Writing a winning investment story

by Vladimir Nesterenko

Presented at the Kyiv School of Economics February 7, 2013

Starting point

• Investment story – an investment rationale, a part of proposal made by an entrepreneur or its designee (e.g., investment bank) to potential investors. The ‘investment story’ is supposed (and expected) to answer the question ‘WHY TO INVEST’.

• For this presentation, we’ll assume the investment story is prepared for Private Equity investors.

• Private Equity investors – funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. [1,2]

The fund’s funnel

Leads

Prospects

Opportunities

Deals

You are here

You want to be here

Proposal

Formal criteria met

Business criteria met

Deal

Chance of success

Leads

Prospects

Opportunities

Deals

You are here

You want to be here

99%

50%

10%

1%

Probability of getting to each category*

* Numbers are indicative, for illustration only

Who decides?

They do?

Not (yet)

Help him

a) Match formal criteria

Investment criteria

• Company size • KYC (oligarchs, …) • Industry • Ticket size (e.g. >$10mn) • Geography • Investment pattern (e.g.,

growth, value) • Maturity • Years profitable (e.g. >3)

• Solid business opportunity • Leading player in its market • High quality management • Manageable risks • Clear exit strategy

Formal Business

if you match these, make it clear from the very start

b) Stand out

( he wants to stand out too )

FAIL

10 shortcuts to writing a story that

stands out

1. Brevity, the soul of wit

Magic tool: DELETE

The ad captured a week ago from the Google search screen

2. Cut to the chase

Magic tool: “So what?”

• “The Company is launching two-three new products a year.” – So what?

• -> “Launching two-three new products a year, unlike its peers, the Company secures its market share.”

• “We’ll push the share of export sales to 40% over the next five years.” – So what?

• -> “By increasing the share of exports to 40% in five years, we’ll double our gross margin.”

3. Be specific

Magic tool: W-Questions

• “By increasing the share of exports to 40%, we’ll double our gross margin.”

• W-Questions: When? What [is the current share]? How? Where [exports will go]? Why [that will prop up margins]? Who? (addressed)

• -> “By entering India market, we’ll increase the share of exports from the last years’ 10% to 40% in 2017 and double our gross margin.” (yet the “Why” question remains…)

Vagueness 3D Re

fere

nce

inde

x OMITTED

“MA PROGRAM IN ECONOMICS

IN KYIV”

“MA PROGRAM” “MA IN KYIV”

“EDUCATION” BEING SPECIFIC: “Kyiv School of Economics’ MA program in Business Economics will hold an admission test in Kyiv on July 4-6, 2013.”

BEING NOT SPECIFIC: Dimension: Reference index “KSE will hold an admission test in Kyiv on July 4-6, 2013.” Dimension: Modality “Kyiv School of Economics may hold an admission test in Kyiv on July 4-6, 2013.” Dimension: Quantor “Kyiv School of Economics usually holds an admission test in Kyiv in July.”

EGGHEADS ONLY

READING

[3,4]

Associations: Pain & Gain

• Hard to construct • May be not understood • May be incorrectly

understood, even to the opposite

For advanced writers only.

• Convincing • Short

Pain Gain

“Children’s boots are on sale. Unworn.”

[5]

“The last man on Earth sat alone in a room. There was a knock on the door…”

[6]

Associations: How they work

• Psychologists call it “transderivational search”

• Wiki: “… Unlike usual searches, which look for literal (i.e. exact, logical, or regular expression) matches, a transderivational search is a search for a possible meaning or possible match as part of communication, and without which an incoming communication cannot be made any sense of whatsoever. It is thus an integral part of processing language, and of attaching meaning to communication. [7]

• Our brains do it all the time • Problem: you can’t get into a reader’s mind

• It’s an ART to make reader attach correct meaning

EGGHEADS ONLY

READING

3. Advocacy, not description

Magic tool: Backward induction

• “By entering India market, we’ll increase the share of exports from the current 10% to 40% in 2017 and double our gross margin.”

• Problem: your reader seeks effects first, then causes • Solution: start from effects

• “We’ll double our gross margin by 2017 by entering

the Indian market and increasing the share of exports from the current 10% to 40%.”

4. Keep it real

5. Address obvious weaknesses

6. Don’t preach to the converted

7. Take responsibility

Magic tool: No passive voice

• “The share of exports will be increased from the current 10% to 40% in 2017.”

• Problem: Sounds like one avoids responsibility • Solution: Show it’s not the case -- say this is YOU who

will make it happen.

• -> “The management is implementing its action plan to increase the share of exports from the current 10% to 40% in 2017.”

8. Avoid buzzwords

An advise from Dave

“Clear your vocabularies of any superlatives, clichés, or any over-used expressions that can’t be backed up, he adds. Avoid using terms like ‘the best’, ‘groundbreaking,’ ‘cutting-edge’, and ‘world class.’ Investors see those words day in and day out and eventually they lose meaning.” Dave Lavinsky, president of Growthink, a Los Angeles-based company that helps entrepreneurs develop business plans and raise capital. [8]

9. Test it

Tests

• Summarize the story in 2-3 sentences and see whether the summary reflects the logic of the entire story. (Normally it’s not the case)

• Ask your colleague (better a junior one) to read the summary and see how long does it takes to read it. If more than 2 min – there is something wrong

• Get feedback: show your story to colleagues, room mates, taxi driver, etc. If your grandma gets it – be sure your story falls into the winning 1%

10. Design matters

Formatting tips

• Bullet points • Key numbers • Rule of thirds [9] • Respect white space • No double accent • Three colors max • BE CONSISTENT

Roundup

1. Brevity 2. Cut to the chase 3. Advocacy, not description 4. Be specific 5. Keep it real 6. Address obvious weaknesses 7. Don’t preach to the converted 8. Take responsibility 9. Avoid buzzwords 10. Design matters

• DELETE • “So what?” • W-Questions • Backward induction • No passive voice

Rules: Magic tools:

Exercise

Here is one of the bullet points from an Investment Summary – use ‘magic tools’ to make it more specific and responsible:

• The Company strategy assumes expanding its

operations to Kazakhstan, to tap its growing retail market.

Cheat sheet

1. Brevity 2. Cut to the chase 3. Advocacy, not description 4. Be specific 5. Keep it real 6. Address obvious weaknesses 7. Don’t preach to the converted 8. Take responsibility 9. Avoid buzzwords 10. Design matters

• DELETE • ‘So what?’ • W-Questions • Backward induction • No passive voice

Rules: Magic tools:

Exercise (solution)

• DELETE: “The Company strategy assumes expanding its operations to Kazakhstan, to tap its growing retail market.” -> “The Company will tap the Kazakhstan’s growing retail market.”

• ‘So what’: -> “The Company will tap the Kazakhstan’s growing retail market to increase it’s sales in CIS.”

• W-Qns: -> “In 2014, the Company will tap the Kazakhstan’s $20bn retail market to increase it’s sales in CIS by 10% by 2017.”

• Backward induction: “The Company targets increasing its sales in CIS by 10% by 2017 on entering Kazakhstan’s $20bn retail market.”

• No passive voice: OK

References

1. http://www.investopedia.com/terms/p/privateequity.asp#axzz2K8rrYzic 2. http://en.wikipedia.org/wiki/List_of_private_equity_firms 3. http://www.center-nlp.ru/library/s55/nlp/meta_model.html 4. http://en.wikipedia.org/wiki/Methods_of_neuro-linguistic_programming 5. http://en.wikipedia.org/wiki/Ernest_Hemingway 6. http://en.wikipedia.org/wiki/Knock_(short_story) 7. http://en.wikipedia.org/wiki/Transderivational_search 8. http://www.inc.com/guides/2010/09/how-to-write-an-executive-

summary.html 9. http://en.wikipedia.org/wiki/Rule_of_thirds

About myself • The founder of Symmetric – the firm that will make strategy consulting available

for mid-sized companies

• 10 years in Finance (corporate and investment banking) x industry experience – Local banks, Citibank – Concorde Capital – BG Capital – Geo Alliance Group (EastOne /Arawak Energy) – Tech startups

• Two MS’s, in Economics and Finance, from EERC (currently Kyiv School of

Economics) and Kyiv National University of Economics. Stanford’s Tech Entrepreneurship course (via Coursera)

• Get connected: ua.linkedin.com/in/vladimirnesterenko

The presentation will be available on

slideshare.net/nesterenkov

and finmodels.com.ua