04-12-2007
Serious business lessons from the Dragons’ Den
By Rosie Beasley
In between the hammy comments from the Dragons and the stuttering presentations from the contestants, the Dragons’ Den does occasionally throw up some serious issues that face all small businesses in the early stages of their existence.
There are many obstacles that entrepreneurs face during the setting up and running of a business. Sometimes these are common yet important business issues and at other times they are caused by personal shortcomings.
Many businesses, for example, are formed by inventors who have the passion and the dedication to bring their invention to life but not the knowledge or experience to make it financially viable.
Passion versus common sense
Andrew Sneath is a case in point. Bringing his products to market had been a 17 year labour of love when he entered the Den to secure an investment. However he clearly demonstrated that in business you can sometimes love too much.
Andrew’s dream is to build a Hydrodome – a £3 million arena for tourists to get an underwater experience without the aid of scuba gear or snorkel. For a mere £45 per ticket, visitors to the dome could spend time submerged in a large tank with only robotic marine-life for company. This doesn’t really sound much like a fun day out, but Andrew was so focused and passionate about the project that he couldn’t see that there is actually a real business opportunity under his nose.
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In fact, even when James Caan expressed an interest in funding the side of his business that involves selling his one-man submarine units for rental in holiday resorts, he still could not see it as a better opportunity than building his Hydrodome.
Successful entrepreneurs are those who can take a step back from their product and see it for its true value. Of course determination and passion are crucial elements in getting through the tougher times when setting up a business, but too much time spent in the workshop and not enough in the real world finding out exactly what it is that people are interesting in buying can lead to wasted opportunities.
As presenter Evan Davis says during the show, 60% of start-ups fail in their first three years. One of the major contributors to this statistic is cash flow. Entrepreneurs with a shaky business plan, or a bad grasp of how to manage cash flow can easily get themselves into trouble, with the only way out being to borrow money or shut down.
Cash flow crisis
Sammy French entered the Den looking for additional working capital to support her business activity and cash to buy more units of her product – the running machine that aids rehabilitation for injured dogs.
If her cute dog Daffy had been able to make the pitch for her, he surely would have run away with the investment, but for Sammy her cash flow issues raised a few difficult questions.
As a single working mum, Sammy didn’t seem to have raised enough start-up capital or catered for ongoing production costs in her business plan. Relying on her bank’s promise to give her a loan, which would have provided some working capital, she ploughed her money and energy into producing the first batch of machines. But although they sold and she did make money on them, it was only enough to pay for the new designs for her product, and not to keep the business afloat. When the bank decided against lending her any money this would have brought her to a standstill.
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Even taking a deposit for advance orders as Peter Jones suggested didn’t help her out, as the money only covered the setting up of the tooling for the new version of her product. She still needed outside funding in order to meet her day-to-day costs and to get the new batch of machines into production.
This is the result of bad forward-planning and even worse cash flow management. In a business like Sammy’s where the costs are predictable, it should have been easier for her to calculate the working capital she would need in advance. Without having that capital in the bank first of all it was not wise to get the production and sales process underway.
Fortunately for Sammy, business angels (or in this case, Dragons) do not get their name for nothing. James Caan eventually stepped up and invested the requested £100k in return for 50% of her business. With his experience and his cash behind her, she should be able to make a better go of managing her finances, therefore giving herself the best chance for success.
Running before you can walk
Success itself can sometimes turn out to be one of the obstacles, as business owners Jerry Mantalvanos and Paul Merker found out.
The pair started a haulage company, JPM Logistics, with the premise that all their vehicles would be made from recycled parts and run on bio-diesel fuel. Having each invested £25k in the business, the pair was able to purchase their first vehicles and gain a contract that had already earned them £106k in profit when the entered the Den.
With over 35 years experience in the industry between them, extensive business contacts and a clear business plan, Jerry and Paul managed to peak the Dragons’ interest early on in the pitch. They mentioned having other contracts with blue chip companies in the pipeline but without investment the business would suffer from growing too fast.
In order to meet the new contracts the business would have to increase its fleet and bring on more staff. This creates a cash flow problem as the business would have to extend its new customers a credit period, and while waiting for payment from these customers, they would still have to pay their daily overheads.
Giving up equity for an investment is only one way to deal with this problem – there are other financial options available, such as asset or invoice finance – however, fortunately for Jerry and Paul four of the Dragons were interested enough in the potential returns from the business to go head-to-head over an investment. In the end the formidable pairing of Dragons that is Deborah Meaden and Theo Paphitis were able to get their deal agreed.
Understand your business model
The final business obstacle that raised its head in the Den stemmed from the entrepreneur not knowing enough about her chosen business model. Franchising can be complicated to set up and not all types of business are suited to it.
A severe lack of franchise knowledge certainly contributed to the difficulties that Hafida Sarachi encountered in the Den. After getting the male Dragons breathing fire over her apparently sexist business idea, she then proceeded to tell them that she isn’t even qualified to undertake any of the more serious household jobs her business would cover.
A business that is supposed to rely on quality and service to sell itself will not get anywhere if the owner lacks the experience to back it up. But it turned out that not only was she unqualified as a handyperson, but she also had difficulties explaining to the Dragons how her franchise would work.
If you are starting a business, research is key when deciding on the right business model. A franchise might seem like the easy option until you know exactly what is involved with setting one up.
Perhaps the garden maintenance aspect of Hafida’s idea would have carried more weight with the Dragons, as she seemed to be pretty good at digging herself a hole. Needless to say the Dragons weren’t convinced about her business scalability and she left the Den empty-handed.
As usual in the Den, some fell and some conquered. Yet all learned valuable lessons about the pitfalls of owning and running a business. A detailed and realistic financial plan, comprehensive research and a clear view of the road ahead are all proven weapons for beating the 3 year start-up failure statistic.
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