The Basics of Business Storytelling: How Narrative Influences Valuation?

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This is the second post in the Basics of Business Storytelling, you can read the first post here.

The year was 2015, this company had the crème-de-la-crème board that included notable former US secretaries of state such as George Shultz and Henry Kissinger, former Secretaries of Defense James Mattis and William Perry, and ex-US Senators Bill Frist and Sam Nunn. It was touted as the “the Apple of Healthcare.”

The founder was a Stanford drop out with her venture funded by marquee investors. At its high point, valued at $ 9 billion with the founder’s net worth alone at $4.5 billion. It all came crashing by Oct 2015 when the WSJ opened the pandora’s box. The company I am talking about is Theranos, and the founder is Elizabeth Holmes.

The year is 2020, this company is a greenfield telecom startup which had managed to put established telecom operators out of business with its predatory pricing model. The promoter calls it a platform instead of a communication service provider.

With the potential to disrupt entertainment to e-commerce, investors believe this startup is all set to be the next big thing. Over the past five weeks, it has attracted investments from Facebook to PE players such as Silver Lake, General Atlantic, Vista Partners and KKR.

You might have guessed the company now – it is Jio part of the Reliance Group and the man behind it is Mukesh Ambani.

How did Elizabeth Holmes and Mukesh Ambani get their companies valued at a premium and attracted investments from the who’s who? The answer is in their narratives. They were able to tie their narrative to the numbers, i.e. their business story drove their valuation.

New York University’s Prof. Aswath Damodaran, an authority in corporate valuation says, “In a good valuation, the numbers are bound together by a coherent narrative and storytelling is kept grounded with numbers.”

When an entrepreneur is pitching for an investment, the narrative that goes behind the numbers is more important. That is what gave premium valuation and attracted investors to Theranos and Jio.

Founders of all the leading companies Amazon, Tesla or Apple, have a consistent story that aligns with their decisions.

Consistent narratives build trust and provide investor confidence. That is the reason why Amazon is valued at $ 1.23 Trillion at a forward P/E of 98.04in comparison to Walmart’s forward P/E of 25.19. The following is what Jeff Bezos said in his 1997 letter to shareholders.

“We first measure ourselves in terms of the metrics most indicative of our market leadership: customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand. We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise. Because of our emphasis on the long term, we may make decisions and weigh trade-offs differently than some companies.”

For the last 23 years, Amazon still retains this narrative. Jeff Bezos always talks about having a dominant market share in whichever segment they operate in, investing back into the business for long term growth and focussing on customer experience.

Whether you are a retail investor trying to value a company before investing in its shares or you are an investor evaluating a startup for potential investment, you must have an investment thesis behind your decision.

To make the valuation story better, Prof. Damodaran suggests a five-step process. It is about weaving numbers into narratives and having every narrative backed up by numbers.

Five-step process for weaving narratives with numbers
Source: Prof. Aswath Damodaran’s Blog

Step 1 is about the story you say about the business.

What story you tell for the business will drive the valuation. In the above reference, I consider Amazon as a retailer and compare it against Walmart. You might have a different narrative for Amazon, which is fine. Your narrative will influence your valuation.

The founder’s narrative will play a key role, based on how persuasive, consistent, and credible their story is, both public and private investors will believe or not believe in them. It will influence investment decisions.

Step 2 is about how the narrative holds good against history, common sense, and reality.

Theranos story will fail against common sense and reality. There could be disruption in technology or business model which may be against historical cases, but it still needs to pass through common sense and reality filter. Common knowledge rides on principles of economics and mathematics. Prof. Damodaran asks investors to test if the narrative is possible, plausible and probable.

When Holmes said she could do 100+ tests with two droplets of blood all at a very competitive price, she was telling a runaway story. Everyone wants to believe this type of story. Unfortunately, no one questioned the numbers behind it or use common sense to understand how blood-testing works. That is what led to massive wealth erosion for the investors in Theranos.

Step 3 is about tying narratives to different levers that drive business.

You break down the big picture narrative into individual narratives. For example, how competitive advantage in the business story gives better margins, how scale gives pricing power, how the asset-light model results in lower Capex and easy scaling, etc. This step is more about narratives than numbers.

Framework to tie narratives to different levers that drive business

Step 4 is about connecting the different levers to come up with the valuation (the end goal).

This step is more about numbers than about narratives. Those of who familiar with valuation know the DCF (Discounted Cash Flow) model where you discount the future value of cash flow to the present value and arrive at the intrinsic value of the share. Based on the intrinsic value and the current market price, you either take a call to invest or not to invest.

Step 5 is more to fine-tune than the valuation process itself.

By keeping with times, one may want to relook at some of the narratives you had built-in for the business. You can do this by tweaking the narrative to the changing nature of the business and by being open to feedback from different market players.

This is where you say, Amazon is not just retail business but also cloud service provider which has a higher growth rate and you plug those numbers. By doing that, you can also open up a range of valuation starting from how a pure-play retail player is valued to how a company that encompasses streaming services to cloud services to e-book & audiobook readers to pay wallets to the smart assistant is valued. Different segments come with different risk, growth, and profit margins.

Are you a numbers person or a narratives person? The future will belong to those who can craft narratives with numbers.

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8 Questions for Meaningful Conversations Instead of “So, What do You do?”

Questions for Meaningful Conversations Instead of "So, What do You do?"
Photo by Amy Hirschi on Unsplash

When I started my sales career in my early 20s, I was raw, and little did I know about using conversation starters that help in building a relationship. In company events or industry conferences, it usually went like this. I am Krishna, sales executive with HCL Infosystems, so what do you do? I did evolve from there and have built long-lasting relationships with narrative-based conversation starters.

I am sure, at various points in life, you must have met someone new in conferences, industry events, training programs etc. and to build rapport would have asked this standard question – “So what do you do? “

In the current context of COVID, where most of us are in some sort of lockdown, it is natural to check what the other person is doing during calls. You might as well have asked this question or ended up in the receiving end of the same question.

But do you think the question, SO WHAT DO YOU DO? made a meaningful difference to the other person?

Research suggests that it is not the best question to start a conversation if you intend to build rapport.

Mark Manson, the author of the New York Times bestselling book The Subtle Art of Not Giving a F*ck, writes, “Sometimes I ask people, How do you choose to suffer? Pleasure is an easy question. And pretty much all of us have similar answers. The more interesting question is the pain. What is the pain that you want to sustain??”

Well, not all are brave enough to ask this question to a person we have just met and build a relationship from thereon. David Burkus writes in an HBR article, “Research findings from the world of network science and psychology suggests that we tend to prefer and seek out relationships where there is more than one context for connecting with the other person. Sociologists refer to these as multiplex ties, connections where there is an overlap of roles or affiliations from a different social context.”

Here are eight questions that can be great conversation starters which can help in finding commonalities that lead to building a lasting relationship. You can learn more about storytelling powered narratives in this piece.

The first four are specific to the current context, while the rest are generic.

What have you learned from the lockdown so far?

This is as open as it can be, it can range from people sharing about what new skills they picked up to things about their relationship in the family to workplace-related dynamics etc. Your response can be about your learnings which helps the other person to know about you.

What are you looking forward to after this lockdown?

This question allows the other person to share something forward-looking (which is positive in the current context) and can have a wide variety of responses. It could be as simple as having that water-cooler conversation which has always been fun to going back to the gym to the long drive. This question can unearth some of the mutual interests.

The one thing that you are not missing because of this lockdown?

Gets people to think hard, but also helps them realize what was considered important during normal times is no longer critical. The options are endless here, be it dining out on Fridays to conducting interviews face to face to driving to work itself! Depending upon the person on the other end, you may get a range of responses that are philosophical to funny retorts.

How has this lockdown changed any of your belief systems?

This question is a twist to the earlier one but has a deeper meaning. More likely, this question will elicit serious responses as it is about belief systems. Age-old beliefs/practices are questioned due to restricted movement – how many of us imagined flight-free world even at the start of 2020? Almost all enterprise sales leaders talk about walking the halls to be closer to the customer, how that is possible in the current scenario?

What is inspiring you right now?

This question is forward-looking and can get you current context-specific responses, but also useful in normal times. It is like what is your new year resolution type question. In general, one can expect more personal reactions to this question, thereby getting to know him/her at a personal level, but work-related responses are also not uncommon.

What is your passion project/side hustle?

We are passionate about our side hustles/passion projects. But not everyone will want to share in a common forum, based on situational context people will respond in detail or keep it short. This question will be able to open up the other person, and one can also get to understand their hidden talents. I have known people who have charted new careers based on response to this question.

What are you doing that is fun?

In a way, this question is a slight twist to the passion project question. Rest assured, this question will steer the conversation away from work-related topics. It could also help spot people who consider work is no different than what they would be doing for fun. Most entrepreneurs fall into this category—a great question to find mutual interests outside of work. Many life and business partnerships have born out of this way.

What book have you recommended the most?

A personal favourite, a different spin to what is generally asked – what book are you reading now? Helps to find what has impressed them so much that they are recommending it to others repetitively, this question also will help in knowing the other person’s interest areas. One more question to find common interest outside of work and nurture a life long relationship.

Did you find your favourite question among these? What surprising insight have you uncovered by asking conversation starter questions?

With all the above questions, the aim is to ask an open-ended question that elicits non-work responses. By doing that, you are creating more opportunities to find mutual interests that are not necessarily work-related. When you connect more with personal interests than work matters, there is a higher chance of converting a stranger into a friend.

The Basics of Business Storytelling – 1 Storytelling Principles from Made to Stick

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I have been getting requests from the readers of my blog and from my network on how they can practice storytelling at work. The basics of business storytelling series will cover this aspect. This series will cover ideas from what I read, observed and learned from practice. This post is about a book that I read which is helping me in my practice.

Prof. Chip Heath and Dan Heath are the authors of the book, “Made to Stick”. In it, they explain why some ideas stick and others die. For an idea to stick, it must have certain elements which help in connecting people and to carry the message forward. The authors have studied several ideas from the field of advertising, leadership communication, social cause messaging, people & company stories before arriving at this framework.

From their studies, they propose six principles that make an idea stick.

Principle 1: Simplicity

There is a simple reason why proverbs have lasted generations across cultures. The Heaths state that, any idea needs to be stripped to its core to make it memorable and easy to pass it on. The Golden Rule is to have a one-sentence statement so profound that an individual could spend a lifetime learning to follow it.

Google’s mission statement, “Our mission is to organize the world’s information and make it universally accessible and useful.” is powerful but also simple.

And a company that is built on that mission is generating revenues upwards of $ 120 billion.

Dr Martin Luther King Jr’s speech, “I have a dream” galvanized an entire community and nation towards freedom from slavery. Imagine a speech filled with jargons, complex information, and superfluous language. It wouldn’t have got this reach.

When you have many message or ideas, use the principle of exclusion to reduce all that into one.

Principle 2: Unexpectedness

“For an idea to endure, it must generate interest and curiosity,” says the Heath brothers. But it has to be done in a balanced manner. Master communicators will expose the gaps in the audience mind and then fill those gaps with their idea.

This approach allows you to hold the audience even though they have got gaps in knowledge. It is done by tapping into their existing knowledge, then exposing the gaps by curiosity and raising interest levels, and by filling that gap with your ideas.

George Loewenstein proposed this gap theory. He says that, as we gain information, we are more and more likely to focus on what we do not know. Someone who knows capitals of 50 countries would be proud of their knowledge, but someone who knows the capitals of 170 countries will more likely want to know the capitals of the rest 20+ countries.

Principle 3: Concreteness

Life is not abstract, but more often, the language we speak is abstract, and it gets worse as we move up the ladder. Terms such as liquidity, metacognitive skills, thematic learning are a put-off when it comes to spreading a message and when you want people to act.

“A bird in the hand is worth two in the bush” is a concrete message. Ideas need to be expressed in human action and sensory information, staying clear of business-speak.

John F Kennedy’s famous moon-shot speech of 1961 can also be expressed as, “Our mission is to become the international leader in the space industry through maximum team-centred innovation and strategically targeted aerospace initiatives”. Or it can be, “Put a man on the moon and return him safely by the end of the decade.”

JFK being a visionary leader, chose the latter. The message is simple and concrete. By speaking in concrete terms, one doesn’t allow a chance for anyone to interpret it differently, the above message means the same thing to everyone, be it the NASA scientists or the US Congress representatives or to the people of the US.

Principle 4: Credibility

Why should people believe in your ideas? Should be the question one needs to answer first. Not everyone has the same level of authority in all the subjects. We associate authority to individuals based on their past actions, their experience.

Some people build credibility by showing numbers, but even numbers do not have credibility when shared by a person who does not have authority in that field. For example, while we believe a physician’s take on health disorders, we do not give the same credibility, when he talks about the fiscal deficit of the economy.

Dan and Chip say, “Sticky ideas have to carry their own credentials. We need ways to help people test our ideas for themselves – a “try before you buy” philosophy for the world of ideas.”

One way of doing this is by adding vivid details that are truthful and meaningful to humans, which symbolize and support the core idea. Including statistics that are in the context of the idea also can help build credibility.

The other famous method is the Sinatra test. If an example passes the Sinatra test, then that one example alone is enough to establish credibility. It traces its origins to Frank Sinatra’s classic “New York New York”, about the life in New York and the chorus sings, “If I can make it there, I’ll make it anywhere.” For it to be successful, one needs to find the Sinatra test relative to the idea.

Principle 5: Emotions

Why should people care about your ideas? By making them feel something. Humans are wired to feel for people, and abstractions do not help in this regard.

Research shows that people are more likely to donate to a single needy individual than to an impoverished region. That is the reason why when funding agencies reach out; they say a specific story of an orphaned kid or someone with health problems in need of money for treatment.

Same emotions do not elicit similar responses across a different set of people. Teenagers may react to one set of emotions differently than adults, so the hard part is figuring out the right feeling to harness for a specific campaign and audience.

Principle 6: Stories

And finally, stories get people to act on ideas. Hearing stories preps us to respond more quickly and effectivity to a situation that is the reason, stories are powerful.

Companies are moving from being case study centric to client story-centric; it is not just a change of title. A story walks through the situation that persisted earlier, the pain points prompting the client to look for solutions, and when the solution provider sensing the business challenges, provides a solution that promises a new normal.

Often master storytellers like Steve Jobs or Elon Musk have used this technique to position their products that promise a new normal and relieves the consumers from unpleasant experiences.

To make an idea stick, it should be a Simple, Unexpected Concrete Credentialed Emotional Story!
Now one can observe that it can also be remembered as SUCCESs.

For an idea to last, it should make the audience,

1. Pay attention

2. Understand and remember

3. Believe

4. Care

5. Be able to act

Are you preparing your next leadership communication or brand message? Read more about the strategic narrative. Read the next post in the Basics of Business Storytelling here.  

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