Innovation

Dragons' debate

Written by PROFIT Staff

In an exclusive rountdable discussion with PROFIT, three stars of TV’s Dragons’ Den argue the role of government in business, challenge the legitimacy of labour unions, reveal the secrets to a successful investment pitch and dish behind-the-scenes details on their hit reality series.

Economy

PROFIT: Let’s start the discussion with the biggest issue of the day: the economy. What are you seeing in your businesses right now, and how soon do you think we’ll be clear of the recession?

Herjavec: I’m seeing capital budgets continuing to be cut. I’m still seeing people trimming staff, and they’re not going to come back at the same rate. I’m in the computer business, and the overall business is way down because people aren’t spending. And I think that’s the fundamental issue: people have become so scared that we’re not seeing capital spending go up. And until capital spending from large companies increases, how can the recession really be over?

Dickinson: I’m starting to see what I would call “pragmatic optimism.” Marketing spending was cut deeply, but people are now looking at increasing their budgets again. They’re not back to the levels that they were at, but they’re not cutting anymore. I think the cuts are done.

O’Leary: I think we’ve bottomed, and we’re going to bounce around the bottom for longer than it takes to go through five fashion cycles. This is going to be a long, protracted recovery — three to five years.

Herjavec: I was out golfing recently with one of the senior guys from Royal Bank, and it seems that the good news is that despite the recession, credit is accessible to companies that are healthy. The bad news is that unless you were a solid company before the recession started, good luck getting any money. To achieve tremendous growth in this economy, you need those brand-new ideas, which require funding. But the funding just isn’t there today.

Canadian Banks

PROFIT: The general perception that Canada’s banks don’t do enough for our entrepreneurial sector has gained more weight through this recession. Whether or not that perception is accurate, do you think the banks should cut smaller enterprises more slack?

Dickinson: The banks aren’t taking the risks they should be taking to support the small, innovative businesses that are out there. It’s a shame. They should be stepping up. They have the capital right now.

O’Leary: But they’re not for the small, risky businesses.

Dickinson: But they need to be! They need to be!

Herjavec: There’s a reason that they’re the most successful banks in the world right now: because they’re conservative in nature. I think we give our banks a really hard time. Can you imagine running a business that’s growing — which means you never have cash — and then your bank calls you and says, “By the way, we’d like our line of credit back by the end of the month.” Because that’s what’s happened in the U.S. Our banks don’t do that.

Dickinson: Oh, yes, they do — they absolutely are doing that.

Herjavec: Only to companies that are shaky and in trouble.

O’Leary: But that boils down to the conservative nature of the banks’ shareholders. Canadians who own bank stock don’t want to lose their capital anymore. And appetite for risk is another thing that’s going to contract in this economy. The risk capital that was there five years ago is not there today, period. If you’re an operating business that has less than $10 million in sales and you want to get a bank loan, the truth is that you can’t get one.

Herjavec: Not true. If you’re an operating company under $10 million, and you have good cash flow and you’ve been consistent, you’d get the money.

O’Leary: But then you don’t need a line.

Herjavec: Of course you need a line, if you’re going to grow. Name me a fast-growing business with less than $10 million in sales that doesn’t need a line — without a rich guy at the helm.

Government and organized labour

PROFIT: What is the role of government in entrepreneurship? Should it just get out of the way, reduce taxes and let small businesses flourish on their own, or should there be more government support for small enterprises?

Herjavec: I think government has to increase the incentive for investors to fund startup businesses. I’m very optimistic about the current climate of entrepreneurship in this country. You have people who want to start a business and who believe they have the ability to start a business. I think that’s different from what it was five years ago, and I see it getting stronger. But, again, how do we give those people easy access to capital? We don’t need handouts. We need lower tax rates, and we need incentives for people to take a risk investing their money in a pure startup. For example, why can’t I pay zero taxes on any income I make from investing in a pure startup for X period of time?

O’Leary: You have to give credit to the Harper government for one thing that has taken over 20 years to realize, and that looks like it’s about to happen: we’re going to have a single regulator in this country for companies that want to issue securities in the public market.

Herjavec: Yeah, that’s big.

O’Leary: Here’s another thing: I think the government has finally come to the realization that it does not have the ability to pick winning companies or sectors. It just doesn’t. So, the only answer is that taxation has to be reduced for small companies in Canada. There’s no question we have the innovation and momentum and resources to be more entrepreneurial. We just don’t have the environment.

Herjavec: What’s the lowest tax rate now — the first $500,000 you make, and then it jumps?

PROFIT: The tax rate jumps at $500,000 in net income, which is much higher than it used to be. But, still, isn’t that jump an incentive to stay small?

Dickinson: Exactly. It’s an incentive not to grow.

Herjavec: So, if we agree that small businesses can’t get capital, why can’t we increase the threshhold from $500,000 to $1.5 million?

Dickinson: Because the government needs taxes to keep the government going — that’s the problem.

Herjavec: Eastern European companies that have come out of communism have gone to a flat-tax system that has really worked. I don’t know why we don’t do that here in Canada.

O’Leary: It’s because we have so many government programs that we can’t afford to run. I estimate that 33 cents of every dollar invested by the government is wasted. The private sector is a lot more efficient than government, so we should let the private sector look after many of the issues we’ve talked about, including health care: there should be a two-tier system, and part of it should be private.

Herjavec: Just look at the municipal workers’ strike that Toronto went through this summer.

Dickinson: It was outrageous.

O’Leary: Ridiculous.

Herjavec: Since I moved into my house in Toronto 10 years ago, my property-tax rate has increased every year. When I moved into my house, I had garbage collection three times a week. I now have it once every two weeks, but the cost has continued to increase.

Dickinson: That’s the point: government shouldn’t be in that business. Private enterprise should be in that business.

O’Leary: Well, I think we’ve touched on a really important topic for Canada: unionism. Because we’re basically at the whim of what I would call a criminal element — Toronto’s garbage strike is an example. Unionism isn’t popular around the world because it doesn’t add any value for anybody — not to the people who use the services, or the members of the union. It just doesn’t work. It’s a form of communism that’s broken. What should have happened in Toronto is that the strikers should have been fired. We’d have to change the laws to do that, but we should. Then we should offer those individuals jobs at market rates, which might be higher than what they’re making now.

Dickinson: I don’t think it’s going to be higher!

O’Leary: Then the market will determine whatever those wages are. They can take those jobs or someone else can. The bottom line is that we break that union — just like it was done with the [U.S.] air-traffic controllers 30 years ago — and say, “Look, guys, you can have your jobs back at market rates; you can work or you don’t have to work. It’s your decision.”

Herjavec: That’s never going to happen in Canada.

O’Leary: Why won’t it happen in Canada?

Herjavec: Because that is part of what makes Canadians Canadian.

O’Leary: What? Canadians like to be abused by unions?

Dickinson: Canadians feel that they have some fundamental rights to services and opportunities that the government provides for them.

O’Leary: Did we not have a contract with those employees to pick up the garbage? They weren’t fulfilling their role. In any other area of business, we could have sued them for not providing the services they were being paid for. It’s that simple.

Skills that made them successful

PROFIT: To which single personal skill or character trait would you credit your business success?

Dickinson: Kevin’s going to say, “Always being right.”

O’Leary: I think the reason I’ve been successful is that I know what my weaknesses are, and I always try to partner with somebody who has the strengths that I don’t. You end up giving up control of the stuff that you’re not good at anyway, and you have a partner that’s working at 110%. As a result, you get to where you need to go faster. I think great businesses move quickly.

Herjavec: I’d say drive. The No. 1 requirement for success as an entrepreneur is having the drive to create something. If you take the three of us, what’s consistent is that we’re pretty driven people. If I had to get up early to do something for my client, I’d say Kevin and Arlene would do the same. If we had to sacrifice something to drive the business forward — even family — I think we would do that. Success comes from the drive and the passion to make something happen.

PROFIT: Are successful entrepreneurs born with drive, or can someone develop that attribute over time?

Herjavec: Some people are born saying, “I have to do something great with my life.” That wasn’t me. There are people who have bad things happen to them that force them to decide to either push forward or accept their lot in life. And that was me.

Dickinson: Everything Robert says about drive applies to most entrepreneurs who are successful. And I would say that in my case, I was driven from the beginning by necessity — a need to do something for my family. After that, I am very competitive with myself. Success drives me. I don’t think about the competition; I think about me, and what I want to accomplish with my life. I have one chance to walk on this earth, and I’m going to do everything I can to live it 150%.

Herjavec: Hallelujah!

What it’s like to be a reality-TV star

PROFIT: How have your personal lives and your businesses changed as a result of the celebrity you’ve achieved from appearing on Dragons’ Den?

O’Leary: Everybody has a different reason for doing this. I’m trying to promote my business, which is my first love. I sell O’Leary Funds, and the show gives me a platform to communicate to my investors the way I think. They understand the kind of investments I want to make as a result of how I invest on Dragons’ Den. It works for me. My business is growing. I’m happy. It’s that simple. That’s the reason I do it. If I can find an interesting investment along the way, then great.

PROFIT: Kevin, do little kids come up to you in the street and kick you in the shins?

O’Leary: Yeah, I get that. And dogs bark at me, too.

Herjavec: My first love is the computer-security business. This has brought a spotlight to our business, and I think that has helped us. Any time you can engage your clients in a conversation beyond just selling them stuff, I think it gets you in the door and adds value.

PROFIT: Do more people return your calls because they’ve seen you on TV?

O’Leary: Oh, yeah, absolutely. But you have to be the real deal. If we were a bad company, it wouldn’t matter.

Dickinson: How has it changed my life? I’m a voyeur: I love watching people and analyzing and understanding why they do what they do. So, Dragons’ Den has opened up a new and interesting window into the world that I didn’t have before. It has given me a chance to be in a different role — to talk to people differently and have them interact with me differently. I love that. It has been tons of fun to do, and I’ve learned a lot from it. It has helped my business, it has helped my profile, it has helped me personally.

Herjavec: And it’s cool.

Dickinson: It is cool. It’s the chance of a lifetime. We’re lucky, and we’re all taking advantage of it. We all understand the business opportunity.

O’Leary: When we were shooting Shark Tank [a U.S. version of Dragons’ Den starring O’Leary, Herjavec and three American investors that debuted in August on ABC-TV] in Los Angeles, my kids got to go on the set of The Suite Life of Zach & Cody and meet the stars. How cool is that?

Dickinson: Or you’re in an airplane and people come up to you and say, “I saw you on the plane, and I’ve just put together this package…”

O’Leary: Well, there’s a real downside to that, too.

How to pitch investors (and how not to)

PROFIT: You’ve seen hundreds of entrepreneurs come through the Dragons’ Den. What is the biggest mistake they make when they pitch you?

Herjavec: They do not explain how I can make money. They talk about all their experience, and how great the product is, and how their mother loves it and their dog barks excitedly when they talk about it. But they don’t explain to any of us how we’re going to profit from investing our capital.

Dickinson: Or they say it’s quick and easy. They say, “In the next two years, we can have 10% of the marketplace.” It’s ridiculous.

O’Leary: The No. 1 mistake I see is overvaluation.

PROFIT: So, what is the best thing that entrepreneurs who are looking to raise financing can tell you about themselves and their businesses?

O’Leary: They can explain why they’re the right person to execute the business plan that they just articulated in 90 seconds. It’s about communication. If you can’t stand up in front of a bunch of investors and explain in 90 seconds why your idea is a good one and why you’re the right person to execute it, you have nothing. And that’s what most people miss. You have to be able to say, “Here’s the plan, here’s why it’s going to work and here’s why I’m the person that’s going to do it.” If you can do that in 90 seconds, you’re going to get somebody like us to put money into you.

Dickinson: If they can show a passion for their idea, if they can be practical about what has to happen with it, if they can be purposeful about what they’re going to do, then great. They have all the things that I need to hear about.

O’Leary: And, still, they’ll fail 90% of the time.

PROFIT: What percentage of the deals you make on the show don’t pass due diligence, and why do they fall down?

O’Leary: About a third of the deals get funded at the end of the day. And, of that, maybe one in 30 makes money. Here’s the thing. You talk to somebody for 15 minutes or an hour, and you get a vision for what their business is. That’s great. Then you start the due diligence on who they are, where they came from, what their balance sheet looks like, what they said their revenues are versus what they really are; and, at the end of the day, it’s often a pretty different story. Or something has changed between the time you made that deal and when you looked more closely at it — the market changed or the company changed or they’re in litigation. There are a million reasons why deals don’t work out. Forget about Dragons’ Den — it happens in investing every day.

Herjavec: We’re happy to take our time. We don’t care if a deal is finalized two weeks or two years later. We’re doing the due diligence that’s required by any investor.

O’Leary: That’s what people don’t understand: once the camera stops, it’s my money.

Dickinson: It’s not even just our money — it’s our time, it’s our effort, it’s our teams. We have lawyers, we have accountants, we have people looking at the stuff.

Herjavec: I think one of the reasons the show works is that when it really is your money, you’re personally engaged. And after the cameras have stopped rolling, you know what? I don’t really care about CBC and I don’t care about what the producers want. All I care about is whether I’m going to make a return, period.

O’Leary: That’s the right way to be if you’re an investor. But it doesn’t take away from what’s brilliant about the show. It’s great television because it captures in a moment, or a series of moments, what the entrepreneurial process is all about. It’s powerful. It’s visceral.

Herjavec: It’s real.

O’Leary: It’s real; it’s our money. And it’s really educational. I know business schools are using the show now to illustrate the difference between a successful pitch and an unsuccessful one, trying to find the attributes that make a difference. We’ve even had professors on the set who’ve tried to look for the common threads in successful pitches. I think that’s a really good thing.

Herjavec: We heard from a focus group that the show is too real. Most reality-TV has a certain amount of “unreal” scripted into it; a lot of it has become very fluffy. But our show is real. There is no script.

Dickinson: That’s the No. 1 thing I get asked all the time: “How much of this do you know ahead of time?” I always say, “This is the most genuine reality show I know.”

Herjavec: Is that the one thing you’re asked? You know what I get asked? “Why do you wear the same suit every week?”

Dickinson: Well, actually, usually the first question I get asked is, “Is Kevin really that much of a jerk?” Yes.

Originally appeared on PROFITguide.com