Most Common Mistakes on Dragon's Den

By on October 26th, 2009

I’m a fan of a show here in Canada called Dragon’s Den, where entrepreneurs pitch their ideas to a panel of dragons hoping for an investment. The catch is that the entrepreneur must get at least as much as they are asking for, or they get nothing.

The most common mistake I’ve seen, and it seems to permeate entrepreneurs, is that of a false sense of self worth. The entrepreneur states an amount of money they want (for example, $400,000) and the amount of equity they will give up to get that money (for example, 25% equity). In the example provide, that puts a value of $1,600,000 on the company, and the first thing the dragons are going to do is figure out if it’s worth that amount.

Knowing this, the pitch will include nice numbers – $300K in sales last year, new contracts to distribute the produce, and so on. But then the entrepreneurs start to show their weakness – they don’t mention the debt until prompted (in one case, $300K of debt), nor the fact that they have negative cash flow (in one case, $30,000 per month). The valuation they’ve placed on their business is suddenly much too high.

To be fair to the entrepreneurs, they often know why they need that amount of money, and they are desperate to get it. They are unable to get a loan for some reason (and that should be a warning of its own) and are hoping for an investor. They are also concerned that the dragons will lower the valuation of the company, so they start way to high in the hopes that it will end high. Not to worry though – one group pitching their idea only had to give up an additional 2% to get what they wanted (33% became 35%) which shows that accurate evaluations will be treated as such.

The other question that many entrepreneurs seem to struggle with is what they have planned for the money. Before handing anyone cash, the dragons want to know that their investment will be handled wisely, and that the person they are trusting with their money has already proven they can handle that kind of responsibility.

Pitching on national TV may be daunting, but it’s really no different than pitching to a venture capitalist in private (except for the national embarrassment when the entrepreneur’s idea is incredibly lousy). Make sure you have an accurate idea of what your company is worth (keep in mind active and passive income, expenses, debt, growth projections, past increases in sales – better yet, get an accountant to do this for you) and how much money the company really needs to grow to the next level. If you set a reasonable expectation, you have a better chance of succeeding to get the capital you need.

Related posts:

  1. Dragon's Den Episode 5
  2. Dragons' Den Episode 8
  3. Dragons’ Den – Episode 6 Review
  4. Review of Dragons' Den Episode 8
  5. This Week on Dragon's Den
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  • Dragon Fan

    How do the dragons evaluate a company in terms of calculations?
    Can you show how asking for $400,000 and only giving $25 equity equals $1,600,000?

  • admin

    An investor is going to put up their cash for a percentage of a company, in the example given, $400,000 for 25%. It is assumed that all that is being given by the investor is their cash. So if the company was worth $1.2M before the investment, and now it has an additional $400K in cash that it didn’t have before, without any debt to cancel it out, then it would now be worth the $1.6M they claim it is.

    There are two ways to name the dollar value of the company – before the investment, or after. On Dragons’ Den, they always use the number after the investment – that is, the value of my company is the value it is today plus the cash you’ll give me, which totals $X. The other way is to say my company is worth $X today, without your investment. If you put up some cash, then you’ll increase the value of my company, and you (the investor) would own that increase in value as a percentage.

  • Dragon Fan

    I made an error in my statement I actually meant 25% equity.

    Thanks for the reply and forgive my ignorance. So the equity the business owner gives up doesn’t have much to do with the Dragons final evaluation? It is based off the company’s present value plus the cash they want from the Dragons? For example: I approach the Dragons and say my business is worth 1,000,000. I ask the Dragons for 400,000, they evaluation my businesses worth as 1,400,000? So the percentage I offer really doesn’t have much to do with the evaluation of my businesses worth? It just determines how much of the $1,400,000 the Dragons will own.

    My business is worth $1,000,000
    I want $400,000
    The Dragons want 50% of my company
    So their entitled to $700,000 of my business If I agree?

    Once again forgive my ignorance.

    Thanks

  • admin

    You’re on the right track, but not exactly.

    The Dragons are trying to get a picture of what the company is worth today, and thus, what the company is worth after they put up the money. So in your example, you want $400,000 and offer 25% (at a valuation of $1.6M after the investment). The Dragons say that they will give you $400,000, but for 50%. That means that they say your company is worth $400,000 now, and they’ll double its value by putting up an equal amount. So they are not entitled to $700,000 – they’re entitled to 50%.

    To make this clearer, let’s say your company has 1,000 shares, which you currently own. You say you’ll sell 250 of those shares to the Dragons for $400,000 (which is your valuation of $1.6M). The Dragons say they’ll give you $400,000, but for 500 shares (that is, 50% of the company). If you accept, they own 500 shares, and you own 500 shares.