10 Terms Every Investor Should Know

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Hey friends 👋 ,

Happy Monday and welcome to Through the Noise!

Before we begin– thanks for the valuable feedback from last week's issue 🙏

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Today we'll bring things back to the basics and understand these 10 must-know terms for every entrepreneur and investor.

Read time: 3 minutes

10 Terms Every Investor Should Know

You'll be pleased to know that we won't be covering male astrology today (technical analysis). 

1. Internal Rate of Return (IRR)

IRR tells you what your average return is when time value of money is factored in.

Let's say you have an option to get 100K today or 100K in 5 years.

You would obviously prefer to get paid today so you can reinvest (and avoid inflation eroding the purchasing power of your money).

An investment that realises returns sooner than later will have a higher IRR.

2. Multiple of Money (MoM)

Also known as cash-on-cash return or multiple of invested capital (MOIC).

Example:

Total cash inflows (proceeds from sale of a company) = $100M

Total cash outflows (initial investment) = $10M

MoM would be 10.0x.

3. Rule of 72

A “back-of-the-envelope” method to calculate how long it would take your investment to double (2x).

Example:

How long would it take to double my money if I invest in the S&P 500?

S&P 500 average return = 8%

= 72 / 8

= 9 years

4. Rule of 115

Tells you how many years for your investment to triple (3x).

Lesser known than the rule of 72, still powerful.

Same example:

How long would it take to triple my money if I invest in the S&P 500?

S&P 500 average return = 8%

= 115 / 8

= 14.4 years

5. Total Value to Paid-In Capital (TVPI)

TVPI answers, “How does the total realised and unrealised profits compare to the initial paid-in capital”

Cumulative distributions = Realised profits

Residual value = Unrealised potential profits

Paid-in capital = Investor's commitment

6. Distribution to Paid-In Capital (DPI)

DPI measures the amount of money returned by a fund to its investors relative to their paid-in capital.

Cumulative distributions = Realised profits

Paid-in capital = Investor's committed capital

7. Dry Powder

Dry powder is capital committed to private investment firms that still remains unallocated.

It's money that's sitting on the side, yet to be invested.

8. Post-Money Valuation

Post-Money Valuation = The value of a company’s equity once the round of financing has occurred.

This includes the latest capital injection.

Post-money valuation = pre-money valuation + financing raised

9. Pre-Money Valuation

Pre-Money Valuation = The value of a company’s equity before raising a round of financing.

This is the value of a company excluding the latest round of funding.

Pre-money valuation = post-money - financing raised

10. Up Round vs Down Round

An "up round" means the valuation of the company raising capital has increased in comparison to the prior valuation received.

A "down round" means the company’s valuation has decreased post-financing in comparison to the preceding round of financing.

Thanks to Wall Street Prep for providing the graphics.

Through the Noise Podcast

Last week we had Vinay Iyengar (Principal at Two Sigma Ventures) on the show talking about Early Stage Investing.

Vinay's early-stage investment focus is in enterprise software, machine learning, marketplaces, and infrastructure.

Catch the episode wherever you listen to podcasts.

That’s all for today friends!

As always feel free to reply to this email or reach out @thealexbanks as I’d love to hear your feedback.

Thanks for reading and I’ll catch you next Monday.

Alex

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