common among startups because of the advantages associated with them for both the budding company and the investors. Along with being comparatively less complicated than equity, the legal fees associated with them are also lower. It allows early stage startups to delay valuation until a later date when the company achieves a higher valuation.

As for the investors, convertible notes offer flexibility and option to choose to convert their invested amount to equity or get repaid with interest.

  • Pre-Money Valuation & Post-Money Valuation

A term common in private equity and venture capital industry, "pre-money valuation" refers to equity value of the company prior to any investment or financing. Hence, now as that can be understood, the valuation of the company following an investment is called "post-money valuation".

The pre-money valuation of the company changes every time a new funding is received. It is determined before each round of investment and thus gives a picture of the current value of the company to an investor.

The pre-money valuation of a company depends on the financial statement data, scalability, the value of the comparable businesses, the state of industry, the market conditions and the company's growth potential.

Once the investment is made, the value of the company increases and is known as post-money valuation.

Pre-money valuation helps in finding initial investors and in the negotiations involved. Higher the pre-money valuation, more interested are the investors. In return, investors use the pre-money valuation to determine their potential ownership stakes.

  • Seed Round Funding

Seed round funding or seed money or seed capital is the first formal round of funding for a startup, in exchange for an equity or convertible note. As the name suggests, it is an early investment when the startup is in the seedling stage and needs finances for the preliminary operations. The investors at this stage include founders, family & friends, angel investors, seed venture capitalists, revenue-based financing lenders or government programs.

In this early stage, startups do face a lot of challenges like-

  1. little or no brand value for their product or service due to lack of funds
  2. customer traction and recognition in the market
  3. regularized and formal process to build a team
  4. lack of business model to identify revenue channels and financial projections of the business.

These can be overcome by thorough evaluation of market and customer needs, detailed business plan, study of market competitors and financial & growth projections.

  • Angel Investor

To define the term, Angel Investor is an individual whose funds a business or more, including startups usually in return  for debts or equity ownership.

Most of these individuals are rich and wish to invest their money in potential startups to help them grow further, thereby getting themselves higher rate of return, but the main aim still being the success of the ideas.

Angel investors are also called informal investors, seed investors, private investors or business angels, who focus on helping the potential startup grow. Anyone who has money and a keen interest in innovation can be an angel investor to the needy entrepreneurs who can't get enough loan, or do not want to be under debts until their business idea takes off.

  • Burn Rate

The term "burn"is synonymous to something negative, hence burn-rate can be defined as the rate at which the company loses its capital before generating a positive cash flow from operations. Especially in case of startups, burn rate is a common metric of performance.

There are two types of burn rate -

  1. Gross Burn Rate- It is a measure of all sorts of expenses against the cash with the company regardless of the revenue. It thus provides an insight in the efficiency of the company.
  2. Net Burn Rate- Calculated every month it is a measure of money lost by a company by subtracting the expenses from the revenue. An increase in the revenue with no change in cost lowers the burn rate and vice versa.
  • Net Profit

A term every entrepreneur has an eye on is "net profit/ net income". It is the total earning of the company after subtracting all sorts of expenses from its revenue.

In simple calculation it is-

Gross profit minus operating expenses and taxes.

A clear indicator of the growth  of an idea/business, net profit is a critical metric for business owners to understand the financial health of their companies. It helps to make decisions of how to sustain losses incase of negative net profit. While with positive net profit the business not only attracts investors, but also promotes the business owner to expand, allocate budget in marketing and hiring more people.

  • Equity Dilution

A decrease in equity ownership for existing shareholders when the company issues new shares is called equit/stock dilution. Increase in equity increases the total number of outstanding shares which thereby decreases the ownership percentage of existing shareholders. This sometimes does lead to decline in investor's confidence and result in lower stock price.

Although it appears all bad, stock or equity dilution is a result of company's rising capital. The company then issues new shares and this could lead to higher returns in the future.

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