30-10-2007
How to lose investment and alienate people – just another day in the Dragon’s Den
by Rosie Beasley for Simply Business
Considering that we’re now in the fifth series of Dragon’s Den it would be reasonable to assume that this new batch of entrepreneurs would be pitching their business ideas to the Dragons having learned some valuable lessons from previous Den hopefuls. However based on last night’s show, it doesn’t seem as though they have picked up anything at all.
Despite revealing a couple of strong product ideas, much of episode 3 ran like a masterclass in what not to do to secure an investor for your fledgling business.
Investors in start-up and growing businesses take a considerable leap of faith that they will receive even a small return on their cash, let alone make good money from it.
Considering that most businesses take at least three years to break even, and that any investment given to an entrepreneur would be tied up in the business with no return for at least this time-frame, the average investor would normally look towards seeing a return of at least ten times the value of their initial investment over a three to five year term. They would also expect to gain a sizeable percentage of the business in order to make the risk more palatable.
The belief which the Den’s entrepreneurs have in their inventions often seems to prevent them from appreciating the level of risk that a Dragon takes by investing in their business. So it makes sense that they generally over-value their business in the Den and offer an unrealistic percentage of the business in return for the investment.
As Peter Jones put it to business partners Polly Marsh and Helen Wooldridge: “You’re not the first and you won’t be the last that comes into the Den and overvalues their business, and in fact I don’t know of anybody that hasn’t!”
On that basis, Peter was ‘out’, but history has shown that even with an overly optimistic valuation and profit projections, often a winning sales pitch and a sound product with sales potential can shine through.
Deborah Meaden and James Caan saw the potential in the Cuddle Dry baby bath towel and made offers of 45% and 40% respectively for the entire £100k investment requested. This was despite some rather dubious profit projections which were a result of the failure of the women to take into account some less obvious costs and overheads in their business plan.
However, in a not entirely unexpected twist, the pair felt that they weren’t prepared to give up such a large portion and what they saw as a controlling share of their business, and declined both offers.
Did they make the right choice? Well, they had a good product and if they’d negotiated a bit harder they might have pushed Deborah down to a lower percentage. They also didn’t question the Dragons on the breadth of experience they would have brought to the table. James Caan for example, with no retail experience to speak of with which to back up his bid, may have been persuaded to buy-in for a smaller cut.
Even so, taking into account the success they had enjoyed to date with selling the product in 40 independent retailers and the Mothercare chain, it seems likely that success is on the horizon for Polly and Helen even if it takes them a little longer to achieve it.
Along with unrealistic valuations, another thing the Dragons are never impressed with is an entrepreneur who is asking for investment in order to be paid a salary.
This was just one of many mistakes in a pitch by hair colourist Sean Pulfry. Sean was looking for £80k investment in return for a 15% stake in his hair brush business, Tangle Tweezer Limited.
Business investors expect to see proof that they will get a reasonable return on their investment, be it a product or a person. If their money is paying for a person to spend more time working on the business, that person needs to show through his or her performance that they are worth it.
Unfortunately Sean failed to demonstrate much business acumen and the Dragons weren’t impressed with the product. He was brought up several times on the fact that he hadn’t done any worthwhile research into the demand for his product in its intended market. In fact Sean had given away 350 free samples of his hair brush but not followed up on getting any feedback.
However Sean did manage to take away with him some valuable advice from retail expert Theo Paphitis.
Possibly the worst sin committed in the Den is when a so-called inventor has come up with a product that solves a non-existent problem. And taking the brunt of the Dragons’ ridicule last night was Jill Parkinson, for her portable showerhead holder, the Shuc.
Invented to ease problems experienced when washing with a handheld shower, Jill’s product had the Dragons baffled from the start.
The bafflement continued when she revealed the projected sales figures that could give one lucky Dragon a fast return on their rather large £120k investment for a rather small 18% of the business.
In the end it wasn’t even the 2,000 units a month that she would have to sell to make a profit that proved she wasn’t on to a winning product. It was the fact that she and her partner had already invested £200,000 of their own money in the business with little to show for it in terms of sales. If an investor entered the business at this point, they would effectively be starting from a position of debt. So, a crushed Jill left the Den empty-handed.
Unfortunately, this episode has yet again shown that even a good business idea does not always equate to a good investment. And, blinded by the time, capital and love they have invested in their inventions, many entrepreneurs find themselves in too deep before they’ve even begun.
Fortunately there was one winner in the Dragon’s Den last night. Mark Champkins impressed the Dragons from the start of his pitch with credentials including being a trained engineer and an award winning inventor. While his Concentrate children’s products (including a drinks holder and lunch box) didn’t entirely match up to the promise of helping kids to concentrate at school, they did show enough promise to secure a surprise 11th hour investment from Peter Jones, who in previous series has displayed a soft touch for children’s products.
As often happens in the series, the entrepreneur himself can be a more interesting proposition for a Dragon than the product they have developed. In Mark’s case, his product was investment-friendly, his presentation style good and enthusiastic and his pitch well prepared. He was also brave enough to stick to his guns and negotiate a 35% offer conditional on his profits in the first three years.
So, what can your start-up or growing business take away from the entrepreneurs’ night in the Dragon’s Den?
The key message seems to be, get your financial plan right and do your research. And if you suddenly feel the urge to sew poppers onto your underwear and attempt to sell them to unsuspecting clothing chains – then it’s time go back to your day job.
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