Funding & Exits — Chapter 4: Investors Buy Stories
For investors, most days are filled with stories. The majority of these stories fall flat or are wildly implausible. Many are interesting, but flawed. Some are interesting, but not a fit. Some are a fit, and intriguing. Some are a fit, and captivating.
But then. Once in a blue moon there’s that mesmerizing CEO who spins a special story. It’s the one that explodes in your head. The one that grips your heart. The one that seizes your gut. It’s that rarest of experiences: a spine-tingling, heart-thumping, lean-forward-in-your chair-then-jump-to-your-feet story.
That’s the one. That story will beat all other stories. It will spark the aggressive term sheet, survive the diligence process, withstand the slog through the detailed negotiation process, and will ultimately yield the cash on favorable terms. The blue moon story wins because the content is compelling and the CEO is captivating. Both substance and delivery matter. If you are the tech CEO who can weave traction and opportunity together into a story of great power, told with drama — your investor will conclude you’re a strong and effective leader. That sparks funding.
Of course, not every investment story is a blue moon story. The facts are the facts. You may be stuck at a value inflection point, without proof you can proceed past it. You may even have regressed, but despite that reality you face the need to raise money. In such situations, you must tell the best possible story that is true. This is the “blues-to-jazz” story: a story that explains how your history of poor traction (the blues) will be transformed into a future of growing opportunity (the jazz). In such a story, your capacity to marshall a cogent case for investment and deliver it authoritatively is even more important.
If your story is a “blues to jazz” story, be prepared to face some funding realities. Let’s say your company has $2M in revenues, a cash burn of $500K a month, and has achieved the Minimum Viable Traction milestone. But you’ve been stuck at that milestone through two funding events; you need to raise money but you haven’t yet demonstrated you can proceed further. Now let’s say there’s another company, Company B, that is also at $2M in revenues, and like you has a burn of $500K a month. It has also achieved the Minimum Viable Traction milestone. But Company B has jumped briskly from initial product release, to Minimum Viable Product, to Minimum Viable Repeatability, to Minimum Viable Traction.
Investors will reward Company B with a much more aggressive pre-money valuation than yours — if you can get funded at all. Your company will be penalized: the pre-money valuation might mimic the valuation a growing company would receive two value inflection points behind you on the continuum.
Investable stories combine traction with opportunity. Traction is proof of progress. Opportunity points to the company’s future profit capacity and hints at its ultimate exit value (if assumptions prove correct and you can execute at scale). The relative weighting of traction and opportunity shifts as you scale. Both are always important, but in the early stages of a company, an investor most heavily weights opportunity (the team, the product vision, the competitive advantage thesis, the market opportunity thesis, the business model and the go to market strategy) while requiring some proof of traction. By the time a company is public, the investor much more heavily weights traction, while still requiring opportunity. The public company investor brings “realistic optimism” to his investments; the realism is grounded in traction, and the optimism is grounded in opportunity.
Whether your story is a “blue moon” story or a “blues-to-jazz” story, it must meet three prerequisites:
- Plans in the domains of product, revenue engine, people, systems and cash management are fully integrated and exhibit no internal inconsistencies or discontinuities
- You can demonstrate at least some traction, and your traction links to your opportunity claims
- Every key scaling assumption is reasonable — i.e. it is consistent with the growth experiences of other successful companies featuring a similar LTV profile and serving an analogous market
Assuming all of these are true, you are ready to build your content. At every stage, the building blocks are common:
- Company summary
- The market problem and current solutions
- Size of the opportunity
- Your product or service
- Its unique, disruptive value
- Competition and competitive advantage
- Business model
- Go to market strategy
- Key value inflection milestones
- Investment ask and use of funds
These story components are important whether you are at the Minimum Viable Product step, pitching on your IPO road show, or anywhere in between. Investors want to efficiently determine whether your investment opportunity rises above available alternatives. These are the considerations they will take into account. Your job is to build a story out of these building blocks.
For each building block, identify all possible claims. For each claim, specify the facts and assumptions that support the claim. Rank the claims by business impact and defensibility. You will now have the raw material to create your pitch assets.
Pitch assets include your elevator pitch, your full spoken narrative, your executive summary, the pitch deck itself, the product demo and the Q&A talking points. The purpose of each of these is to excite, inform and engender confidence. While each pitch asset is unique, all must follow a rational sequence, balance facts and vision, provide evidence of traction, demonstrate market insight, and paint a compelling picture of opportunity.
You might have 3 minutes with an investor at a cocktail party, or you might have 40 minutes in a room full of VC partners. You might be presenting a formal pitch, or having an informal coffee. You might be sharing a product demo or answering questions. No matter the format, the essence of the story and the purpose of your pitch are consistent.
Your first job is to grab the audience’s attention with a smart turn of phrase — an opening gambit. Once you have them looking up from their cell phones, say what you do in the simplest terms. A metaphor can be helpful (such as, “we are the AirBnB of the flexible office market”). Next, point to the megatrends emerging in your industry. What is your key insight about these trends? What opening in the market do you see? Explain simply. Then define your category and demonstrate that you own it. Then state the 2–3 most important claims in your epic story. Finally, name the amount you will raise and welcome the investor’s participation.
In this section, feature the 3–4 people on your team that matter most, given your stage of funding. Just provide a high-level overview of each person in the executive summary and the pitch deck. The purpose here is to give the investor confidence your team is strong and domain relevant.
Traction is proof. It is the fastest route to investor conviction. So bring your traction story right to the front. Any investor will make inferences about the future based on what you have already achieved.
At every stage, investors weight the levers of company building differently. You need to know the weighting, so that you focus on the right types of traction at the right stage. Prior to Minimum Viable Product, product is primary. Then, product and revenue engine share center stage. As you scale, product, revenue engine, and people are most important. Eventually, it becomes more and more important to optimize systems (while continuing to progress in the other three company building domains). And of course, your funding history remains a key part of the traction story at all stages of the journey; it explains your cash in the bank, clarifies your runway, and demonstrates investor pedigree.
In an executive summary or pitch deck, make your traction and opportunity stories visual. The fewer words the better. Images and infographics are more compelling than words.
Market opportunity — the problem and solution
What is the psychological, technical, or workflow boulder that you remove? How big is that boulder? How completely do you clear it away? How dependent are you on other moving equipment, or is it just your moving equipment that does the trick? Is there an existing alternative for moving the boulder? The difference you make should be orders of magnitude better than that alternative. If your improvement isn’t 10X the current available alternatives, most investors will back away. They will conclude your advantage is insufficient to build a big company.
Defend every claim you make. The better you defend powerful claims, the more story momentum. If you solve a high-priority problem in a big market via a hard-to-replicate technical or psychological breakthrough, explain “high-priority”, explain “problem”, explain “hard-to-replicate”, and explain the “technical or psychological breakthrough” with clarity and brevity.
Size of the opportunity
Once you have proven that you solve a big, important problem in a new and compelling way, you need to prove the size of the market. For this, you need a rational definition of the target market. Once the target market is clear, determine the revenues your company would achieve if 100% of the companies or consumers in the market bought your product. That’s your Total Addressable Market, or TAM.
Many CEOs define TAM with a lavish abandonment of common sense. An English language ecommerce site selling educational toys can’t reasonably define its market as “total child spending for all parents of children from 5 to 12 worldwide”, when the viable market is just “discretionary educational toy spending from US tiger parents and homeschooler parents with children from 5 to 12.” Another TAM inflation method is to claim the revenues already generated in a market, versus the revenues that could be achieved if everyone bought your solution. For instance, if you’re selling a marketing automation solution to auto dealers, you can’t claim the entire $600B automotive market as your TAM. The fact that $600B is spent on new vehicles every year tells nothing about the size of the auto dealer marketing automation market, which might be no more than $1B.
The more defensible your calculation, the more credibility you gain.
Product or service
Now it’s time to display your product. What exactly makes it so unique and compelling? Show the key product features. Explain how they annihilate the customer’s pain point. Be succinct. Give them barely a lick of the special sauce. The investor doesn’t want or need to know the 108 ingredients that make it taste good, nor details of its manufacture.
Unique, disruptive value
Instead of rambling on about sauce manufacturing, elicit its unique and disruptive value. Why is it such a big deal? What makes it 10X better than all available alternatives? Double click into the next layer of proof points. Show the evidence. Five briefly summarized proof points are better than thirty detailed ones. Give the investor but a glimpse and make sure that glimpse is highly compelling.
Competition and competitive advantage
The purpose of this section is to answer one simple question: “Why do customers prefer your solution over others?” Accentuate your positives. Don’t dwell on your competitors’ negatives. Keep it high level, but have a feature-by-feature, competitor-by-competitor comparison chart as backup.
Now that you have confirmed you solve a big problem in a big market better than anyone on the planet, it’s time to prove you can make money. In the business model, you identify your price, your customer lifetime value and the average cost of customer acquisition. These are your unit economics.
Once again, traction proof is key. Defend your pricing and retention assumptions. How can you be sure your price point won’t erode over time? What will you do if it does? What proof do you have that your retention projections will hold?
The mission here is to prove that your company will become a profit machine.
Go to market strategy
Customer acquisition and retention costs can comprise no more than ⅓ your customer lifetime value at scale. Here you must explain how you will scale revenue growth consistent with this boundary condition, at least by the point your company has achieved the “Minimum Viable Scaling” value inflection point. How will you achieve sufficient reach at the top of the funnel? How will you deliver projected conversion rates in the mid and bottom funnel? Your revenue growth projections hinge on these assumptions; your investor will put them to the test.
If you lay out clear, evidence-driven, credible milestones in the scaling of your revenue engine, you will increase investor confidence.
Your business model and go to market plan is codified in your financial plan. As you develop your funding story, you’ll probably go through multiple iteration cycles between your product road map, your go to market plan, your financial plan and your pitch claims. This is a good thing. Not only will it improve your pitch, it will also improve your grip on the business.
The result should be a financial plan that flows seamlessly from actuals into projections, without significant month-over-month discontinuities. The unit economics should hold. The growth projections should look aggressive but viable.
Wherever possible, include all assumptions on one tab. This will help your investor easily conduct sensitivity analysis.
Of course, for later stage private companies and public companies, the financial statements and forward-looking projections will be very detailed, sophisticated, wrapped in legalese and flawlessly prepared.
Key value inflection milestones
It’s important to state to an investor what you expect to accomplish with the investor’s cash. By revealing the next milestone you expect to reach, you show an understanding of what must be true to raise the next round of funding. An investor will be reassured if he feels that you understand the progress you must make to be fundable the next time around.
Investment ask and use of funds
The final component of your story is the “ask”. Here you provide more background on the amount you seek to raise, and why. The requested level of funding should directly align with the value inflection milestone you seek to achieve, along with the financial projections.
Script Your Story
It may come as a surprise to learn that the pitch deck is not the story: the real story is you. Investors invest in people. Your pitch deck and all your supporting documents are just secondary support tools. Every investor presentation is a moment of truth for you and your company. In this moment, you will either win big, or completely lose. There is no middle ground. So it’s on you to be completely prepared.
The first preparation step is to understand your audience. Never forget that the investor will begin the meeting somewhere on the continuum from clueless to skeptical. It’s your job to their grab attention right away and never let go — not until she has responded to your call to action with an enthusiastic “yes”.
In an article published on the site of early stage venture firm First Round Capital,1 Tyler Odean, product leader for Chrome at Google, weighed in on the art of persuasion. Odean encourages presenters to focus on the “System I” brain — the fast-processing, simplistic, binary, “safe or unsafe”, “black or white” part of the brain. The “System II” brain, which is highly skeptical and will subject any logical argument to intense scrutiny, is already overworked — and a listener only wants to engage it when it really matters. If a presenter can win over the “System I” brain, the listener suspends disbelief.
It requires radical word reduction, talk-to-a-five-year-old simplicity, metaphors to increase familiarity, “pass the smell test” plausibility and a natural, sequential flow in your argument’s building blocks. It also requires that you give the listener ample space and time, pausing regularly. The System I brain doesn’t want “to be sold”.
A great story achieves the following:
- A high-impact beginning
- A clear statement of the “ask”
- A clear and relevant benefit to the audience
- A logical, snowballing flow
- Relentless impact, delivered with brevity and punch
- A concluding call to action
- Deft Q&A management, authenticating your command of the opportunity and validating your leadership skills
The high impact beginning
You have just entered the room. Around the table sit four VC partners, all looking at their iPhones. What do you do?
Introduce yourself. Walk around the table, look each person in the eye and shake hands. When Ashish responds “I’m Ashish Kapoor”, acknowledge him by name: “Nice to meet you, Ashish. I’m Joe Blow, CEO of GreatCo.” It’s surprising how often CEOs launch into an investor pitch before taking the time to establish this brief personal connection.
Once your laptop is plugged in and pitch deck is on screen, what next? Jerry Weissman, author of “Presenting to Win: The Art of Telling Your Story”, points to seven “opening gambits” you can choose from to deliver the high-impact beginning.2
- The rhetorical question
- A striking declarative statement or statistic
- The retrospective prospective
- The anecdote gambit — a human interest story
- An influencer quotation related to your company
- An aphorism (a familiar saying that everyone will recognize)
- An analogy (comparison of two dissimilar factors)
In a speech to Khosla Ventures captured on video and visible online, Weissman shared the opening gambit Dan Warmenhoven, Network Appliance’s CEO, presented during that company’s IPO roadshow. Here it is, according to Weissman:
“Good afternoon, ladies and gentlemen. Welcome to the Network Appliance IPO roadshow. What’s in a name? What’s an appliance? A toaster is an appliance. A toaster does one thing and one thing well. It toasts bread. Managing data on networks is complex. It’s currently handled by appliances that do many things, and none of them very well. Our company, Network Appliance, has developed a dedicated device that does one thing and one thing well — and we call that device a file server. We’re confident that when you consider the growing volume and complexity of data on networks, you will recognize we are in a large, fast growing market. We invite you to participate in this growth opportunity.”3
Weissman describes Warmenhoven’s opening summary as a “triple opening gambit”. In his first three sentences after introducing himself, he quoted an aphorism (“what’s in a name”), posed a rhetorical question (“what’s an appliance”) and provided an analogy (“a toaster is an appliance”). By doing so, he grabbed the audience’s attention. He presented a concise, compelling, easy to understand elevator pitch. He even made sure to include the “ask” right away (“we invite you to participate in this growth opportunity”).
Make sure your opening comments meet this high bar. Distill the essence of your entire company down to a few punchy opening lines. It will be hard, but doing so will sharpen your thinking and prepare you to tell the story with precision and impact.
A clear statement of the “ask”
What do you want? Say it. “We seek $10M in funding for our Series A. I invite you to be our lead investor in this round.” Or “We will price our initial public offering of shares at $14.37. We invite you to participate in this growth opportunity.”
A clear and relevant benefit to the audience
Each statement must be worded so that the investor benefit is clear and self-evident. Waste no words that do otherwise.
A logical, snowballing flow
You walk into the room. You ask names, shake hands and say hello. You plug in your laptop; the pitch deck pops onto the screen. You barely look at it. Your focus is on the audience. You present your company summary. There is instant understanding. It feels unique. It feels game changing. It’s in a big market. The audience leans forward.
This is your high-impact beginning. If done well, you’ll scan the room to find everyone staring back, fully engaged.
You highlight team and traction; great progress has been made in a short time. It’s a harbinger of good things to come. You move on to the market problem and the deficiency of current solutions. Then you show your product. It’s just a glimpse — barely enough for them to comprehend its transformative potential. Then you linger on the huge problem it solves, emphasizing its unique, disruptive value. You pause and look around. You want to confirm that everyone has processed the significance of what you have just said. You can see in their eyes: they’re captivated. The general partner leans forward and interjects a question. All those hours of Q&A preparation kick in as you nail the answer.
With gathering momentum, you march on. You are in command of your facts as you describe the competitive ecosystem. You show why your competitive advantage is sustainable, revealing the most significant points of product advantage. Every claim has a fact or assumption behind it. Every assumption is logical and reasonable.
On to the business model. You start by demonstrating customer ROI. This sets up your defense of your pricing scheme, which delivers the ROI while delivering your company compelling unit economics. You show proof you’ve already sold customers at this price, and show strong customer retention data. The resulting customer LTV seems reasonable. You then show current and planned cost of customer acquisition. The path from current to planned unit economics is reasonable and logical.
Next up is your go to market strategy. Traction proof lends credibility to your plans. The growth steps are well staged. Your customer acquisition spending is in line with LTV boundaries. Every key assumption is clear and reasonable.
These projections flow right into your financial plan.You highlight your cash position quarter by quarter and note when the next funding event must occur. You assure the investor that it is your intention to achieve the next value inflection point in company traction well in advance of this next funding event. Your audience seems reassured that you are already planning the next investment.
Finally, you explain the size of this round, and how it will be used. You wrap up with a simple statement: “I welcome you to participate in this exciting opportunity.” As you open it up to questions, you are peppered with them. You parry and strike, wielding claims, facts and assumptions like a matador.
It started with a handshake. Then you seized the advantage with a forceful opening statement. From that point on, your story unfolded in a logical, snowballing flow. As your final handshakes are greeted with smiles and you walk out the door, it occurs to you that the snowball has become an avalanche.
In every initial investor meeting, remember to keep vision lock on the goal. It is simply this: a follow-up meeting. You will never complete due diligence and close funding in the hour you have to present, so don’t try. Deliver every claim with punch, and keep things moving. Cadence matters. The interested investor will follow up later to ask a whole host of detailed questions — none of which need to be dealt with now.
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1. Tyler Odean, “Master the Art of Influence — Persuasion as a Skill and a Habit”, First Round Review, http://firstround.com/review/master-the-art-of-influence-persuasion-as-a-skill-and-habit/.
2. Jerry Weissman, Presenting to Win: The Art of Telling Your Story (Pearson Education, 2006).
3. Jerry Weissman, “Power Presentations”, Khosla Ventures CEO Summit — Marketing, 2011, https://www.khoslaventures.com/presentation-workshop-jerry-weissman.