Dragon's Den Episode 5

I just finished watching the fifth episode of Dragon’s Den – if you missed it last night, you can watch it on the CBC website. Note that this article will include spoilers, so if you haven’t watched it yet, do that first. Then please come back and read this.

As is usual for the show, there were eight pitches and two deals, with 6 strikeouts. The deals were of interest, because neither deal was quite the way the entrepreneurs expected.

The first deal went to a company that makes edible dough, asking for $500,000 for 25% of the company. The deal was finalized on 3 dragons ultimately joining the offer to provide the funding in exchange for 10% royalties until the investment has been repaid (that is, 10% on the first $5,000,000 in sales) and 3.5% royalties on all sales after that. The reasoning of the dragons was actually fairly simple – the investment was going to be used almost exclusively to launch the product in North America, and there was no guarantee that more money would not be needed later on.

From the perspective of the entrepreneurs, this is likewise a good deal – they shift the risk of launching the product to their investors, and don’t have to give up equity. The royalties they pay are only for the North American sales, which means that they can expand elsewhere without losing out because of the deal. The only way they could lose is if the company is ultimately worth a fortune, in which case, everyone wins.

The second deal was also different than expected as well. The pitch was for $30,000 for 30% of the company, which sells hand-crafted Elvis costumes. The deal that was ultimately brokered was from 2 dragons for $5,000 for 5%, and $25,000 as an operating line. In this case, the entrepreneurs ignored one piece of information when accepting the deal – an operating line includes interest payments, and that needs to be negotiated as well. The investment was small, but that is to be expected with an extremely niche market, where the profit margin may not be very high.

The concept of an operating line is that if a company requires the money, rather than send them to the bank, the dragons will loan the money instead, but not as an investment. The question that is only sometimes answered on the show is the interest rate of that loan, and what guarantees there are that the rate will remain the same for a given period of time. However, from the perspective of an entrepreneur, there is little risk in accepting the loan, as they can always pay it off immediately if they find better rates elsewhere. Based on the interest rates that have been quoted on the show in the past, however, it seems that the current standard is about 10%, while the dragons seem to offer about 7%. At that rate, it’s unlikely that the entrepreneurs will be able to beat the offer.