Dragons' Den 2011: Episode 10 review - Prior preparation prevents poor performance

Hugh Andree, CEO and founder of ForcesSelect, a recruitment company for former forces personnel, reviews the final episode in the latest series of BBC TV's Dragons' Den.

When seeking external investment in a company, you have to be prepared to answer three key questions:

1. Is there a problem? i.e. a demand
2. Does my product/service/idea solve the problem?
3. How much will it cost?

Watching Dragons' Den last night, I was amazed to see how many of the would-be business starlets ignored one of the simplest adages of life, let alone of pitching to the tenacious and scrutinising Dragons: 'prior preparation prevents poor performance'. Not having figures to hand is a fundamental basic for such an important opportunity.

Two of the budding entrepreneurs, Chris and James, had invented a toy which they thought would be the next best thing in child entertainment. They were passionate and enthusiastic about their product but it made no impact on the Dragons. It was boring and kids don't like boring.

The market is huge, competition is fierce and the route to market was not clear. In addition there was no track record with regard to sales and they didn't even have comparative sales data and forecast figures. They were effectively 'launching' a product and the risk of investing was too high for the Dragons on a product they could not and would not be passionate about.

The 'Roast Cosy' tapped into the British enthusiasm for a roast dinner and suggested something that could enhance the nation’s favourite food but again it came back to the question of the need for a particular product and good old tin foil may not be as sophisticated or cook quite as fast, but it’s served us for generations and has the flexibility to be used for so many other purposes.

Next in the Den were two medical entrepreneurs  who were passionate and knowledgeable about their market place and believed in their 'Access to Prescriptions' solution. They claimed to be able to save the cash-strapped NHS a lot of money, something that hinted at the prospective product having massive potential.

But a track record is vital in order to convince would-be investors of the potential of a product and with two years of business under their belts, they had only 'sold' their service to one GP practice. Anyone in their right mind would ask: 'Is there really a demand for this product?' Anyone who has ever arranged a repeat prescription would know that this idea simply could not take off.

Tim Smith could clearly answer all three questions and in some detail. 

There was an obvious demand for his company's diverse range of foldable footwear and customers and retailers wanted them as demonstrated by his trading history from 2008 to date and he had a forecast for 2012. However, he had two challenges to overcome which are very common: ownership and valuation.

It is vital to keep the structure and ownership of a company as simple and 'clean' as possible. A business structure that is straight forward and easy to understand makes it more attractive to external investors. If there is a complicated ownership structure, it creates confusion or hurdles that only the most enthusiastic investors may be willing to entertain.

The second issue and probably the most common mistake entrepreneurs make concerns the valuation of their companies. Ask a couple of impartial, experienced investors, accountants or corporate financiers to price the business and compare them. I guarantee that the valuations will differ significantly!

So in summary, ask yourself the following questions:

• Can you demonstrate a track record? Know your trading history, sales, costs and net profit.
• Is your valuation fair and justifiable? Find out what the investment multiple is relevant to the sector that the company operates within and consider, with examples, how similar businesses that have attracted outside investment succeeded in doing so.
• Does the risk of investing demonstrate a worthwhile return?

Passion, enthusiasm and tenacity will only get a business so far; it's the numbers that ultimately dictate success.