PROVEN STRATEGIC NAVIGATION

Analysis by an Angel Investor: Dragons Den Episode 2

18 August 2013

Episode Two of the new format Dragon’s Den began with what was described as a “Pitch Malfunction” and it wasn’t the only poor performance of the night. Having sat through my fair share of pitch malfunctions, I think I was yelling “get back to the drawing board” before Peter Jones could even mouth the same words.

Despite the fact that this is clearly theatre, rather than a credible investment presentation forum, there are still valid lessons to be learnt from this episode.

There are six key questions that all businesses need to answer in describing themselves:

-       What is the problem you are solving?

-       What is your product or solution?

-       Who are your customers?

-       What is your USP?

-       How does it scale?

-       How much money do you need and what do you need it for?

It’s the first three that determine whether you have a business and the last three that are relevant in determining the value of the business.

If you answer those questions, simply and clearly, you have the best chance of starting the conversation that is the investment process.

What is the problem you are solving?

The only business that appeared to solve a problem was the disposable nappy recycling service. The details of viability were not discussed as the Dragons alleged lack of commitment from the founders who wouldn’t leave their full-time jobs.

If you’re not solving a problem, then your product needs to be attractive to customers.

What is your product or solution?

The hand-crafted bookbinding cases for mobile devices initially appeared to be an attractive product. On further scrutiny it failed miserably on construction. It is essential that products are fit for purpose and are well tested. British Standard quality control measures increase a products investment potential and customer satisfaction.

The Running Mat seemed to split the panel along gender lines. Was it a real product or a car sunscreen in a bum bag? This was obviously not inventive and certainly not “patentable”.

Who are your customers?

Selling to people close to you doesn’t provide an ongoing customer base with objective feedback. We don’t know who bought the 35 iPad covers or if the running mats sold beyond the ‘boot camps’, but 157,000 units of beef-jerky from a small pub chain (that’s also willing to invest in the business) is always going to get an investors attention.

What’s your USP?

By virtue of their cultural origin both food products (Rio - A Taste of Brazil and Texas Original Jerky) have a unique selling point. These both have strong brand names that describe their product exactly. The differences between them were their distribution channels and the costs involved in accessing these.

How does it scale?

The nappy recycling business obviously requires large capital investment to become a viable business. Distribution costs for boxes of nappies delivered to your door by the same truck that takes away the used product is scary than that idea in itself. If the business really works, where will all the recycled plastic decking be sold? The questions just mount up.

How much money do you need and what do you need it for?

Working capital required to fulfil an order is much more attractive to an investor than capital required for product development and marketing. Original Jerky was clear in stating that the investment was required to fulfil an existing order and grow the business.

It was unclear that anyone else new what the money was for, but certainly would all be able to spend it.

The question of valuation.

Only two businesses got money:

The Running Mat Ltd: The original request was for £50,000 for 25% of the business. This equates to a pre-money valuation of £150,000. Two Dragons offered a combined £50,000 for 40% of the business, halving the pre-money value whilst pulling in an existing profitable exercise business. A big difference from the first request and based more on the founder than the business.

Original Jerky unexpectedly got more money than requested. Peter Jones raised the offers of £37,500 for 16% to £50,000 for 24%. Texan Joe’s customer, Brew Dogs, had agreed to match offers, so he raised £100,000 valuing the business at £208,333 with the investment. “Well done Cowboy”.

While Jones appeared to concede 1% to allow the founder to maintain “control”, it is unlikely that he will have control. He does have a majority stake in his own business, but the only way to guarantee control is to never raise external funding. Investors exercise a degree of control no matter how small their share. Once you bring in other parties, you have others to answer to and agendas to meet.

This highlights the importance of finding investors you can work with and who bring more than money to the table.