“After nourishment, shelter and companionship, stories are the things we need most in the world.” — Sir Philip Pullman
“The future belongs to a very different kind of person with a very different kind of mind — creators and empathizers, pattern recognizers and meaning makers.” — Daniel Pink, from A Whole New Mind
A theme permeating a number of my recent business conversations is storytelling. Specifically, how to tell the “financial story” of a business, clearly and succinctly.
“How Do I Explain My Business?”
The question I heard was, “How do I explain my business to…?” Sometimes the target audience is new potential investors. At other times, the story has to be told in an “All Hands” with the existing employee base. Typically new potential senior leadership hires will ask to hear the story.
My recent conversations on this topic ranged across business models — marketplaces, B2B SaaS and DTC consumer goods. My initial thought was that each story would need to be quite different.
Upon reflection, I realized that all financial stories ought to contain the same core elements.
Undoubtedly, each storyteller will make their own modifications. You must know your audience and context — some situations will merit longer discussions and others demand a shorter version.
The Impetus for Creating New Businesses
Businesses are started when people see a set of “potential customers” whose needs are not being met at all or not met well currently. The current solution is painful — the pain can be both emotional and monetary (actual out-of-pocket costs, time and/or opportunity cost.) The innovators see a “new” and “better” way to solve the problem. The belief is that the market for this new solution is large (or at least large enough to create a profitable business.)
The “New Way” vs. the “Old Way”
Start the financial story with contrasting your “new way” vs. the “old way.” Use a visual of some kind to show the differences. Be clear which parts of the value chain you are re-inventing.
In the rest of your conversation you need to convince the audience of two things: (1) The new way is working; and, (2) Continued improvements and investments you are making in the business (products, people and processes) will mean even greater success in the future.
Part I: Historical Financial and Operating Data
There are five (5) key elements to talk about using financial and operating data.
Growth: Typically shown in the form of revenue increasing over time. Alternative metrics might be visitors, customers or marketplace volume.
Retention: Typically shown relating to revenue. It is critical to be able to retain the vast majority of customers acquired (especially if it costs money to acquire them.) The ideal is to grow customer spend over time, such that the spend in Year 2 exceeds Year 1.
Gross Margin: This metric highlights the cost to serve customers. SaaS businesses are attractive because the marginal cost to serve a customer is much lower than businesses with a hardware or services component. If the gross margin is below benchmark for your industry, it is important to be able to tell a story on how it will improve over time.
Customer Acquisition Cost: Typically shown in the form of a payback period (months for subscription and # of purchases for e-commerce / marketplaces.) The key is to be able to show that customers can be acquired at an attractive cost.
Burn Efficiency: Most rapidly growing businesses are using cash. Cash burn is acceptable if it is efficient. The typical metric here is the ratio of incremental revenue to incremental cash burn.
When showing these metrics the best case is made when the company can show consistent performance (i.e. a trendline). Ideally the direction of these metrics is positive, meaning that the first derivative (or rate of change) is increasing.
Part II: The Future will be Even Better
This part requires the greatest storytelling gift. It requires painting a vibrant image of a future which has not yet come true. The goal is to convince the audience that you are likely to bring that future into existence.
From a financial storytelling standpoint, I suggest focusing on two messages.
Message One: Why Now?
Timing is really important. There are two ways to answer the “why now?” question. Sometimes both explanations are required.
The first approach generally relies on one of two changes in the world, as explained well by Lenny Rachitsky in this Twitter thread. The first change is that a new technology (mobile phones, cheaper computing power) or seminal event (regulatory change) has enabled a whole new set of products/services. The second change is that people’s beliefs have evolved significantly. Some important thing historically taken for granted and typically with a significant emotional component, is being questioned. The belief change enables behavior change. In both cases make it clear that your business is “rowing with the current.”
The second approach is that events in the recent past have conspired against runaway success, and that headwinds are now in the past. Foremost amongst these today would be the impact of COVID-19 pandemic and lockdowns. And it could also the limited availability of capital to make necessary investments in the leadership team or marketing.
Message Two: Where We Will Be Investing? (or Use of Funds)
Be as specific as possible on the key investments (whether in new hires, systems, processes, products etc.) which will enable the future vision to be achieved. Tie these investments back to the “why now” part. Subtly point out their absence in the past and how now is the right time (i.e. what you have learned) that makes these new investments sensible, timely and likely to have a high return on investment.
Be Succinct. And, Prepared to Dive Deeper.
Ensure you have a short version of this entire story — 8 to 10 slides max. Be prepared to dive deeper with certain audiences (current and new investors in particular.) In the deeper dive you should be prepared to answer nuanced questions, particularly as regards the historical and financial data. These nuances might include different (albeit related) metrics to those presented or analyzing the data in other ways (by customer segments or product families.)
Prior to presenting the financial story, screen for people (whether investors or new senior leaders) who believe in the need to change the “old way” and share many of your views on “why now.” A enticing story, told well, will provide context coupled with the right mixture of facts so that the vision seem inevitable.