第3章 Great Business Ideas Do Not Get Funded
Intuit, a $20 billion global high-tech company born and built in the Silicon Valley, was never able to raise a single dollar of venture capital funding, despite seven years of pitching investors. Hotmail, founded by Sabeer Bhatia, and ultimately bought by Microsoft for $450 million, was not able to raise funding, despite desperate attempts to gain interest from angel groups, seed investors, and venture capital firms, until they had already gained traction with hundreds of thousands of users. On the other side of the coin, five out of ten companies that receive venture capital investment fail within three years. Clearly, something else is at work here, beyond the intrinsic merit of the business idea. If great business ideas do not get funded, what is the answer? You can see the outline of this answer in that familiar quote from the famous British economist John Maynard Keynes, that "business decisions … can only be taken as a result of animal spirits." What is it that triggers our animal spirits, what moves human emotions? Is it facts? The English novelist E. M. Forster makes a useful observation about the relative value of facts. Here, he says, are the facts: The queen died, and the king died. And here, he says, is the story: The queen died, and the king died of a broken heart. Which phrase touched you just now? Which way of telling gave you a rush of emotion? Humans are motivated, moved, by stories. And notice that the second phrase doesn't ignore or exclude the facts, it incorporates the facts into a story. And there is your answer: Great business stories get funded.
It is likely that, as a businessperson, you do not consider yourself a naturally talented storyteller. It may be the farthest thing from your ambitions or perhaps even a skill you hold in low esteem. But you will not succeed in raising capital and building your business until you become an effective storyteller about your particular idea. This matters. Here is the good news: the craft of composing a great business story can easily be learned, even by those who do not possess the gift of gab. On closer examination you will find that great business stories have a precise set of unvarying elements in their makeup, and a precise order in which these elements appear. If you intend to transform your dream into a reality, you will need to master this composition, which is revealed to you, step by step, in the following pages.
What constitutes a great business story, one that will get funded? Let's dive into the topic. All great business stories are alike in three essential features: (1) they have a compelling story line or plot; (2) the primary actors in that story line are brought to life-made real-through factual substantiation; and (3) the story is memorable.
Let's examine these three features one by one.
There are many effective story-line formats you could choose from, compelling plots that have moved audiences throughout the ages: the hero's exultant return home after conquering some adversity in a faraway land; star-crossed lovers whose blighted future overwhelms their passionate romance; cases of mistaken identity that drive many comedic story structures.
For a business story, far and away the most appropriate structure to adopt is the familiar one of bad guy, good guy, and happy ending. Think of Lex Luthor, Superman, and Superman winning Lois's heart by courageously foiling Luthor's dastardly deeds. Think of PG&E, suspected of poisoning the groundwater near its operations, and Erin Brockovich, in the movie of the same name, tirelessly chipping away at the corners of the terrible truth until she can prove it, and the happy ending when hundreds of affected victims receive millions in compensation as settlement for their claims. Think of Darth Vader in Star Wars, and Luke Skywalker triumphing over him and his evil empire, with the happy ending of a universe at peace.
In a business setting, the bad guy does not need to be a human. It could be hunger, or ignorance, or illness, or simple waste. The same can be said for the good guy. It could be food, romance, entertainment, health, or more time and energy made available. When the good guy prevails over the bad guy, that's what leads us to our happy ending.
Let's apply this elemental formula to some successful modern companies.
Who was the bad guy in the Google business story? Lack of access to information: "I know that the answers to my questions are out there somewhere, but I can't find them, and so I remain ignorant." Who was the good guy? Google's search algorithms and technology that collect and make available unprecedented amounts of information to unprecedented numbers of people. And what was the happy ending? Millions of people, performing billions of Google searches and, in the process, participating in the creation of one of the most profitable companies in the history of commerce.
How about online dating innovations like Match.com or eHarmony? Who was the bad guy? Loneliness. Who was the good guy? The technology that enabled millions of the romantically inclined to pair up easily with other like-minded individuals. And the happy ending? Romance, or at least more companionship, and in the process, extremely large, profitable, and fast-growing business models created.
Sounds simplistic, and it is. The essential power of this story line is precisely its simplicity. The existence of entire industries can be usefully examined through this prism. Insurance? The bad guy is catastrophic loss. Banking? The good guy is that your money is safe. Medicine? The happy ending is that you live a fuller life, or at least a life full enough to be able to afford the medical costs associated with a full life. Okay, the analogy only goes so far, but you get the idea. Good guy fights bad guy, and good guy wins, creating a happy ending. In forcing your own business idea to conform to this ancient story form, you strip away all but the essential drivers of your business. You can see clearly what you are building. You can also see whether it is worth building or not. Who is the bad guy your business seeks to conquer? Is it inefficiency, is it some life-threatening health issue, is it a lousy consumer experience in some daily activity? You cannot raise money for a business innovation that does not address a definable bad guy, a distinct problem. And until you can articulate clearly a precise problem your business solves, no one will ever be interested in the solution. A natural outcome of this principle is that, if you cannot clearly articulate a persuasive problem that your business solves, you will not be able to raise capital. It's the very first step in your journey.
If you have, in fact, arrived at a compelling problem that needs solving, then who is your good guy? How does your good guy beat the bad guy, how does your solution solve that particular problem? And, finally, what is the happy ending, particularly a happy financial ending for investors, which will result from your good guy's victory in the marketplace?
I encourage entrepreneurs to think long and hard about these essential story lines in their business idea, and to do so before they invest any time and energy in any other business-building activity. If you don't get this part right, almost nothing else you can do will make any difference to your success. If you do get this right, if you have a compelling bad guy, good guy, and happy ending, you own an inherently exciting business story, and you hold in your hands the most powerful tools of the business-building trade.
We are going to turn next to the second feature of great business stories-substantiating your story line-but I want to pause here to illustrate just how powerful these initial story elements are all by themselves. Here is the illustration: An investor who is captivated by your story will often go out and find the research and the numbers that support the urge to invest in you and your idea. This happens time and time again. In the world of social psychology, this is known as selective exposure. After making a decision, we tend to seek out information that supports our decision. We will also avoid information that contrasts with our decision. But the decision is sometimes already made, on the spot, triggered by the investor's animal spirits, which are moved by your adopting an ancient, powerful story line.
Let's examine essential feature 2: bringing the essential story lines in your story to life through factual substantiation.
Great business stories are never works of pure fiction. Investors may be amused or entertained by fiction, but they will not invest in it. If your business story is exciting, if you have an exciting bad guy, and good guy, and happy ending, then the next order of story-building is to substantiate those story lines with illustrations and factual research.
Imagine illustrating the bad guy for an online dating business.
The entrepreneur might put the potential investor in the shoes of someone who is lonely and trying to meet someone to form a relationship. The scenario would show what it is like to go to a public place, such as a bar, spend money on expensive drinks, and watch as the clock nears last call. The example would take the investor through this lonely night, possibly during the holidays, with the intention of meeting a quality person but continually coming up short.
The story would illustrate the pain of asking someone out on a date and being rejected. Because the process of meeting someone at a bar is so hit-or-miss, the story would describe the investor walking home alone in the cold. By clearly describing the pain of the situation, you make it real. You can detail the cost of the nice clothes your character buys to wear to upscale nightclubs. You strive to bring the pain to a personal level for the investor. Or put your investor in the shoes of someone who spends $100 on weekly dance lessons in the hope of meeting someone on the dance floor. If the investor can feel your character's plight, he or she will welcome a solution that can ease the pain.
Research and think through the size of the problem: How many lonely souls are trapped in fruitless searches for some romantic companionship? And what is the cost of those searches? Document your research, and name your research sources.
The villain, in your business story, must spring to life, or the investor will not have any interest in the hero. You make your bad guy convincing, you give them flesh and blood, through a balanced mixture of anecdote and researched facts.
After you exemplify the problem, you need to bring the same level of illumination to your good guy. Why will your solution work? Exactly how can a caped, curly-haired man who can fly save the planet?
What are the key drivers of your solution? Breakthrough technology, scale, some innovative service level or marketing innovation? And how do these drivers directly address the problem? The kind of business you are building will dictate the kind of drivers you identify.
For example, one successful business I am familiar with is centered around launderettes. The business partners did a national roll-up of launderettes and recognized two key drivers that would make their solution profitable. First, they discovered that all launderettes used the same supplies, which, individually, they had to purchase at retail prices. However, if you rolled up hundreds of launderettes to purchase supplies, the savings would fall through to the bottom line. So, the first driver was a restructuring of purchasing. The second driver was the recognition that all launderettes lost a significant number of quarters, either through theft or careless handling. Therefore, developing a way of tracking every quarter that was spent at a launderette could be very profitable. The second driver was efficiency. The owner of the business once told me that they were doing about $200 million annually, all in quarters!
There is one other critical substantiation to your good guy, and that is the team of talents you have assembled to execute the business plan. If your key driver is technology innovation, who on your team will be responsible for that innovation, and what is their background or suitability for that role? If the key driver is some marketing analytics, same question. In many respects, you as entrepreneur and the team you assemble compose the good guy in your story.
Most entrepreneurs do not have the resources to hire employees before their funding goes through. If that is the case for you, it is important to point out to your potential investors that you are talking with first-rate potential team members. Explain that you are talking with two or three team members who are qualified to be crucial to your business's success and that you are confident you will get one of them as soon as you have funding.
When explaining exactly how your good guys can win the day, aim to quantify your solution-just as you did with your problem. For instance, getting back to the example of early online dating sites, you might pull from surveys that demonstrate how many single people there are. You could examine how many hours people spend searching for the perfect outfit or working out in order to attract others, or the astounding number of wasted cocktails.
It is extremely helpful if you can give your investor at least a glimpse of Superman flying. Early client interest or proof of early revenue can provide terrific support. Without either, you can still use anecdotal evidence to give a hint of how you will succeed. For example, with the first company I founded, GetSmart.com, my initial investor had seen the prototype of my business, and flying across country on his way out to meet me, he had to stop in three different airports. At each airport he went up to strangers, described my business, and asked them if they would use it. It turned out that every person he approached said "Yes" and asked when the service would be available. Any evidence you have that supports your business is better than saying, "I don't have any clients and I have not made any money." Imagine if you were an entrepreneur of one of the first online dating sites. What kind of anecdotal evidence that supports your business idea could you provide to investors?
And now let's turn to the happy ending to your great business story. For the investor, the only happy ending is that if they invest in your good guy to defeat the bad guy, the business will grow and produce solid profits.
This part of your story will clearly need to be substantiated as well. How does your business make money? Is it monthly subscription, or item purchasing, or dramatically reducing a current run rate of needless expenses? Document your research on this revenue model and provide fact-checked examples. What is the size of your market? When you answer this question, think about how authentic your reasons are for framing that answer. For instance, Tom Proulx, cofounder of Intuit, once told me that in its early stages, his hiring staff asked potential employees how many dentists there were in the United States. The interviewer would ask them to talk out loud to see how they were thinking through and arriving at their answers. Sometimes, the employee candidates would start by recognizing that they had a dentist. Next they would recall that there were about 300 million people in the United States. Once in a while they then arrived to the conclusion that logically there must be about 300 million dentists in the country because everyone needed a dentist. Needless to say, this kind of fuzzy logic never got anybody hired at Intuit.
In describing the happy ending, you will need a realistic assumption of the proportion of the market you believe your business could capture. Again, what important information leads you to this figure? How long will it take you to capture this targeted figure? And what will be the expenses to get there?
Of course, you will need to identify your profit margins. How are you figuring such margins? Are these margins similar to what your competitors are receiving? If they are radically better, what is your radical innovation that will transform your particular industry?
Your potential investors will likely question your budget assumptions. Investors are pessimists, which they became, over time, by backing optimists. By analyzing the information that propels your assumptions, you will be better able to justify to investors why your assumptions are realistic.
Finally your story line of good guy beats bad guy and realizes a happy ending will not be credible in a business setting unless you also address the risks that your good guy faces, one of which is certain to be identifiable competitors. Many first-time entrepreneurs shy away from mentioning the risks in their business, thinking that mentioning these risks will only serve to spook the investor and be counterproductive. This is a misreading of the investor psyche. All investors are nervous, especially when they are in decision-making mode about a potential investment. When you capably point out the risks of your business building, you give these fears a name, which allows you to also talk about how you have structured the business in order to mitigate that risk. Perhaps the risk is that your business will acquire fewer than the targeted number of customers, or at a price-point lower than you have forecast. This allows you to point out that you have answered this risk by, say, locating a professional outside marketing team that has already proven successful in a similar business. Or perhaps the risk is that your innovative technology will not perform as advertised, and you explain that, to mitigate this risk, you have partnered with beta-testing customers who are actively reporting back to you on any potential bugs before the product is released.
You know what worries you most about your own business model, and you have surely taken steps to solve for those worries. Lay it all out for the investor. Far from spooking them, it makes you and your potential happy ending all the more credible.
One important category of risk is the likely competitors to your good guy. There are competitors in any worthwhile business undertaking. If you can find no competitors whatsoever, please stop and rethink your entire business model. It is likely that you are pursuing a mirage. When you identify competitors, mention them as a legitimate risk, and point out your own best reasoning about why you, and not they, are positioned to be more successful.
You have fashioned a compelling plot of a believable bad guy, good guy, and happy ending, and you have made your actors spring to life by factual comprehensive substantiation. Now let's turn, at last, to the third attribute of all great business stories: they are memorable. The secret to making your business story memorable is happily contained in a single word: brevity.
My father was an evangelist who spoke all over the world. He heard a quote somewhere that struck a chord with him, and he repeated it often: "If you want me to give a five-minute speech, I'll need a month to prepare. If you want me to give a twenty-minute speech, I'll need two weeks. If you want me to speak for an hour, I am ready right now." This quote speaks to the price of brevity: it is expensive. If you are going to be persuasive in a couple of minutes, you have to think hard.
"Never was so much owed by so many to so few." Winston Churchill spoke these words about the heroics of the British Royal Air Force during World War II. Innumerable book-length treatments of those same heroics have been penned and published, but his is the quote that is remembered. Why? Because it sums it all up in exactly eleven words. Jack Ramsey was recently asked to define the Twitter business model. He did not launch into a long dissertation on business model dynamics and marketplace forces. He answered: "Twitter moves ideas around." If I asked you to tell me about your business, how long would it take you? Ten minutes? I am not interested. Investors do not have ten minutes. You will never attract investor capital if it takes you ten minutes to tell someone your ideas. If you are like most start-up companies, you have a big vision about how your product or service will impact your community or your world. You have a fuzzy idea about where you would like to be in five years, but no idea how to tell your business's story in a compelling way now-in one bullet of condensed drama. You know that your business has the ability to make big money, but in order to convince someone else, you feel that you need to tell them everything so they'll get it.
For most of the business conversations you are going to have as you go about raising capital, and there will be hundreds of them, you will have about 120 seconds to capture your listener's interest. After you pass 120 seconds, you will notice your investor's eyes glazing over, as he begins to think of the groceries he needs to buy, or the golf course she will be playing next weekend. You and your story are already forgotten.
Boil it down: Who is your bad guy, who is your good guy, what is the happy ending? The next secret reveals the formula for how you can reduce your great business story to two minutes. The more concentrated your message, the more likely you are to stand out from the crowd.
CONCLUSION
Great business stories get funded, and they share three essential elements: (1) a compelling plot; (2) factual substantiation of the principal actors in that plot; and (3) brevity. If you can master these three elements, you can raise capital. The secrets outlined in successive secrets in this book will shorten the time frame it will take you to raise that capital, prevent the terms of your capital raising from destroying your dream, and help you discover how to find an investor who will be a great long-term partner. But this initial three-part secret all by itself, when mastered correctly, will provide you the breakthrough to raise capital.
In doing research for this book, I have come to realize that the importance of effective storytelling, far from being some trick of persuasion, is hard-wired into the human psyche. It is inescapable. I ran across this quote by Ursula K. Le Guin, which sums it up nicely:
"The story-from Rumpelstiltskin to War and Peace-is one of the basic tools invented by the human mind for the purpose of understanding. There have been great societies that did not use the wheel, but there have been no societies that did not tell stories."
NUMBERS MYTH
For this secret, the biggest myth is that numbers are enough to attract investors. People have somehow been led to believe that investing and investment decisions are all a matter of arithmetic. Facts, numbers alone, do not persuade. In order to persuade an investor, entrepreneurs have to be able to tell their stories. The following quote appears in the book Animal Instincts by George A. Akerlof and Robert J. Shiller:
The human mind is built to think in terms of narratives, of sequences of events with an internal logic and dynamic that appear as a unified whole. In turn, much of human motivation comes from living through a story of our lives, a story that we tell ourselves and that creates a framework for motivation. Life could be just "one damn thing after another" if it weren't for such stories. The same is true for confidence in a nation, a company, or an institution. Great leaders are first and foremost creators of stories.