The tech and the team matter - but it's your story that matters most
When a startup undertakes an equity fundraise, company valuation is often a source of much debate. New investors will pitch their offer price as low as they dare and the company will do its best to negotiate it back up.
This cycle will repeat itself many times during the life of the business as new investors join in. It will happen one final time at the point of exit. The process of agreeing what we might call a ‘fair valuation’ is almost never-ending.
For such a fundamentally important metric, it seems as though there should be some tried and tested method to determine this figure. Yet the reality is there isn’t. Attempts to posture a ‘true valuation’ based on science are as many and varied as there are sources of capital.
Valuation is instead a function of investor sentiment.
Sentiment: a thought, opinion, or idea based on a feeling about a situation, or a way of thinking about something.
Sentiment is the root of the emotional buying decision. This is usually made very quickly, often in the first investor meeting. This is where the desire takes hold. The desire to be part of the journey and, ultimately, a participant in the eventual outcome.
Of course, institutional investors will invariably have their ‘valuation models’, but these are used after the fact to bring some form of scientific rationale to their thinking. The reality is that no one knows what the final outcome for the company will be. It’s simply too far away.
It's therefore the job of the founders to postulate the incredible potential of the business. The fear of missing out must be made to sit foremost in the minds of prospective investors.
So, how do we trigger this desire? How do we create an image of a business with incredible potential?
Everything I have learnt over the past 10 years of advising early stage businesses leads me to believe it’s the story or narrative behind the company’s quest that is the trigger. The cold facts of your proposition are important to investors, but they won’t unlock this desire on their own.
Stories engage our emotions
Research has shown that audiences are more likely to engage with and adopt messages that make them feel personally involved by triggering an emotional response. Storytelling is a powerful vehicle for this.
Noah Zandan, author of just released Insights into Influence, has studied the science behind ‘influence’. His work reveals that stories make us use our brains differently. Referring to research by Ohio State University on cognitive processes that occur when becoming immersed in a story:
They call that feeling — of being so lost in a narrative that we hardly notice the world around us — ‘transportation’. And they discovered that when we’re transported by a narrative — whether it’s true or imagined — we tend to view the protagonist more favourably and embrace the beliefs and worldviews the story presents.
Most importantly, though, we tend to believe the story more readily than we would believe a non-narrative account. This is because our brains actually process narratives differently. When we’re taking in straight information, we’re paying critical attention to the message — reaching back for our own existing knowledge and opinions and actively analysing what we’re hearing.
When we’re transformed by a narrative, however, our single focus is on the story. We absorb it entirely, without pausing to deconstruct or doubt what we’re hearing. We’re truly swept away, and this makes us more likely to embrace the ideals and messages the story is promoting.
The story arc
As entrepreneurs, we often find ourselves in front of audiences talking about our vision and the business we are building to turn this into reality. The classic example is of course the investor pitch.
Have you ever found yourself struggling to understand if your pitch really hit the spot? Were they genuinely interested or were they just being polite? If things didn't then progress as hoped, did you manage to figure out where the disconnects were?
The chances are it wasn’t the substance of your pitch that was off – more likely it was your narrative.
The skill in the storytelling is not the ingredients per se. It’s how you connect them together in a way that makes the whole experience engaging. An experience where you feel ‘swept away’ - where you feel compelled to do something.
Storytelling is a skill. It requires an intricate combination of art and science.
Let’s look at the easy part first - the science.
The science element can best be described as the construction of the story arc, also known as the narrative arc. This is a literary term for the path a story follows. It provides a backbone by providing a clear beginning, middle, and end. A classic ‘arc’ is as follows:
The exposition is the beginning of the story. Here you set the scene and grab attention.
The rising action sets the story in motion, often characterised by problems and challenges that must be overcome.
The climax is the most important event in the story – the tipping point where tensions are at their highest and where the most important actions occur.
The falling action de-escalates the tension, provides answers and eases the audience into the conclusion.
The resolution is where the plot comes to the end, all major problems are solved, and loose ends tied up.
The investor pitch
The most powerful investor pitches embrace the narrative arc structure. This is used as a backbone to tell a compelling story. This is where the art - the real skill in storytelling - takes over.
Investors often say that the greatest pitch meetings have also been the most memorable. The story felt real, it came alive, and they felt moved. When they reflect on such meetings, they will say things like:
Let’s look briefly at each of these to see how the narrative creates such a positive emotional reaction.
1. They felt engaged
Securing strong interest right at the beginning of the investor interaction and maintaining it until the end is what we all wish for. The narrative arc is immensely helpful here.
At the beginning we often refer to the opening gambit or setting the scene. Then it's the reveal of the story, the problem we are going to solve and the unique insights we have that will enable this.
Great storytellers are able to create powerful images, often using an analogy, an anecdote, a revealing insight or other technique to help visualise a mental image.
They use these mental images to frame their thesis, to stir curiosity, to challenge received wisdom, and to set out an alternative vision.
When used skilfully, these are the mechanisms that can transport an audience to a place where they feel fully engaged. Our slides become almost incidental.
2. They really bought in
To establish trust and become believable you must connect with your audience at an emotional level, human to human.
The most powerful presentations are open and honest. Great exponents don't just talk about their mission, they talk about their journey, their sacrifice, and their failures. They explain what it means to them and, critically, what they have learned.
If you can create a human context, this will make the story highly relatable. By doing so you will create a connection. This will make you and your story more credible and alluring.
Be genuine. The only person that expects you to be super-human is you.
3. They could sense an exciting outcome.
It’s imperative that we put ourselves in the shoes of the audience when thinking about our key messaging. In the case of investors, we have to remember they are only going to invest if they can see a big financial return.
We make this come alive in the investor meeting by talking about our unique capability to solve a big problem. By big I mean the size of the market opportunity that will be open to us if we are successful. If investors can’t see huge potential, whatever else we say will be lost.
A word of caution: Tech businesses will often put too much emphasis on the ‘capability’ aspect of their proposition - the product or the service they are building. If we can’t first convince investors that the problem is real and big, we will fall at the first hurdle.
Sharing key market insights that substantiate our thesis is vital. Wrapping this up in our narrative, for example referring to prior industry experience, customer use cases and the like, will make it feel tangible.
Above all, create a clear image of the future you will enable.
Not just for capital raising
We have talked here about the power of narrative in the context of the investor pitch. But the same goes for almost any other interaction where we need to persuade - a customer pitch, an employee gathering, a press briefing.
The narrative arc is a powerful framework to help build your story. By overlaying your personal insights, you will draw your audience in, securing their engagement. By transporting them to an exciting picture of the future they will focus on the big issues and see you as a thought leader they want to follow.
Also published in The Startup on 9th March 2020
About the author: John Hall is CEO and co-founder of Duet Partners. His 30-year tech career began with major US semiconductor and software companies. He was based in Silicon Valley during the '90's. Before Duet he was CEO of a VC-backed consumer electronics company, sold in 2009 following several rounds of capital raising. In the past 10 years since starting Duet he has advised dozens of founders on the startup to scaleup journey and is a retained Board advisor to a number of UK technology companies.