The importance of storytelling when it comes to pitching
End of last year, I ran a session for founders on raising early-stage investment. At the beginning of the session, I asked the audience to walk me through an outline of the stages involved when engaging an investor. One of the responses I received was, ‘you pitch the business…then if there is interest you present and discuss the financial model.’ I then asked a second question. When do you use ‘storytelling’? Several responses came in via messaging, ‘the pitch’. Which is correct, but it is not the only stage where it is used.
I was looking for someone to say that ‘storytelling’ is also used to convey the financial model. It is not something you simply ‘present’ it to an investor, but it is something you build a ‘story’ around, in order to convince them to make an investment in your business.
The financial model in of itself is an opportunity to present your case as to how the business will scale and develop into a profitable venture; where the interplay between revenue, cost and investment is made clear to an audience of investors. In addition to that and perhaps most important, is the ability to convey and convince investors of the potential upside when it comes to exiting the business in 5 to 7 years’ time.
This is where storytelling takes front stage and pulls all the parts together; to convince an investor of your vision and to gain their support throughout your journey.
When giving over your story, there are two important aspects connected to your model that you need to nail, namely your valuation rationale and exit strategy.
1) Communicating your valuation rationale
There are numerous established models you can use for working out your valuation which is a topic for a separate article. There is not a right way or a wrong way of going about it. However, it is worth noting that some traditional valuation models will not work for newly launched startups because they require trading history. Some can be adapted with varying success but you may find multiples analysis valuation method to be more useful when you are starting from scratch.
With that said, whatever model you choose will in most cases be challenged by a potential investor who may come back to you with a different valuation based on an entirely different model.
In some cases, we have seen startups that back up their valuation by researching valuations of similar or related startups. Again, this can sometimes fly back in the face of the founder where the investor is only benchmarking the startup to other ventures in their portfolio or their own held view on the market which again may differ to your own viewpoint.
We generally advise founders not to set in stone their valuation. To get the right investor on-board will sometimes require flexibility particularly when it comes to valuation.
2) Communicating your exit strategy
To do this successfully, you need to think about the potential exit for an investor and how this belongs to the whole story when they come to evaluate your startup for investment.
From the investor perspective. He or she will estimate the likely exit size for a company of your type and within the industry in which it plays. They will then work out how much equity is needed in order to reach their return-on-investment goal, relative to the amount of money that they would need to put into the company.
Therefore, putting thought into your end game is a must and the thought process should result in a few exit scenarios instead of one (which might be shot down from the word go). However, we take a view that unless asked for it, do not present it in your pitch deck or financial model. Keep it in your ‘back pocket’ for when you need it.
A good starting point would be to build a story around your base case and growth projections. Where will you be in 5 years? Which parts of your business will be most attractive to potential acquirers? Will your acquirer be a financial buyer or a strategic buyer? A financial acquirer will primarily focus on companies with good financial performance. Whereas a strategic buyer will be interested to acquire a company’s customer base and data in order to compete in a particular market or to complement their own offering. Whether you envisage both types or one type of acquirer. You can then move on to research who those acquirers may be.
In summary, storytelling encompasses not just the business pitch but also the financial model where the model, milestones, exit strategy and valuation come together to form a cohesive and convincing case for an investor to buy into your startup.
One final caveat. Beyond your pitch and financial model. Do not forget about your own ‘story’ about how you started, how you came to the vision of the company and what skills you and your team bring to the table. This ‘story’ is especially important when raising your first round of funding, where the story about ‘you’ and your team is equally as important as the business and financial model.