Innovation

Lessons from the Dragons' Den: What Dragons want

Written by Sean Wise


Tune in, read on, lift off

Capital connections
What Dragons want

Here be dragons: 
Jim Treliving
|  
Kevin O’Leary

Laurence Lewin

Jennifer Wood
|  
Robert Herjavec

Whether you’re hunting for big investors or a small bank loan, you’d do well to polish your business plan and your presentation. More than a few Dragons’ Den contestants will wish they’d followed these prescriptions for financing pitches.

DON’T: Pitch in a bikini

Sex sells. That’s a fact known by the business moguls who made up the investment panel on Dragons’ Den, and by many of the 100-plus entrepreneurs who pitched their business concepts to the Dragons. Most “pitchers” took a conservative approach to selling with sex, dressing in business or business-casual attire and bringing in models to perform the task of titillating their would-be investors.

But not the entrepreneur who pitched in a cowboy hat, bikini top and cut-off shorts that would do Daisy Duke proud — and was scolded by Jennifer Wood, cattle rancher, software entrepreneur and the lone female Dragon. “If you want to be taken seriously by professionals,” Wood advised, “then act and dress professionally.”

DO: Seek more than just money

The right investor can expand your network, evolve management and lend vital expertise. After investing in a young technology business that could benefit from his expertise and resources, serial tech entrepreneur Robert Herjavec told his fellow Dragons: “The best deals for me are the ones where I can leverage my investment with my network, experience and facilities. That way, I can increase their and my chances of making money.” More than half of the deals completed in the Den were for more than just the money.

DON’T: Forget to build barriers

“Why can’t I take your idea and just do it myself?” asked Herjavec of numerous pitchers. His point: being first to market doesn’t provide a sustainable competitive advantage. Smart entrepreneurs show investors not only how their product is great but also what difficulty others will have in duplicating it.

That’s why investors adore secure intellectual property (e.g., patents, trade secrets) and long-term, exclusive lock-up deals with distribution channels. Pitchers who demonstrated such “barriers to entry” faced by would-be competitors fared extremely well in the Den. For instance, one entrepreneur sparked a bidding war among the Dragons by showing the patents held on his product.

DO: provide support for your claims

All entrepreneurs think they offer the best investment opportunity. Investors might love your idea, too — but they want to know they’re not the only ones drinking your Kool-Aid. In other words, they see reduced risk in a business validated by third parties (e.g., customers and strategic partners) or supported by credible market research. “I don’t know anything about software, but if Bill Gates said [your software] was good, who would I be to argue?” explained Jim Treliving, the Dragon behind Boston Pizza, over drinks after a day’s taping.

Considering that you can Google and find almost any fact, a lack of supporting evidence suggests either that your claims cannot be substantiated or, worse, you are too lazy to do your homework. Neither sits well with investors.


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What Dragons want

DON’T: Play where there is no pain

A large number of pitchers were unable to explain why anyone would need their product, sometimes due to an inability to articulate the problem it would solve, but often because there was no such “pain” in the marketplace. Either way, that fact didn’t sit well with the Dragons. After listening to one particularly awkward and pointless pitch, La Senza co-founder Laurence Lewin leaned over to his fellow Dragons and said, “Trying to sell a product that the market is not already demanding is like selling bras for [fish].” Herjavec’s response: “What they’ve invented is skis, but the problem is they are trying to sell them to people who live in the desert.”

DO: know and play to your audience

By definition, angels invest out of desire, not out of need. Consequently, you must get them enthused about working on your project. Some pitchers achieved this by extensively researching the Dragons, then highlighting areas of their ventures that would resonate with the interests of a particular Dragon. Knowing Lewin’s fetish for odd modes of transportation, one entrepreneur aimed his request for funding for a three-wheeled motorcycle directly at the lingerie retailer. The bonus: piquing Lewin’s interest was likely to prompt the other Dragons to take notice of the opportunity.

DON’T: Overvalue your Company

Remember that raising capital from investors is akin to selling product. That product is equity, which represents a future return — hopefully positive — to the investor. Like any product, it must be reasonably priced.

Too many pitchers overestimated the value of their ventures. Worse, one in five had no idea how to calculate valuation, let alone justify it. “I don’t have a problem with greedy — I have a problem with stupid greedy,” investor and former software dynamo Kevin O’Leary advised one entrepreneur who’d asked for $500,000 for a 5% stake in his fledgling company. In doing so, the entrepreneur had unwittingly valued his business at $10 million, even though it had not yet generated a cent in sales.

DO: Offer big upside

Angel investors, like the Dragons, expect the potential for high rewards. “I don’t get out of bed for 10%,” snapped O’Leary at an entrepreneur who wanted a large sum of money in return for 10% interest per year. “You want my money? Then show me how you are going to make me money — a lot of money.” “A lot of money” means a return commensurate to the risk of investing in an early-stage venture, usually 10 to 20 times the amount invested.

DO: Know your market

Successful pitchers in the Den knew the driving forces in their target markets, understood the competitive landscape and had identified the hurdles that they would have to leap in order to grow their businesses. More impressive were the few entrepreneurs who’d anticipated the key questions that would be asked, prepared the right answers and even provided supporting evidence. They simply could not be stumped, and this served them well against even the toughest Dragons.


Tune in, read on, lift off

Divorce, then marriage

Of zeal and madness

But where are the orders?


When both sides win

Skin in the game

Capital connections
What Dragons want

DON’T: Pitch a product

It sounds counterintuitive, but it’s wrong to promote your product to investors. Sell them on your business instead. Herjavec conveyed this message to several contestants in the Den: “I invest in companies, not products. I invest in businesspeople, not inventors. Having a great product is a start, but to be a fundable business you need to have barriers to entry [against competitors], a distribution plan that makes sense and, last but not least, a way to make money.”

DO: Be Likeable

This tip could also be phrased as “Don’t bite the hand that will feed you.” One pitcher challenged a Dragon’s knowledge of his industry, even though the Dragon had been in that industry for years. Another pitcher told a Dragon to “keep his counsel to himself” and then proceeded to argue with the other Dragons. When one contestant became despondent over the volume of questions asked by the Dragons, he advised them, “This is my time to pitch. Would you please shut up?” “It may indeed be your time to pitch,” replied Lewin, “but it is our Den.”

Investors don’t want to complicate their lives by dealing with founders who are hard to work with. Prove when you pitch that you’ll get along fine.

DO: Know your numbers

After several contestants failed to answer basic questions about market size, gross margins, break-even points and their supply of goods, Treliving had seen enough. “‘Be prepared’ isn’t just for Boy Scouts,” he complained during a break between pitches. “What are these guys thinking, going in without knowing the basics?” If you can’t provide potential investors with key facts off the top of your head, you deprive them of required information and undermine their confidence in you.

DO: Simplify the opportunity

Most investors have to answer to somebody, whether it’s a business partner, spouse or fellow investors. If they cannot explain your venture to these people, they will not invest. That means you need to present your opportunity in terms they can quickly comprehend. Several deals involving technology — which sometimes baffles even the smartest people in business — were struck in the Den; in each case, the successful entrepreneurs focussed on the cost/benefit analysis of their offering and avoided the hard-core programming code or chemical formula.

DON’T: Swim in a small pond

Scale is one of the key differences between an investor-ready venture and a hobby business. Some pitchers were attacking only a small local market, or pitching an opportunity that would grow to only a few million dollars in annual revenue.

“To get the large returns we seek, you need to have revenue potential in the tens of millions,” Lewin advised one entrepreneur with a good idea, albeit for a small business. “If you are, at best, going to only make hundreds of thousands €¦ you will do well, but it’s not a business investment for me.”

Still, the Dragons were kind enough to point so-called “hobby plays” in the right direction. When your business is solid but unlikely to boom, call the bank.

Originally appeared on PROFITguide.com