In the first unit of our series, we covered in-depth Angel Investing, the need for angel investing, what to expect of it and why should one not do angel investing. Now, we introduce you all to the second unit of our Masterclass covering Financial Concepts and Terminologies.

We have divided this module into two parts. In the first part, we plan to cover Concepts and terminologies related to Markets and users which are crucial to understanding before any investor starts investing in a particular company. In the second article, we’ll cover the Financial Concepts & terminologies related to a business:

Like always, we’ll try to explain the concepts to all of you with the help of a story and examples to help you grab the information better. So tighten your seatbelts as we go on a rollercoaster ride to understand the various financial concepts & terminologies related to Angel Investing.

In the olden times in Bharata, where money moved through markets like rivers and piles of information were like quiet guards, there was a magical cloth called the "Tapestry of Financial Concepts." This special cloth was made with words and mysterious signs, and it had the secrets to riches, risks, and doing well in life.

One day, an investor who was interested in supporting the entrepreneurial spirit of the society & making exceptional returns was sitting alone in the local ground, watching children play games. He called a few kids & offered them candies provided they answered his question. The question was very simple, What did the kids aspire to become? One of them replied Pilot, another kid replied that she wanted to serve in the Armed Forces, and another kid replied they wanted to represent the country in Cricket. There was one kid standing behind all the others, maybe too shy to give a reply. Upon insistence, the kid replied he wanted to start a business. This kid caught the eye of aspiring investors.

For far too long, the investor had been hearing about stories of successful entrepreneurs & how Angel Investors were making a living for even their future generations just by investing in these early-age startups. Here, was a kid in front of him, barely 15 years of age, having an idea with potential & a vision to contribute something to the development of society. The question was how to groom him into a successful entrepreneur so that his success would have spillover effects.

After thinking for a while, the investor believed that the only way he could meet both objectives was if he got access to the renowned, much-talked-about special cloth because that special cloth had the recipe for success. So the investor set out on a path to explore the secrets of the special cloth. Upon finding that special cloth, the investor carefully opened the cloth & it had a few terms written on it as if they were some codewords. What were those codewords?

Let’s explore those Codewords together:

TAM/SAM/SOM: We’ll start by explaining each one of them briefly.

TAM: TAM stands for Total Addressable Market. As we promised earlier, explaining with the help of an example, if an Investor wants to invest in startups that are into electric vehicle manufacturing, the first thing they would look at is what is the demand for electric vehicles across segments in the market & who has a dominant position in the market. It is to be noted that Electric Vehicles are divided into different segments, from 2-wheelers to 3-wheelers to 4-wheelers to even Trucks and buses.

SAM: SAM stands for Serviceable Addressable Market. In other words, if we have an investor, let's say his name is Ram, before investing in a particular electric vehicle startup, he would like to know the size of the market the company is trying to address with its products.

For eg. OLA & Ather are into 2-wheeler electric manufacturing while TATA, Tesla, and Mahindra are into 4-wheeler electric vehicle manufacturing. There’s even a segment of Electric Buses in which the players consist of Olectra, Ashok Leyland, etc. The larger the Serviceable Addressable Market, the better prospects the company has.

SOM: SOM stands for Serviceable Obtainable Market. It looks at what portion of the Serviceable Addressable Market, the company can realistically capture shortly (3-5 years). In other words, let’s say Ram finds an attraction to invest in the 2 Wheeler market but before investing he would like to understand how much market size the company, let’s say OLA, plans to capture till 2025 & how much share its competitors plan to capture. This will help Ram plan his investments accordingly.

With this, we have completed our first sub-unit of this module. Coming to the second sub-unit of this module, we plan to cover:

CAC & LTV: In this sub-unit, we’ll talk about two very important terminologies that every investor should know before they start investing.

CAC: CAC stands for Customer Acquisition Cost. Many companies resort to targeted online marketing campaigns to attract their customers. So the cost that the company pays to attract customers is known as Customer Acquisition Cost.

Fintech Companies like Paytm & Policy Bazaar spend sizable sums of money on acquiring a customer. It’s possibly one of the major reasons behind them having a sizable customer base. For eg. the Average monthly users today transacting via Paytm is over 90 Million.

LTV: LTV stands for Lifetime Value of Customers. LTV estimates the average revenue the company is expected to generate in the lifetime of the customer’s association with the company.

LTV & CAC are interlinked. A company needs to back the increasing customer base by retaining those customers which is only possible if they provide better products and services. The more customers get retained, the more would be the LTV value earned by the company.

For instance, Take the example of BSNL. Over the past decade, BSNL fell from having the second largest consumer base after Airtel to now at the last position among big players because while on the one hand, CAC increased after the entry of players like JIO, on the other hand, due to poor delivery of service, LTV also decreased as many customers purchased services from private players.

MRR & ARR: In the third sub-unit we plan to cover MRR & ARR. So let's dive straight into our 3rd sub-unit:

MRR: MRR stands for Monthly Recurring Revenue. MRR is an indication of the health of your business. It signifies the growth potential of your business.

ARR: ARR stands for Annual Recurring Revenue. ARR is the value of the recurring revenue of a business’s term subscriptions normalized for a single calendar year.

Most companies, especially companies dealing in Software as a Service (SaaS) lay special emphasis on improving their MRR & ARR. Recently a SaaS-based company Whatfix hit 50 Million US$ ARR.

COGS: COGS stands for Cost of Goods Sold. It is the sum of all direct costs associated with making a product. It includes money mainly spent on Raw materials & labour.

Companies like Apple have impressive profitability because just in the FY 2023-24, Apple’s COGS, also known as cost of revenue represented 56% of its entire cost base. The lean P&L further strengthens Apple’s robust business model. Of late, Apple has been pursuing to improve gross margins via supplier dominance & in-house chip development.

AOV & ARPU: In this subunit, we’ll cover AOV & ARPU. AOV & ARPU are two important indicators of how your business is performing, and how much revenue on average is the business able to generate per order value & user.

AOV: AOV, also known as Average Order Value is a key performance metric that underlines the the customer purchasing habits. Its of great help to e-commerce companies like Amazon, Flipkart & now the newly launched ONDC as it will help them prepare a database of the average amount of spending per order.

ARPU: ARPU or Average Revenue Per User, on the other hand, as the name suggests how much money you’re earning from each user in a given timeframe.

ARPU indicator is used by companies across the world. It helps companies plan better strategies to attract more revenues from their users by offering enhanced products and services.

For eg. Recently Telecom companies like Airtel & VI have been asking for a hike in the tariff rates to attract more revenue per user, automatically improving their ARPU.

DAU & MAU: In the 6th sub-unit, we would cover the Daily Active Users (DAU) and Monthly Active Users (MAU) indicators.

DAU & MAU are 2 indicators that are frequently used by companies around the world, especially to track the traffic on their websites & apps. This helps them design their brand campaigns & get clarity on who is their target market.

I won’t take any other company’s name here but Planify itself. We regularly track the DAU & MAU numbers to check traffic on our page & app. This helps us plan better on what our target market is.

User Retention: In the last sub-unit of this User submodule, we'll discuss User Retention & what it signifies. User Retention indicates the amount the company is willing to spend to retain its customers.

Retaining your customers increases word-of-mouth recommendations & loyalty toward the business. Infact, according to a report published by Hiver, existing customers are more likely to spend 30% more on a new product than new customers.

Finally, as the financial saga unfolded, the Tapestry of Financial Concepts became a masterpiece—a symphony that harmonized the dance of risk and return, the ebb and flow of markets, and the alchemy of wealth creation. In Bharata, where every investor and trader was a storyteller, the enchanted tapestry continued to evolve, unveiling new chapters of financial mastery.