resources/evaluators/rubric_business_narrative_builder.json
{
"criteria": [
{
"name": "Narrative Clarity",
"1": "No coherent narrative, just financial projections without a story, or narrative is vague and generic (e.g., 'company will grow')",
"3": "Narrative tells a directional story with some specificity, addresses market and strategy, but may lack detail on competitive dynamics or timeline",
"5": "Narrative is specific, compelling, and internally consistent, clearly describing how the business evolves over time, what market it serves, how it makes money, and what could go wrong"
},
{
"name": "Life Cycle Classification",
"1": "No life cycle stage identified, or classification contradicts observable evidence (e.g., calling a declining company 'young growth')",
"3": "Life cycle stage identified with some supporting evidence, but rationale may be thin or stage transition signals not discussed",
"5": "Life cycle stage clearly identified with multiple supporting characteristics, transition signals discussed, confidence level and alternative stage considered"
},
{
"name": "TAM Sizing Rigor",
"1": "No TAM estimate provided, or TAM is a single unsourced number with no methodology",
"3": "TAM estimated using one approach (top-down or bottom-up) with sources cited, but no cross-check or the estimate is not clearly connected to company revenue projections",
"5": "TAM estimated using both top-down and bottom-up approaches, sources cited, estimates cross-checked and reconciled, clear connection from TAM to company market share to revenue growth"
},
{
"name": "Narrative-to-Numbers Linkage",
"1": "Numbers appear without connection to the narrative, or narrative and numbers tell different stories",
"3": "Most value drivers are connected to narrative elements, but some numbers lack clear story-based rationale",
"5": "Every value driver traces directly to a specific narrative element, and every narrative claim has a corresponding number, with the mapping explicitly documented"
},
{
"name": "Growth Path Plausibility",
"1": "Revenue growth implies impossible market share (>50%), or growth rate sustained at >30% for >15 years with no justification",
"3": "Revenue growth path is within plausible range, bounded by TAM, but may not account for competitive response or market saturation",
"5": "Revenue growth path is clearly bounded by TAM, accounts for competition and market dynamics, supported by historical analogues, and includes a realistic market share trajectory"
},
{
"name": "Margin Benchmarking",
"1": "Target operating margin stated without any industry reference, or margin assumption exceeds all known peers without explanation",
"3": "Target margin benchmarked against industry median or select peers, but rationale for where in the range the company lands may be incomplete",
"5": "Target margin benchmarked against industry median and quartiles, with specific rationale for the chosen target tied to competitive advantages, cost structure, or pricing power"
},
{
"name": "Risk and Failure Assessment",
"1": "No discussion of risk or failure probability, even for young or distressed companies",
"3": "Risk factors mentioned and failure probability stated for relevant companies, but basis may be generic (e.g., 'startups have high failure rates') rather than company-specific",
"5": "Risk assessment is company-specific with failure probability grounded in data (cash burn rate, capital available, industry base rates, Altman Z-score), distress value estimated, and risk reflected in cost of capital"
},
{
"name": "Alternative Narratives",
"1": "Only one narrative presented with no acknowledgment of uncertainty or alternative outcomes",
"3": "At least one alternative narrative mentioned with directional impact on value drivers, but may lack full driver-level detail",
"5": "Multiple alternative narratives developed with complete value driver mappings, specific triggers identified for each, and impact on valuation quantified or at least directionally characterized"
}
],
"guidance_by_type": {
"Young Growth Company": {
"target_score": 4.0,
"key_requirements": [
"Narrative must address path to profitability, not just revenue growth",
"TAM sizing is critical because it defines the ceiling for revenue projections",
"Target operating margin should come from mature industry peers, not company's own history (margins are likely negative or meaningless)",
"Failure probability should be explicitly stated (10-30% range typical) with basis in cash burn rate and capital available",
"At least two narratives (e.g., 'mass market leader' vs 'niche premium player') to bracket the range of outcomes",
"Sales-to-capital ratio should be estimated from peers since the company may not have stable invested capital base"
],
"common_pitfalls": [
"Extrapolating current explosive growth rates for 15+ years",
"Setting failure probability to 0% for a company that is burning cash",
"Using the company's current (negative) margins as a baseline rather than industry targets",
"Defining TAM so broadly that any revenue projection looks small as a percentage"
]
},
"Mature Growth Company": {
"target_score": 4.0,
"key_requirements": [
"Narrative should focus on where growth comes from next (adjacent markets, geography, new products)",
"Operating margin should be compared to current margin and industry benchmarks, with trajectory explained",
"Reinvestment quality matters: ROC vs WACC should be assessed to determine if growth creates value",
"Competitive advantage period (length of high growth) should be estimated based on advantage durability",
"Stable growth transition should be realistic (not a sudden cliff from 15% to 3%)"
],
"common_pitfalls": [
"Assuming current growth rate persists without identifying specific drivers",
"Missing margin compression from intensifying competition",
"Ignoring the capital required to fund growth in new markets"
]
},
"Mature Stable Company": {
"target_score": 3.8,
"key_requirements": [
"Narrative should focus on competitive moat durability and disruption risk",
"Revenue growth should converge to risk-free rate or GDP growth",
"Operating margin stability should be assessed (is the current margin sustainable?)",
"Capital allocation narrative matters: how is excess cash flow being deployed?",
"Terminal value will be the dominant portion of firm value -- inputs must be well-justified"
],
"common_pitfalls": [
"Overvaluing stability and ignoring secular decline risk",
"Setting terminal growth rate above risk-free rate",
"Not accounting for potential disruption from technology or new entrants"
]
},
"Decline or Turnaround Company": {
"target_score": 4.2,
"key_requirements": [
"Narrative must clearly address whether this is managed decline or turnaround, with evidence for the chosen path",
"Revenue trajectory should reflect realistic decline rate, not anchored on historical peaks",
"If turnaround narrative: identify specific management actions, timeline, and evidence of execution",
"Failure or liquidation scenario should be developed as a full alternative narrative",
"Margins may need to be modeled as contracting, not stable"
],
"common_pitfalls": [
"Anchoring on historical peak revenue and assuming reversion",
"Turnaround narrative based on hope rather than evidence",
"Ignoring distress costs (customer flight, employee attrition, credit tightening)"
]
}
},
"common_failure_modes": [
{
"failure": "Disconnected narrative and numbers",
"symptom": "Numbers were set by extrapolation or benchmarks without a story explaining them, or the story implies one trajectory while the numbers imply another",
"detection": "For each value driver, ask 'What part of the narrative justifies this number?' If no answer, they are disconnected.",
"fix": "Rebuild by starting with the narrative, then deriving each number from the story. If the narrative says 'niche player' but revenue implies 25% market share, reconcile."
},
{
"failure": "TAM not connected to revenue path",
"symptom": "TAM is stated but revenue growth does not reference it, or implied market share trajectory is not calculated",
"detection": "Compute implied market share at year 5 and year 10; if not calculated, TAM and revenue are disconnected.",
"fix": "Build a year-by-year market share trajectory from current share to target share, bounded by TAM."
},
{
"failure": "Missing failure probability for young firms",
"symptom": "Company is pre-profit or burning cash but failure probability is not stated or is set to 0%",
"detection": "Check if life cycle stage is Start-up, Young Growth, or Decline, and whether failure probability appears in the driver table.",
"fix": "Estimate failure probability using cash burn rate (months of cash remaining), industry base rates, and qualitative assessment. A 0% failure probability requires explicit justification."
},
{
"failure": "Single narrative without alternatives",
"symptom": "Only one story presented, creating false precision in the valuation",
"detection": "Count the number of distinct narratives in the output.",
"fix": "Develop at least one alternative narrative (different strategy, different market outcome, different management quality) and show how it changes value drivers."
},
{
"failure": "Margin target without industry benchmark",
"symptom": "Target operating margin stated as a number without reference to what mature peers achieve",
"detection": "Check whether industry median and quartile margins are cited alongside the target.",
"fix": "Look up operating margins for 10-20 mature companies in the same industry. Report median and 75th percentile. Explain where the target falls and why."
},
{
"failure": "Growth rate exceeds TAM constraint",
"symptom": "Revenue projection at maturity implies market share above 30-40% in a competitive market",
"detection": "Compute target revenue / TAM. If result exceeds 0.30-0.40 in a competitive market, the growth rate is too aggressive.",
"fix": "Either reduce the growth rate, extend the time horizon, or provide a specific explanation for why high market share is achievable (dominant network effects, winner-take-most dynamics, regulatory barriers)."
},
{
"failure": "Stable growth rate exceeds economic growth",
"symptom": "Terminal growth rate set above risk-free rate or nominal GDP growth (typically 2-4%)",
"detection": "Check whether stable growth rate is above the risk-free rate in the analysis currency.",
"fix": "Cap stable growth at the risk-free rate or nominal GDP growth for the relevant economy. No single company can grow faster than the economy indefinitely."
},
{
"failure": "Life cycle misclassification",
"symptom": "Company placed in wrong stage, leading to inappropriate narrative structure and driver selection",
"detection": "Cross-check the classified stage against the 6-stage characteristics table. If fewer than 3 of 6 characteristics match, reconsider.",
"fix": "Re-evaluate using the Life Cycle Classification Checklist. If the company straddles two stages, note both and explain which you are weighting and why."
}
]
}
resources/methodology.md
# Business Narrative Builder Methodology
Deep reference for the 6-stage corporate life cycle model, narrative-to-numbers framework, narrative plausibility testing, competitive advantage assessment, and TAM sizing methodology.
## Table of Contents
- [6-Stage Corporate Life Cycle Model](#6-stage-corporate-life-cycle-model)
- [Narrative-to-Numbers Framework](#narrative-to-numbers-framework)
- [Narrative Plausibility Testing](#narrative-plausibility-testing)
- [Competitive Advantage Assessment](#competitive-advantage-assessment)
- [TAM Sizing Methodology](#tam-sizing-methodology)
- [Industry Margin Benchmarks](#industry-margin-benchmarks)
- [Common Narrative Failures](#common-narrative-failures)
---
## 6-Stage Corporate Life Cycle Model
Based on Damodaran's corporate life cycle framework. Each stage has distinct characteristics that shape the narrative and value drivers.
### Stage 1: Start-up ("The Lightbulb Moment")
| Characteristic | Description |
|---------------|-------------|
| Revenue | Minimal or zero; may be pre-revenue |
| Earnings | Deep losses; no operating income |
| Funding | Founders, angels, seed/Series A |
| Competition | Market may not exist yet |
| Key uncertainty | Does the idea have potential? |
| Risk type | Company-specific; idea and execution risk |
| Typical duration | 1-3 years |
**Narrative implications**: Story is about the idea and the founding team. Numbers are largely speculative. TAM sizing is critical because it defines the ceiling. Failure probability is high (50-80% for most start-ups). Valuation is driven by optionality and vision.
### Stage 2: Young Growth ("From Idea to Business")
| Characteristic | Description |
|---------------|-------------|
| Revenue | Growing rapidly (>30% per year) |
| Earnings | Negative or barely positive |
| Funding | Venture capital, early public markets |
| Competition | Emerging; market structure forming |
| Key uncertainty | Is there a viable business model? |
| Risk type | Company-specific shifting toward market risk |
| Typical duration | 3-7 years |
**Narrative implications**: Story is about business model validation and path to profitability. Target operating margin comes from mature industry peers (not the company's own history). Sales-to-capital ratio is critical for estimating reinvestment needs. Failure probability is meaningful (10-30%). Revenue growth is the dominant driver.
### Stage 3: High Growth ("The Bar Mitzvah")
| Characteristic | Description |
|---------------|-------------|
| Revenue | Growing at 15-30% per year |
| Earnings | Turning positive; margins expanding |
| Funding | Mix of internal cash flow and external capital |
| Competition | Multiple players; market structure solidifying |
| Key uncertainty | Will the business generate profits at scale? |
| Risk type | Mix of company-specific and macro |
| Typical duration | 5-10 years |
**Narrative implications**: Story shifts from "can it work?" to "how big can it get?" Operating margins should be converging toward industry norms. Reinvestment rate is still high but declining. Competitive advantage period (length of high growth) becomes a key narrative element.
### Stage 4: Mature Growth ("The Scaling Up Test")
| Characteristic | Description |
|---------------|-------------|
| Revenue | Growing at 5-15% per year |
| Earnings | Positive and growing |
| Funding | Primarily internal cash flow |
| Competition | Established market with clear leaders |
| Key uncertainty | Can the business be scaled further? |
| Risk type | Predominantly macro/market risk |
| Typical duration | 5-15 years |
**Narrative implications**: Story focuses on reinvestment quality and adjacent market expansion. Return on capital vs cost of capital determines whether growth creates value. Competitive advantages are durable but not permanent. Failure probability is low (<5%).
### Stage 5: Mature Stable ("The Midlife Crisis")
| Characteristic | Description |
|---------------|-------------|
| Revenue | Growing near GDP (0-5%) |
| Earnings | High and stable |
| Funding | Excess cash flow; returning capital |
| Competition | Oligopoly or stable competitive landscape |
| Key uncertainty | Can the business be defended? |
| Risk type | Macro risk; disruption risk |
| Typical duration | 10-30+ years |
**Narrative implications**: Story is about competitive moat durability and capital allocation. Revenue growth converges to risk-free rate or GDP growth. Operating margin is at or near long-term target. Focus shifts from growth investment to capital return (dividends, buybacks). The key narrative risk is disruption from new entrants or technology shifts.
### Stage 6: Decline ("The End Game")
| Characteristic | Description |
|---------------|-------------|
| Revenue | Declining |
| Earnings | Falling; margins contracting |
| Funding | Divesting assets; managing cash |
| Competition | Market shrinking or company losing share |
| Key uncertainty | Will management face reality? |
| Risk type | Company-specific; management and strategic risk |
| Typical duration | Varies; can be extended through managed decline |
**Narrative implications**: Story depends on whether management accepts reality or fights it. Two sub-narratives: (a) managed decline -- shrink gracefully, maximize cash extraction, return capital; (b) turnaround -- new management, strategic pivot, narrative reset. Both are valid; the key is evidence for which is more plausible.
### Stage Transition Signals
| Transition | Signals to Watch |
|-----------|-----------------|
| Start-up to Young Growth | First meaningful revenue; product-market fit indicators |
| Young Growth to High Growth | Operating income turns positive; unit economics proven |
| High Growth to Mature Growth | Revenue growth decelerates below 15%; market share stabilizes |
| Mature Growth to Mature Stable | Revenue growth falls below 5%; excess cash flow begins |
| Mature Stable to Decline | Revenue begins contracting; market share erodes; disruption emerges |
---
## Narrative-to-Numbers Framework
Damodaran's 5-step process for converting a business story into valuation inputs.
### Step 1: Develop a narrative for the business
Tell the story of how the business evolves over time. A good narrative addresses:
- **What market does the company operate in?** (current and potential)
- **How big can the company get?** (revenue trajectory bounded by TAM)
- **What competitive advantages does it have?** (and how long do they last?)
- **How will the company make money?** (margin trajectory and business model)
- **What can go wrong?** (risk factors and failure scenarios)
The narrative should be specific to the company, not generic. "Company X will grow revenue" is not a narrative. "Company X will expand from domestic e-commerce into international markets, leveraging its logistics infrastructure to achieve a 15% operating margin as it scales to $50B in revenue over the next decade" is a narrative.
### Step 2: Test the narrative for plausibility
Apply the three-tier plausibility test (see [Narrative Plausibility Testing](#narrative-plausibility-testing) below):
- **Possible**: Could this happen? (Is it physically and economically possible?)
- **Plausible**: Is it reasonable? (Does evidence support it?)
- **Probable**: Is it likely? (Is it the most likely outcome among alternatives?)
### Step 3: Convert the narrative into value drivers
Map each narrative element to a specific valuation input:
| Narrative Element | Value Driver | How to Quantify |
|-------------------|-------------|-----------------|
| "How big can it get?" | Revenue growth rate | TAM x target share, compute CAGR from current to target |
| "How will it make money?" | Target operating margin | Benchmark against mature industry peers (median and quartiles) |
| "How much reinvestment?" | Sales-to-capital ratio | Revenue / Invested Capital; industry benchmarks |
| "What can go wrong?" | Cost of capital | WACC from cost-of-capital-toolkit; higher for riskier narratives |
| "Could it fail entirely?" | Failure probability | Cash burn analysis, industry failure rates, Altman Z-score |
Every number should be backed by a portion of the story, and every part of the story should have a place in the numbers.
### Step 4: Connect drivers to a valuation
Feed the value drivers into a discounted cash flow model:
```
Expected FCFF = Revenue x Operating Margin x (1 - Tax Rate) - Reinvestment
Value = Sum of PV(FCFF) over high-growth period + PV(Terminal Value)
```
This step is handled by the `dcf-valuation-engine` skill. The narrative builder's job is to produce the inputs; the DCF skill computes the output.
### Step 5: Keep the feedback loop open
Listen to people who know the business and use their input to refine the narrative:
- Industry experts may challenge TAM assumptions
- Competitors' results provide margin benchmarks
- Macroeconomic shifts may alter the growth trajectory
- Management actions may confirm or invalidate the narrative
Work out the effects of alternative narratives on valuation. The gap between narratives represents uncertainty in the estimate.
---
## Narrative Plausibility Testing
A framework for disciplining narratives so they produce defensible valuations.
### Three Tiers of Plausibility
**Tier 1 -- Possible**: Could this happen?
- The narrative does not violate physical laws, market size constraints, or basic economic logic
- Revenue projections do not exceed TAM
- Margin assumptions are within the range observed in any industry
- Growth rates are achievable (have been achieved by some company in some market)
- Test: "Can I point to at least one historical example of something similar?"
**Tier 2 -- Plausible**: Is it reasonable given the evidence?
- The narrative is consistent with observable facts about the company and industry
- Revenue growth is supported by customer data, market trends, or management track record
- Margin trajectory matches the competitive dynamics of the industry
- The company has the resources (capital, talent, technology) to execute
- Test: "Would a knowledgeable industry participant find this credible?"
**Tier 3 -- Probable**: Is this the most likely outcome?
- The narrative is the best single prediction among alternatives
- It accounts for the most likely competitive responses
- It reflects realistic management execution (not best-case)
- Base rates for similar companies support the assumptions
- Test: "If I had to bet, would I bet on this narrative over alternatives?"
### Plausibility Red Flags
- Revenue projection implies market share above 30-40% in a fragmented, competitive market
- Operating margin target exceeds the industry leader by more than 5 percentage points without clear structural explanation
- Growth rate sustained at >20% for more than 10 years (very few companies achieve this)
- Failure probability set to 0% for any company not yet profitable
- No competitive response assumed (the company grows unopposed)
- "Everything goes right" narrative with no acknowledgment of risks
### Narrative Scoring Matrix
| Dimension | Weak (1) | Adequate (3) | Strong (5) |
|-----------|----------|-------------|------------|
| Specificity | Generic ("will grow") | Directional ("will grow 15-20%") | Precise with logic ("will grow 18% via international expansion, adding $2B in 3 years") |
| Evidence base | Assertion only | Some data cited | Multiple data points, industry comparisons, historical analogues |
| Internal consistency | Drivers contradict each other | Mostly consistent | All drivers reinforce the same story |
| Testability | Cannot be proven wrong | Partially testable | Clear milestones and metrics that confirm or refute |
| Alternatives acknowledged | Single narrative only | Bear/bull mentioned | Full alternative narratives with driver implications |
---
## Competitive Advantage Assessment
Competitive advantages determine the length of the high-growth period and the sustainability of above-market returns.
### Types of Competitive Advantage
| Advantage | Description | Durability | Examples |
|-----------|-------------|------------|----------|
| Brand | Customer recognition, loyalty, pricing power | Moderate to high (10-20 years) | Apple, Nike, Coca-Cola |
| Network effects | Value increases with user count | High (15-25 years if dominant) | Visa, Meta, Uber |
| Switching costs | Cost to customers of changing providers | Moderate to high (10-20 years) | SAP, Oracle, Bloomberg |
| Cost advantage | Structural cost leadership | Moderate (5-15 years; can be replicated) | Walmart, Costco, TSMC |
| Intellectual property | Patents, proprietary technology | Varies (patent life 15-20 years; trade secrets longer) | Pharmaceutical firms, Qualcomm |
| Regulatory barriers | Licenses, permits, legal protections | High while regulation persists | Utilities, banks, telecom |
| Scale economies | Cost advantages from size | Moderate (5-15 years) | Amazon logistics, Google infrastructure |
### Estimating the Competitive Advantage Period
The competitive advantage period (CAP) is the number of years during which the company earns returns above its cost of capital. It determines the length of the high-growth phase in the DCF.
**Framework for estimation**:
1. Identify the primary advantage (from the table above)
2. Assess its durability based on:
- How difficult is it to replicate? (years and capital required)
- Is the advantage strengthening or weakening? (network effects compound; patents expire)
- What are the most credible competitive threats?
3. Set the CAP in years:
- Weak/no advantage: 0-3 years
- Moderate advantage: 5-10 years
- Strong advantage: 10-15 years
- Exceptional advantage (dominant network effects, regulatory protection): 15-25 years
---
## TAM Sizing Methodology
### Addressable vs. Obtainable
| Level | Definition | How to Estimate |
|-------|-----------|-----------------|
| TAM (Total Addressable Market) | Total revenue opportunity if the company had 100% share | Industry research, census data, global market reports |
| SAM (Serviceable Addressable Market) | Portion the company can realistically serve (geography, segment) | Filter TAM by geography, customer type, product fit |
| SOM (Serviceable Obtainable Market) | Portion the company can realistically capture | SAM x realistic market share (based on competition, execution) |
### Top-Down Methodology
1. Start with the broadest relevant market size (global industry revenue, total spending in category)
2. Apply filters to narrow to the addressable segment:
- Geographic filter (which countries/regions can the company serve?)
- Segment filter (which customer types are addressed?)
- Product filter (what portion of the market does the product address?)
3. The result is TAM
**Common sources for market sizes**: Industry reports (Gartner, McKinsey, IBISWorld), government statistics, public company filings, trade associations.
### Bottom-Up Methodology
1. Count the number of potential customers or units
2. Estimate the revenue per customer per year (from pricing and usage data)
3. Multiply: TAM = potential customers x revenue per customer
**When bottom-up is better**: When the company is creating a new category (no industry report exists) or when granular customer data is available.
### Cross-Checking TAM Estimates
- Compare TAM to public company revenues in the space (TAM should be larger than the largest player's revenue)
- Compare to GDP or consumer spending in the category (TAM should not exceed total spending)
- Compare top-down and bottom-up estimates (within 3x is reasonable agreement)
- Check growth rate: if TAM is growing faster than GDP for extended periods, confirm the structural drivers
### TAM Pitfalls
- **TAM inflation**: Defining the market too broadly (e.g., "the global software market" when the product serves a niche)
- **Static TAM**: Assuming the market does not grow or shrink over the projection period
- **Ignoring substitutes**: Not accounting for adjacent products or services that compete for the same budget
- **100% share fantasy**: Assuming the company can capture more than 30-40% of a competitive market
---
## Industry Margin Benchmarks
Use these ranges as reference points for target operating margin. The company's narrative should explain where it will land within the industry range and why.
| Industry | Median Operating Margin | 75th Percentile | Notes |
|----------|----------------------|-----------------|-------|
| Software (SaaS) | 15-20% | 25-35% | High margins at scale; R&D is major cost |
| Semiconductors | 20-25% | 30-40% | Cyclical; design vs. fabrication matters |
| Pharmaceuticals | 20-25% | 30-40% | Patent-protected products drive high margins |
| Consumer electronics | 5-10% | 12-18% | Scale and brand matter; Apple is outlier |
| Auto manufacturing | 5-8% | 10-12% | Capital-intensive; Tesla targets top quartile |
| Retail (general) | 3-6% | 8-12% | Low margin, high volume; varies by format |
| Airlines | 5-10% | 12-15% | Cyclical; fuel and labor costs dominate |
| Banks / Financial services | 25-35% | 40-50% | Operating margin on net interest income |
| Telecom | 15-25% | 28-35% | Infrastructure-heavy; regulated |
| E-commerce | 2-5% | 8-15% | Low margin; logistics and fulfillment costs |
These are approximate ranges from Damodaran's industry datasets. Margins vary by geography, business model, and competitive position. Use the relevant peer set for the specific company.
---
## Common Narrative Failures
### Narrative Failure 1: The Disconnected Story
**Symptom**: The story sounds compelling but the numbers do not follow from it. Example: "Company X has amazing technology" but the revenue growth rate is set at 8% without explanation.
**Fix**: For each number in the value driver table, write one sentence explaining how it connects to the narrative. If you cannot write the sentence, the number is not linked.
### Narrative Failure 2: The Numbers-Only Valuation
**Symptom**: Historical financial data extrapolated forward without a story. Revenue grows at the trailing 3-year CAGR; margin stays at current level; no narrative for why.
**Fix**: Start with the story first. What will the company look like in 10 years? Then derive the numbers from that vision.
### Narrative Failure 3: The "Everything Goes Right" Story
**Symptom**: Only one narrative presented and it assumes optimal execution, no competitive response, and favorable market conditions.
**Fix**: Develop at least one alternative narrative (bear case or different strategic path). Identify what signals would cause you to shift from the primary to the alternative.
### Narrative Failure 4: The Impossible Narrative
**Symptom**: The implied numbers violate basic constraints. Market share exceeds 50%. Margins double the industry leader. Growth rate of 40% sustained for 20 years.
**Fix**: Apply the plausibility test. Check every driver against TAM, industry benchmarks, and historical precedent.
### Narrative Failure 5: The Stale Narrative
**Symptom**: The narrative was written once and never updated despite new evidence (earnings reports, competitive moves, industry shifts).
**Fix**: Treat the narrative as a living document. Revisit after every major piece of new information and assess whether the story still holds.
resources/template.md
# Business Narrative Builder Templates
Templates for company context gathering, life cycle classification, TAM sizing, narrative construction, and value driver mapping.
## Table of Contents
- [Company Context Questionnaire](#company-context-questionnaire)
- [Life Cycle Classification Checklist](#life-cycle-classification-checklist)
- [TAM Sizing Template](#tam-sizing-template)
- [Narrative Document Template](#narrative-document-template)
- [Value Driver Mapping Table](#value-driver-mapping-table)
- [Alternative Narrative Template](#alternative-narrative-template)
---
## Company Context Questionnaire
Gather this information before constructing a narrative:
### Company Profile
- **Company name**:
- **Industry / sector**:
- **Founded / age**:
- **Public or private**:
- **Headquarters / geography**:
### Current Financials
- **Revenue (trailing 12 months)**:
- **Revenue growth rate (1-year, 3-year)**:
- **Operating income / EBIT**:
- **Operating margin**:
- **Net income**:
- **Invested capital (debt + equity - cash)**:
- **Cash on hand**:
- **Total debt**:
### Business Description
- **Products/services** (what does the company sell?):
- **Revenue model** (subscription, transactional, advertising, licensing):
- **Key customers/segments**:
- **Geographic revenue breakdown** (by region or country):
### Competitive Landscape
- **Primary competitors** (3-5):
- **Market position** (leader, challenger, niche):
- **Competitive advantages** (brand, network effects, IP, cost structure, regulatory):
- **Barriers to entry** (capital, regulation, technology, scale):
### Management and Strategy
- **CEO tenure and track record**:
- **Stated strategy / vision**:
- **Recent major decisions** (acquisitions, divestitures, pivots):
- **Capital allocation priorities** (growth investment, dividends, buybacks, debt reduction):
### Risk Profile
- **Key risks** (competitive, regulatory, technological, financial):
- **Cash burn rate** (if unprofitable):
- **Months of cash remaining** (if applicable):
- **Debt maturity profile**:
---
## Life Cycle Classification Checklist
Use this checklist to classify the company into one of the 6 stages. Check the characteristics that apply, then select the stage with the most matching items.
### Stage 1: Start-up
- [ ] Revenue is minimal or zero
- [ ] Deep operating losses
- [ ] Product still in development or early market testing
- [ ] Funded primarily by founders, angels, or early-stage VC
- [ ] No meaningful competition yet (market may not exist)
- [ ] Key question: Does the idea have potential?
### Stage 2: Young Growth
- [ ] Revenue growing rapidly (>30% per year)
- [ ] Operating income is negative or barely positive
- [ ] Business model being validated and refined
- [ ] Funded by venture capital, early public markets, or private equity
- [ ] Competition emerging but market is still forming
- [ ] Key question: Is there a viable business model to commercialize?
### Stage 3: High Growth
- [ ] Revenue growing at 15-30% per year
- [ ] Operating income turning positive or becoming meaningful
- [ ] Business model proven; focus is on scaling
- [ ] Generating some internal cash flow, supplemented by external capital
- [ ] Multiple competitors in the space
- [ ] Key question: Will the business generate profits at scale?
### Stage 4: Mature Growth
- [ ] Revenue growing at 5-15% per year
- [ ] Positive and growing operating income
- [ ] Cash flows fund most reinvestment needs
- [ ] Looking to expand into adjacent markets or geographies
- [ ] Competition is established with clear market structure
- [ ] Key question: Can the business continue to scale profitably?
### Stage 5: Mature Stable
- [ ] Revenue growth near GDP (0-5%)
- [ ] High and stable operating margins
- [ ] Strong free cash flow generation
- [ ] Returning cash to shareholders (dividends, buybacks)
- [ ] Defending market position against disruptors
- [ ] Key question: Can the business be defended?
### Stage 6: Decline
- [ ] Revenue declining
- [ ] Operating margins under pressure
- [ ] Market shrinking or being disrupted
- [ ] Considering asset sales, restructuring, or strategic alternatives
- [ ] Management facing existential strategic choices
- [ ] Key question: Will management face reality?
**Selected stage**: ____________
**Confidence**: High / Medium / Low
**Rationale**: (explain why this stage was chosen; note any characteristics that point to an adjacent stage)
---
## TAM Sizing Template
### Top-Down Approach
Start with the broadest relevant market and filter to the addressable segment.
```
Total market (global or regional): $________
x Relevant segment filter 1 (________): x ____%
x Relevant segment filter 2 (________): x ____%
x Geographic filter (if applicable): x ____%
= Total Addressable Market (TAM): $________
x Realistic penetration rate (5-year): x ____%
= Serviceable Obtainable Market (SOM): $________
```
**Sources and assumptions**:
- Total market estimate source:
- Filter rationale:
- Penetration rate basis:
### Bottom-Up Approach
Start with the unit economics and scale to the addressable population.
```
Number of potential customers/units: ________
x Addressable percentage: x ____%
= Addressable customers/units: ________
x Revenue per customer/unit per year: $________
= Total Addressable Market (TAM): $________
```
**Sources and assumptions**:
- Customer count source:
- Revenue per customer basis:
### TAM Cross-Check
| Metric | Top-Down | Bottom-Up |
|--------|----------|-----------|
| TAM estimate | $ | $ |
| Ratio (higher / lower) | | |
| Within 3x? | Yes / No | |
If estimates differ by more than 3x, investigate which assumptions diverge and refine.
### Market Growth Trajectory
| Year | Market Size | Company Revenue | Implied Share |
|------|-------------|-----------------|---------------|
| Current | $ | $ | % |
| Year 3 | $ | $ | % |
| Year 5 | $ | $ | % |
| Year 10 | $ | $ | % |
Sanity check: Does implied market share at year 10 exceed 30-40% in a competitive market? If so, revisit the revenue growth assumption.
---
## Narrative Document Template
### The Narrative
**One-sentence summary**: (e.g., "Tesla will become the mass-market EV maker, capturing 10% of the global auto market")
**Full narrative** (3-5 sentences describing the story of how the business evolves over time):
### Life Cycle Assessment
**Current stage**: (from classification checklist)
**Expected trajectory**: (e.g., "Move from Young Growth to High Growth within 3-5 years as production scales")
### Market Opportunity
**TAM**: $________ (source and methodology)
**Target share at maturity**: ________%
**Revenue at maturity**: $________
### Competitive Position
**Primary advantages**:
1.
2.
3.
**Length of competitive advantage period**: ________ years
**Basis**: (what sustains the advantage -- brand, network effects, IP, regulation, cost structure?)
### Value Drivers (Summary)
| Driver | Value | Narrative Link |
|--------|-------|----------------|
| Revenue CAGR (high-growth period) | % | |
| Length of high-growth period | years | |
| Target operating margin | % | |
| Sales-to-capital ratio | x | |
| Cost of capital (WACC) | % | |
| Stable growth rate | % | |
| Failure probability | % | |
### Alternative Narratives
(See [Alternative Narrative Template](#alternative-narrative-template) below)
---
## Value Driver Mapping Table
For each driver, trace the connection from narrative element to number.
### Revenue Growth
| Element | Value | Source |
|---------|-------|--------|
| Current revenue | $ | Company financials |
| TAM at maturity | $ | TAM sizing template |
| Target market share | % | Competitive analysis |
| Target revenue at maturity | $ | TAM x share |
| Years to maturity | | Life cycle assessment |
| Implied CAGR | % | (Target/Current)^(1/n) - 1 |
### Operating Margin
| Element | Value | Source |
|---------|-------|--------|
| Current operating margin | % | Company financials |
| Industry median margin (mature peers) | % | Industry data |
| Industry 75th percentile margin | % | Industry data |
| Target operating margin | % | Narrative rationale |
| Years to reach target | | Growth period assumption |
**Narrative rationale for target margin**: (why this number? competitive advantage? cost structure? pricing power?)
### Reinvestment Efficiency
| Element | Value | Source |
|---------|-------|--------|
| Current sales-to-capital ratio | x | Revenue / Invested Capital |
| Industry average sales-to-capital | x | Industry data |
| Target sales-to-capital ratio | x | Narrative assumption |
**Narrative rationale**: (capital-light or capital-heavy model? improving or declining efficiency?)
### Risk Profile
| Element | Value | Source |
|---------|-------|--------|
| Estimated WACC | % | From cost-of-capital-toolkit or estimate |
| Beta (estimated) | | Comparable firms or regression |
| Risk-free rate | % | Government bond yield |
| Equity risk premium | % | Market estimate |
### Failure Risk (for Young Growth or Distressed firms)
| Element | Value | Source |
|---------|-------|--------|
| Probability of failure | % | Cash burn analysis, industry base rates |
| Distress/liquidation value | $ | Asset-based estimate |
| Basis for failure probability | | (cash runway, Altman Z-score, industry data) |
---
## Alternative Narrative Template
Develop at least one alternative to the primary narrative.
### Alternative Narrative: ____________ (name: e.g., "Bull Case", "Bear Case", "Niche Player")
**One-sentence summary**:
**Full narrative** (3-5 sentences):
**How it differs from primary narrative**:
| Driver | Primary | Alternative | Difference |
|--------|---------|-------------|------------|
| Revenue CAGR | % | % | |
| Target operating margin | % | % | |
| Sales-to-capital | x | x | |
| WACC | % | % | |
| Failure probability | % | % | |
**What would make this narrative more likely?** (specific events, data, or signals):
**What would make this narrative less likely?**:
---
## Complete Estimation Workflow
1. **Context**: Fill out Company Context Questionnaire
2. **Stage**: Complete Life Cycle Classification Checklist
3. **Market**: Fill in TAM Sizing Template (both top-down and bottom-up)
4. **Story**: Write the Narrative Document
5. **Numbers**: Complete the Value Driver Mapping Table
6. **Alternatives**: Write at least one Alternative Narrative
7. **Validate**: Score against rubric (target average >= 3.5)
SKILL.md
---
name: business-narrative-builder
description: Constructs a structured narrative linking a company's qualitative business story to quantitative valuation drivers (revenue growth, target margin, reinvestment efficiency, cost of capital, failure risk). Classifies the company within a 6-stage corporate life cycle and sizes the total addressable market. Use when starting a company analysis, building a valuation narrative, assessing competitive position, sizing TAM, or when user mentions business narrative, story to numbers, life cycle stage, or company analysis.
---
# Business Narrative Builder
## Table of Contents
- [Example](#example)
- [Workflow](#workflow)
- [Common Patterns](#common-patterns)
- [Guardrails](#guardrails)
- [Quick Reference](#quick-reference)
## Example
**Company**: Tesla, circa 2018
**Narrative**: "Tesla will become the mass-market electric vehicle company, leveraging its brand and technology lead to capture a meaningful share of the global auto market as it transitions from internal combustion to electric."
**Life Cycle Stage**: Stage 2 -- Young Growth
- Revenue growing rapidly (~80% YoY) but negative operating income
- Key uncertainty: Is there a business model that can be commercialized at scale?
- Company-specific risk dominates macro risk
**TAM Sizing**:
- Global auto market: ~$2T in annual revenues
- EV share trajectory: ~3% today, targeting 25-30% in 10 years (~$500-600B)
- Tesla target share of EV market: 20-30% (~$100-180B in revenue at maturity)
**Value Drivers Derived from Narrative**:
| Driver | Value | Rationale |
|--------|-------|-----------|
| Revenue CAGR (next 10 years) | ~25% | From $21B to ~$150B, bounded by TAM |
| Target operating margin | 10% | Auto industry top quartile; premium brand with manufacturing scale |
| Sales-to-capital ratio | 2.5x | Capital-intensive but improving; factory efficiency gains |
| Cost of capital (WACC) | ~8.5% | Young growth firm, high beta (1.3), moderate debt |
| Failure probability | 10% | Cash burn concerns, but improving production; distress value ~$50B (brand + factories) |
**Alternative narrative**: "Tesla remains a niche luxury EV maker with 2-3% of the global auto market, premium margins (12-15%) but limited scale." This narrative produces a lower revenue path (~$50B) but higher margins, yielding a different but defensible valuation.
## Workflow
Copy this checklist and track progress:
```
Business Narrative Builder Progress:
- [ ] Step 1: Gather company context
- [ ] Step 2: Classify life cycle stage
- [ ] Step 3: Size total addressable market
- [ ] Step 4: Develop business narrative
- [ ] Step 5: Convert narrative to value drivers
- [ ] Step 6: Validate narrative plausibility
```
**Step 1: Gather company context**
Collect: industry, current revenues, operating income, invested capital, products/services, competitive landscape, geographic breakdown, company age/stage. See [resources/template.md](resources/template.md#company-context-questionnaire) for the context questionnaire.
**Step 2: Classify life cycle stage**
Place the company in one of 6 stages (Start-up, Young Growth, High Growth, Mature Growth, Mature Stable, Decline). Each stage has distinct characteristics for revenue growth, earnings, funding, and competitive dynamics. See [resources/methodology.md](resources/methodology.md#6-stage-corporate-life-cycle-model) for the full stage definitions and classification criteria.
**Step 3: Size total addressable market**
Estimate TAM using top-down (total market filtered to addressable segment) and bottom-up (unit count times price). Distinguish between TAM (total), SAM (serviceable), and SOM (obtainable). See [resources/template.md](resources/template.md#tam-sizing-template) for the sizing template.
**Step 4: Develop business narrative**
Write a narrative describing how the business evolves over time. The narrative should answer: What market does the company operate in? How big can it get? What are its competitive advantages? How will it make money? See [resources/methodology.md](resources/methodology.md#narrative-to-numbers-framework) for the 5-step narrative process.
**Step 5: Convert narrative to value drivers**
Translate the narrative into the five quantitative drivers: (1) revenue growth rate and path, (2) target operating margin, (3) reinvestment efficiency (sales-to-capital), (4) risk profile (cost of capital), and (5) failure probability. Each number should trace back to a specific element of the story. See [resources/template.md](resources/template.md#value-driver-mapping-table) for the driver mapping table.
**Step 6: Validate narrative plausibility**
Test whether the narrative is possible (could it happen?), plausible (is it reasonable given evidence?), and probable (is it the most likely outcome?). Develop at least one alternative narrative. Validate using [resources/evaluators/rubric_business_narrative_builder.json](resources/evaluators/rubric_business_narrative_builder.json). Minimum standard: average score of 3.5 or above.
## Common Patterns
**Pattern 1: Young Growth Company**
- **Profile**: Negative or thin earnings, high revenue growth, large TAM, wide range of outcomes
- **Narrative focus**: Can the business model work at scale? What is the path to profitability?
- **Key drivers**: Revenue CAGR (20-50%+), target margin from mature industry peers, high sales-to-capital, elevated failure probability (10-30%)
- **Examples**: Tesla (2018), Uber (pre-profitability), early-stage SaaS companies
- **Watch for**: Overestimating TAM penetration, underestimating time to profitability, ignoring cash burn and survival risk
**Pattern 2: Mature Growth Company**
- **Profile**: Positive and growing earnings, moderate revenue growth, proven business model
- **Narrative focus**: Can the company scale profitably? Where does reinvestment go?
- **Key drivers**: Revenue CAGR (8-20%), operating margin at or near target, reinvestment in existing and adjacent markets
- **Examples**: Amazon (2020s), Alphabet, enterprise software companies in growth mode
- **Watch for**: Assuming current growth rates persist indefinitely, missing margin compression from competition
**Pattern 3: Mature Stable Company**
- **Profile**: Slowing revenue growth, high and stable margins, strong free cash flow
- **Narrative focus**: Can the business be defended? How durable is the competitive advantage?
- **Key drivers**: Revenue growth near GDP (2-5%), stable operating margin, declining reinvestment needs, focus on capital return
- **Examples**: Coca-Cola, Johnson & Johnson, established consumer staples
- **Watch for**: Overvaluing stability (disruption risk exists), ignoring secular decline in legacy segments
**Pattern 4: Decline or Turnaround Company**
- **Profile**: Shrinking revenue, deteriorating margins, potential for narrative change
- **Narrative focus**: Will management face reality? Is there a credible turnaround story?
- **Key drivers**: Negative or low revenue growth, margin pressure, potential asset sales or restructuring, new management or strategy shift
- **Examples**: Legacy retailers, declining media companies, post-disruption incumbents
- **Watch for**: Anchoring on historical performance, overly optimistic turnaround assumptions, ignoring distress costs
## Guardrails
1. **Every narrative should be testable.** Frame the narrative so it can be classified as possible (could happen), plausible (reasonable given evidence), or probable (likely outcome). Untestable narratives produce arbitrary numbers.
2. **Revenue growth path should be bounded by TAM.** The company cannot grow larger than its addressable market. If a 10-year revenue projection implies market share above 30-40% of a competitive market, revisit the assumptions.
3. **Target operating margin should be benchmarked against industry quartiles.** Use mature companies in the same sector as the reference point. A narrative claiming margins 2x the industry median requires a compelling competitive advantage explanation.
4. **Stable growth rate should not exceed the risk-free rate or nominal GDP growth.** No company can grow faster than the economy indefinitely. The terminal growth rate in any narrative should converge to 2-4% (nominal).
5. **Failure probability should be stated for young and distressed firms.** For companies in Start-up, Young Growth, or Decline stages, explicitly estimate the probability that the firm does not survive as a going concern. Base this on cash burn rate, available capital, and industry failure rates.
6. **Alternative narratives should be acknowledged.** A single narrative creates false precision. Develop at least one alternative story (bull/bear, different strategic path) and note how it changes the value drivers. This discipline reduces confirmation bias.
## Quick Reference
**Key formulas:**
```
Expected FCFF = Revenue x Operating Margin x (1 - Tax Rate) - Reinvestment
Revenue Growth (CAGR) = (Target Revenue / Current Revenue)^(1/n) - 1
Sales-to-Capital Ratio = Revenue / Invested Capital
(measures reinvestment efficiency: higher = less capital needed per dollar of revenue)
Reinvestment = Change in Revenue / Sales-to-Capital Ratio
Value of Firm = Sum of [FCFF_t / (1 + WACC)^t] + Terminal Value / (1 + WACC)^n
(preview: detailed DCF mechanics are in dcf-valuation-engine)
```
**Life cycle stages (summary):**
| Stage | Revenue Growth | Earnings | Key Question |
|-------|---------------|----------|--------------|
| 1. Start-up | Minimal | Deep negative | Does the idea have potential? |
| 2. Young Growth | Very high (>30%) | Negative/thin | Is there a viable business model? |
| 3. High Growth | High (15-30%) | Turning positive | Will it generate profits at scale? |
| 4. Mature Growth | Moderate (5-15%) | Growing | Can the business scale further? |
| 5. Mature Stable | Low (0-5%) | High and stable | Can the business be defended? |
| 6. Decline | Negative | Declining | Will management face reality? |
**Resources:**
- **[resources/template.md](resources/template.md)**: Company context questionnaire, life cycle classification checklist, TAM sizing template, narrative document template, value driver mapping table
- **[resources/methodology.md](resources/methodology.md)**: 6-stage life cycle model detail, Damodaran's 5-step narrative-to-numbers framework, narrative plausibility testing, competitive advantage assessment, TAM methodology
- **[resources/evaluators/rubric_business_narrative_builder.json](resources/evaluators/rubric_business_narrative_builder.json)**: Quality criteria for narrative clarity, life cycle classification, TAM sizing, driver linkage, plausibility
**Inputs required:**
- Company name, industry, and current financials (revenue, operating income, invested capital)
- Products/services description and competitive landscape
- Geographic revenue breakdown
- Company age, stage, and management assessment
**Outputs produced:**
- `business-narrative.md`: Narrative document linking story to numbers, life cycle classification, TAM estimate, value driver table, alternative narratives