Leadership

Lessons from the Dragons: Winning a Winner-Takes-All Market

Speedy scaling and some entrepreneurs who were out fishing in Dragons' Den Season 10 Episode 13

Written by Murad Hemmadi
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Thomas Crown shows PressFront to Michele Romanow. Photo: CBC

Almost a decade in, Dragons’ Den continues to inspire and amuse Canadian TV audiences. But the CBC’s hit show isn’t just meant to be entertaining. It’s a televised school for entrepreneurs. For each episode of Season 10 (which airs Wednesdays at 8 pm ET), we’ll be talking to one of the Dragons to get a behind-the-scenes glimpse of their decision-making process and hear what they hope viewers learned. Episode 13 featured a product that needed to scale speedily and a couple of entrepreneurs who were out fishing.

PressFront

Entrepreneur: Thomas Crown | From: Toronto | Ask: $150,000 for 10%

App that makes print media interactive

Software can do something few other product classes can: scale, and fast. “When you have a product that works, a billion people can use it,” says Michele Romanow. “[It] would be pretty much impossible in the physical goods space to get that kind of distribution.”

That ability to ramp up rapidly is what drives the huge valuations we’ve become used to seeing from technology companies. But when Thomas Crown came into the Den looking to put a $1.5 million price tag on PressFront, not all the Dragons were ready to pay up. “I think the Den is challenged with these new tech businesses—these aren’t valuation models that are easy to deal with,” observed Joe Mimran. Ultimately it was tech veteran Romanow—the head of marketing for Snap by Groupon and a co-founder of Buytopia—who did the deal, partnering with Michael Wekerle to put up a joint $150,000 for a 25% equity stake, of which 2.5% was reserved for an option pool that Crown would contribute an additional 5% to.

The PressFront app augments physical media, allowing users who scan a magazine page to access videos, find product information, or buy what they see. The company charges publishers $1 a page to use the DIY version of its platform, and $29 per leaf to do the augmentation for them. With eight or more items per page and the opportunity to drive purchases, “it’s cheap,” Mimran observed on the show.

In an exclusive interview before the episode aired, Romanow says PressFront is part of a broader industry trend. “I think that there’s going to be a lot of value in how you make offline media online, and how you intercept those two worlds,” she explains. “I think [Crown] had an interesting approach on that.”

One of the platform’s selling points for publishers is the ability to access data on reader engagement and interest which they can show to advertisers, something that’s harder to gauge from a print magazine alone. “If we could get Condé Nast and the group of publishers that matter to use this, then we’d have a pretty awesome business here that’s centred around a monopoly,” Romanow observes. (The deal didn’t close, and PressFront has since rebranded as ScanChat).

During one month in beta, PressFront generated $20,000 in augmentation services sales. That number looks tiny compared to Crown’s valuation. “I think you have a long way to actually turn some profit and some good margins in this business,” Manjit Minhas told him. Tech companies can take a lot longer to generate revenue, Romanow acknowledges. The flipsde: “Most businesses don’t ever get the chance to scale the way a tech business does.”

In the Den, Romanow noted that Crown’s product was facing a lot of competition. “This is like a winner-take-all market, classic,” she told him. And post-filming, Romanow emphasizes that there’s only one way to win that kind of contest. She cites the example of Polar Mobile, which also started out as a magazine platform play and grew very quickly by acquiring lots of titles.

“It’s really about speed [and] size of contract,” Romanow says. “You have to go quickly, you have to find a solution that everyone wants to use, and you have to have both solid technology and really strong business development folks.”

TOTALUP

Entrepreneur: Jim Chung | From: Brampton, Ont. | Ask: $100,000 for 15%

Interactive push-button ad on for casino games

Monetization takes its own kind of genius: A nuclear physicist tinkering in his basement could lead to some explosive results, but TOTALUP wasn’t really blowing up in the Den. The company rents its push-button technology to casinos, creating a nice stream of recurring revenue that totalled some $80,000 as of filming. It’s a business model that at least one Dragons appreciated. “I love the royalty business, I think [it’s] one of the best businesses you can be in,” Joe Mimran said. But Mimran didn’t think the product had enough traction, and another Dragon was concerned about the product’s creator, who didn’t make an appearance in the Den. “My biggest thing is that you are going to be the guy doing all the work,” Jim Treliving told Jim Chung, the business half of the TOTALUP team. “Because inventors are a different breed, as you know.” Treliving offered $100,000 for 50%, and Chung took the deal.

Tomorrow I’m Fishing in Canada

Entrepreneurs: Peter Jacobs & Jamie How | From: Whitby, ON | Ask: $250,000 for 50%

Canadian fishing vacation packages

Don’t price yourself out of a deal: Jacobs and How believe there are plenty of European vacationers who want to hit Ontario’s lakes with rod and tackle, but they had a hard time convincing the Dragons of that without any revenue. “We’re not gifting the money out,” said Jim Treliving. “You’ve got to have a business. We’re investing in people that make money.” And the rates that the company proposed to charge—$2,200 for five days and five nights—seemed unprofitably low, even if Jacobs and How run their package tours in the offseason as planned. The duo failed to hook an offer.

The TwoCan Cane

Entrepreneurs: Marco Longley & David Bernhardt | From: Richmond, B.C. | Ask: $50,000 for 10%

Convertible cane

Recycle your capital quickly: After licensing the Heft, the product he successfully pitched in the Den in 2012, Longley wanted to do things differently this time around. “Our goal is to manufacture,” he said. But that ambition prevented at least one Dragon from making an offer. “You’ve got a lot of hurdles ahead of you,” Joe Mimran said, listing off the need to learn manufacturing and buy lots of inventory. Valuation also proved to be a hurdle, so Longley offered a royalty starting in year three that would see the initial capital paid back three- or four-fold over 36 months. “We know as capitalists, your first goal [is to] get your money back fast, so you can get it into another project,” he said. Manjit Minhas, who said her 6’2″ father goes through canes at a rapid pace, countered with an offer of $25,000 for 25% equity and a 3% royalty beginning in the first year. Longley and Bernhardt accepted.

Sweet Flour Bake Shop

Entrepreneur: Kim Gans | From: Toronto | Ask: $350,000 for 35%

Custom cookies

Adapt to the space you’re in: With $700,000 in sales over the previous 12 months, Gans entered the Den with a sweet little business, but one that was only breaking even. As Sweet Flour expanded from a storefront into e-commerce, Gans also had two children, she explained. “I wasn’t ready to accelerate the business in that time,” she said. “We feel we can grow this business [to] $10 million-plus in three years [and] be in 20 locations.” But the retail side worried the Dragons. “You’re competing with the chocolate shops, bakeries—everyone has their own kind of clientele,” observed Michael Wekerle, a fan of the cookies. But Manjit Minhas liked the potential of the store-within-store model, and she made the only offer, proposing $350,000 for a 10% equity stake and a 10% royalty until she’d doubled her initial capital. Gans tried to counter by offering a flat 40% equity stake, but Minhas wouldn’t bite. “It’s about moving fast, because there are no barriers to entry here,” she said. She offered to drop the royalty to 7.5%, but Gans couldn’t stomach it.

MEET THE DRAGONS THEMSELVES:

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Originally appeared on PROFITguide.com
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