Posted by petergradwell on Tue, 13/09/2011 - 11:12
Peter Gradwell, founder of Gradwell, reviews the latest episode of Dragons' Den and offers some business lessons.
This week another set of brave entrepreneurs ventured into the gritty, disused industrial world of the Dragons' Den.
Straight out of the blocks was Barmate, a new type of tap for your local pub barrel. It unearthed a gap in the market so small that Peter Jones claimed he couldn't see it! I suspect he rather likes chatting to his local barman during the 90 seconds or so that it takes to pour a pint, but on a busy Friday night, operations need to be streamlined. The trio behind Barmate – Richard Hadden, Sebastian Stoddart and Nick Cross – demonstrated how a simple product could speed things up and make the business of serving pints and taking money much more efficient. They conducted some research, did their sums and managed to get a big name involved; this got the Dragons interested.
In the end, Theo and Deborah made offers and as usual, the Dragons offered the money (£50,000), but wanted higher equity, with Theo asking for 25%. In doing so he took the value down from £330,000 to £200,000 in a stroke of his pen. However that was not all and, throwing in a nasty pun on Dragon firepower, he talked the valuation lower arguing that if both he and Deborah invested equally, they should get 20% each. The trio decided that two Dragons would be better than one and, crucially, they hadn't just come for the money, so they conceded 30% of their business and took Dragon input over equity.
This raised the first moral dilemma of the evening for anyone looking for investment; what price would you put on the future of your business and are you going to be more likely to succeed if you have the right backing in place? As someone seeking investment, you can never tell until it's too late and those in the Den don't get long to decide!
As usual, we were treated to a whirlwind of weird and wacky ideas (with Dragons dressed in CSI suits investigating a crime committed with an ice cream), which surely highlights all the things that a potential investee should avoid doing.
Firstly, make sure you have a solid business plan that can quickly and easily scale when you start pouring sales in. The Dragons know how to get your product into the mass market and how expensive that will be. So if you're still making things from your bedroom, it's unlikely they will want to support you.
Secondly, your idea needs to be good and solves a real existing problem in the market. Bowler Lefait's Cleebo tweezers may be the best logical way to clear your baby's blocked nose, but in reality, a tissue (or Duncan's fingernail) does the same job and is a lot cheaper!
Thirdly, a number of ventures lost out when the entrepreneurs revealed how much of their own money they had put in – a Dragon does not want to pour good money after bad and sometimes in business things don't work out. It's important to know when to say stop and put an end to a project; Lefait demonstrated this perfectly. A well-presented former city high flyer, he was so passionate about his product he had left common sense behind and ploughed £200,000 into his new business. The low fat snack may have been a good product, but the company made losses of several hundred thousand pounds without even thinking that the business wasn't working.
They should have pulled the plug earlier, as big losses cause a major problem for the Dragons, because they will struggle to get a return on their investment if the business is not making a profit and that is solely what they're after.
It's frustrating that the Dragons frequently cannot make their minds up about what they want. Are they looking to invest in established profitable businesses or early stage companies? Wendy Thomson introduced her Health Swing and taught us another lesson about investing in new ideas, which has to be "focus on the first sale". Unless you can persuade someone to buy your idea with real money, you don't have a business. Deborah Meaden was very keen to see if Wendy had secured any expressions of interest. She hadn't and the Dragons were all out in a snap.
Last night was not all about business. Wendy charmed the Dragons with an intelligent pitch for a product that had obvious benefits. The challenge here, as in many occasions, was making money from the idea and whilst Wendy didn't get any money, she ended up with a generous offer of time and contacts from Hilary Devey.
Finally, we had Simon with Kiddi Motto; balance bikes for two to five year olds. He already had a healthy track record in sales with retailers, including John Lewis, but appeared to have got there more through luck than judgement as his main objective was to secure a business mentor, with money coming second. But if you don't know the numbers, you don't know the business. Deborah was quick to fire confusing questions around and pulled his historical accounts apart.
I always think this is very unfair disadvantage of the format, because in the real world you wouldn't be put on the spot like this and would be able to refer to your paperwork, so these questions would be a breeze. Peter and Theo both quickly opted out as they didn't have time to be mentors, so it was down to Hilary and Duncan to save the day, bringing both money (with the usual increase of equity) and business sense to the creative disorder.
I have often wondered why people appear to enter the Den, with dodgy products, weird valuations and no ideas about the business plan. Of course it is television, but like most business TV it does a disservice to those who need investment and those who make them. So, if you think you need some external investment here are some things to do before appearing on the next series:
- Ask a local accountant to value your company and most importantly, understand how similar companies in both your sector and similar sectors are valued
- Swot up on your top ten numbers. Know the difference between sales; turnover, gross and net profit, cash flow and balance sheets
- Get some strong sales under your belt
- If the product is just an idea and the money is needed to make it come to life, then seek out your potential purchaser and document what they would need to happen, in order for them to buy it
- Finally, forget about making friends with a celebrity investor. There are many local groups of people who know how to run companies and often a few hints is all you need
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