27-11-2007
Ensnaring naive entrepreneurs is a team sport
Dragons’ Den is in no small part about personality. Contestants in the Den have to face off against the force of the Dragons’ personalities and more often than not they come off worse. When a weak pitch is compounded by unrealistic financial projections and a sky high valuation, this only serves to make matters worse.
The Dragons are not successful entrepreneurs for nothing, and when they see a product that is of interest, they know how to play on the weaknesses of the contestant until they get the deal they want. So it appears that Dragons hunt in packs. Who knew?
Pitch like you mean it
Ian Helmore was the first victim to fall prey to these highly advanced hunting tactics. He gave a nervous and rather unenthusiastic pitch for his product, the Steri-Spray shower unit, and asked for a whopping £145,000 in return for only 10% of his business. Steri-Spray is a new type of shower that uses UV light to eliminate bacteria from water before it comes out of the shower head. Immediately sensing weakness on his part, the Dragons proceeded to break him down.
Duncan Bannatyne was the first to make his position known, quickly ousting himself from the running by declaring that as the legionella bacteria develop in the water tank, that an institution such as a hotel or care home would have to buy one unit for every single tap and shower, which would be too expensive.
While Ian knew his product inside out, this nevertheless made a dent in his confidence and allowed the other investors to take a stronger position. Peter then proceeded to question him about his financial projections, specifically his sales figures and profit margins. As a pre-start-up inventor, Ian really didn’t have a strong grasp on the reasoning behind his pricing strategy. This further undermined his credibility with the room, even though by now it was apparent that the Dragons had an interest in his invention.
As so often happens with contestants in the Den, the selling point which would have given Ian a strong position from the start of his pitch wasn’t revealed until proceedings were too far along. The fact that a competitor’s inferior and less cost effective products were already being widely used in hospitals would have given Ian a much stronger basis for his business. However, though this revelation gave him an 11th hour confidence boost, it was by then too late.
Deborah was able to make her offer of the whole amount for 40% of the business knowing that she and the other Dragons had created enough uncertainty around the potential of the Steri-Spray to force Ian to part with a higher percentage of his business.
In the end, while Ian tried to stand his ground and accept other offers, the Dragons were for once supportive of each other and Deborah and Theo ended up taking half of the 40% each. For Ian Helmore this was a good result as he had no way to effectively bring his product to market, however it was a clearly manipulated effort on the part of the potential investors.
Don't set yourself up for a fall
Occasionally what at first appears to be a position of strength on the part of an entrepreneur, quickly turns into their downfall in the hands of the Dragons.
Susanne Chishti had years of experience working in the investment banking sector behind her and she used this to back up the valuation of her business, Yes! Superbaby, at £1.75 million. Yes! Superbaby sells baby-stimulating clothing for parents to wear during childcare. Unfortunately the saleability of the products on offer and the performance of the business to date didn’t quite match up to these expectations and for the most part the Dragons weren’t impressed.
As James Cann put it, “I’m so glad, really I am, that you got out of banking because I think you would be fantastic at losing money. I really do.”
Not only did she value the business too high, she also failed to fully demonstrate the benefits of the baby products in her pitch. Perhaps if her presentation style had been as warm and motherly as her products, she would have had a more favourable experience in the Den.
With some pitches on the show it’s clear that the Dragons have no interest in investing in the product but are simply enjoying toying with the entrepreneur, almost to see how long it will take – or if it’s even possible – to make them lose faith and admit they have a business that is going nowhere.
They will usually highlight their intent by coming up with flamboyant reasons not to invest and quite often, as with Deborah’s rant about Susanne’s products being ‘scary’, these reasons don’t make complete sense. But it doesn’t matter because we know they’re not really interested anyway. However, they didn’t get much of a rise out of Susanne and in the end she did manage to get some positive feedback from Dragon Peter Jones and so was able to leave the Den with her head held a little higher.
Dragons can smell fear
At other times it really isn’t clear whether the Dragons intend to invest or not. Poor Elina Davis was reduced to tears by the apparent dismissal of all she and her husband had achieved with their Caribbean ready meals business. With their products already in two major supermarkets, it seemed as though the couple were really going places with their company.
Yet while the Dragons clearly liked Elina and her husband Mark as people, they were none too sure about their business acumen. A weak presentation and an inability to accurately describe the problems that needed solving with the manufacturing and distribution of their meals sold them short and gave the Dragons the opportunity they needed to take advantage.
By the time the couple had been grilled by three of the five potential investors, they were clearly convinced they were going to leave the Den empty handed. But James Caan, with personal experience of their industry, could see the potential and quietly bided his time while the other Dragons picked the opportunity apart. He and Duncan Bannatyne could see that the business only needed some re-jigging to make it profitable (either outsourcing the production via competitive tender, or taking it in-house and doing it themselves), and could also see that the contestants really needed and wanted someone to take the business in hand.
Therefore, by waiting until the last possible minute to make an offer, James and Duncan managed to guarantee that the entrepreneurs would be more than happy to release a far higher percentage of the business than they originally asked for. A total investment of 50%, shared by James and Duncan, was offered and accepted, giving the two Dragons exactly what they’d been after.
Learn from others' mistakes
Despite the slightly underhanded methods employed by the dragons to get the investment opportunities they want at the price they want, there is no doubt that with the right Dragon on board, an entrepreneur has every chance of succeeding.
Despite many of the investments made on the show not yet showing a profit, each new business idea on the show still represents an opportunity to make money. It is down to those involved with the business to make that happen.
Business owners should nevertheless be aware that investors are always going to go after the best deal for themselves, using every trick in the book, rather than considering the needs of the entrepreneur. Therefore a solid business plan and unwaveringly belief in your business and products are vitally important when pitching for an investment.
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