Why investors back a founder's story over the business

HostIt always feels a bit strange when you hear about a new company getting millions of dollars before they even have a product to sell. It's like they're selling a dream, and for some reason, the people with the money are happy to buy it. Why does a good story seem to matter more than the actual math of the business?

GuestWell, if you look at a brand new company, there really is no math yet. There are no sales, no real customers, and no history to look back on. All the person with the money has to look at is the human being standing in front of them and the world that person says they can build. In those early days, the story isn't just a wrapper for the business. The story is the business. Think about it this way. If I show you a sheet of numbers for a shop that doesn't exist yet, I'm just guessing. You know I'm guessing, and I know I'm guessing. But if I tell you a story about why the world is changing and how I'm going to lead that change, I'm giving you a map. People who put money into startups aren't looking for a report on what happened yesterday. They want to know if this person is the type of leader who can make a weird, unlikely future actually happen.

HostBut that sounds very risky. I mean, shouldn't they care more about the plumbing? Like, how the thing actually works? If I'm putting my own money down, I want to see the engine, not just a drawing of a fast car.

GuestYou would think so, but the engine is going to break. It's almost a rule. In the first few years of a new company, the tech will fail, the market will shift, and the first plan will probably end up in the trash. If you back the engine, you lose your money when it stalls. But if you back the person with the big vision, you're betting that when the engine breaks, that person is going to find a way to build a better one. They're buying the ability to solve problems that haven't even happened yet. A story tells you how a person thinks and how they handle the unknown. Numbers can only tell you about a plan that's probably going to change anyway.

HostI still struggle with the idea that the math doesn't matter. If the costs are twice as high as the price, no amount of storytelling makes that a good deal. Aren't these people just being lazy if they ignore the books and listen to a tall tale?

GuestIt's not about being lazy, it's about what the math is actually telling you at such an early stage. The books are mostly a work of fiction in the beginning. They're based on guesses about how much things will cost and how many people will buy. If a person with money spends all their time arguing about a number on page ten of a plan, they're missing the point. The point is whether this founder can see a gap in the world and has the drive to fill it. The math is just a way to show you have thought about the steps. But the story is what gets you through the three years of failing before you finally hit it big. It acts as the fuel for the whole team when things get hard.

HostSo the pitch is basically a test run for their hiring skills? Like, if you can convince me to give you money, you can convince a worker to join you?

GuestExactly. That's a huge part of it. A founder who can tell a great story to a person with money is a founder who can tell a great story to future workers and customers. If you can’t convince a person to give you a check, how are you going to convince a top engineer to quit their high-paying job at a big firm to come work in your garage? You're looking for proof that this person can move people. They need to be able to recruit a team, win over the press, and sell to people who have never heard of them. The story is the main tool they use to do all of that. If the story is weak, the company will never grow, no matter how good the tech is.

HostWait, this feels like it opens the door for a lot of fast-talkers who don't actually know what they're doing. We have seen big blow-ups where the story was great but the whole thing was a lie. Does this focus on the story just reward people who are good at acting?

GuestIt absolutely does. That's the dark side of this whole system. There's a very thin line between a person with a vision and a con artist. The problem is, at the very start, they look identical. Both are telling you about a world that's not here yet. Both are asking you to ignore the current facts and believe in what could be. This is why you see so many smart people lose money on big lies. They get swept up in the narrative. But even with that risk, many still prefer the big, risky story over the small, safe business. A small business that works is just a job. A big story that works is a win that changes the whole world.

HostSo it's less about the facts and more about how the story makes the person with the money feel?

GuestOur brains are actually wired to trust stories more than raw data. When we hear facts, we look for flaws. We try to find the catch. But when we hear a good story, we tend to put our guard down. We start to see ourselves in the world the speaker is describing. We want the story to be true because it feels good to think about that future. Even the most hard-headed person with a checkbook still ends up betting on the person who makes them feel like the future is finally arriving.

HostThe numbers on the page might show the path, but the person at the front of the room is the only one who can make you believe the trip is worth taking.

GuestThe big dream is the only thing that keeps the shop running when the math says it should've closed a long time ago.