Keep Track of This

The deal on Dragons’ Den from CBC this week showed an unusual level of risk, and not because of the entrepreneur who put forward the idea. Interestingly, all five Dragons thought the product was solid, and the company had sales to back up the valuation. The issue, however, was in the viability of the company as an investment.

Track It BackJason Wagner of Winnipeg, Manitoba, came on the Den asking for $200,000 for 25% of his company, TrackItBack. The product is a label which can be attached to anything, such as portable electronics, and contains an ID which can be used to identify the owner of the object.

His company, which has been around since 2005, is profitable, with $500,000 in sales last year (2008) and projected sales of $800,000 in 2009. With 85% recovery rates on reported lost items, the $800,000 valuation seems to be fair. In addition, Jason stated that Sony was including the label with their Vaio laptops with a one year subscription, which had a conversion rate of about 16% with customers renewing at the end of the first year.

The problem the various Dragons saw with the product was in its life expectancy. With GPS technology available, it is only a matter of time before the label becomes obsolete as the manufacturers add their own tracking systems into the devices. As such, the exit strategy from an investment point of view becomes complicated, since there’s small chance of going public, or someone buying out the company.

Perhaps that’s why Brett Wilson made the following offer – he would give the $200,000 for a 25% stake in the company, but would also require a 4% royalty. With a $20 price tag on the labels, that’s the equivalent of 250,000 units sold to recoup the investment. According to the numbers given by Jason, it would take Brett in the area of 6 years for that to happen, although, with increasing sales each year, that could turn out to be a lot shorter.

Sometimes it’s not how good or bad a product is, or how solid the pitch and the numbers are. Sometimes it’s just about getting a plain return on the investment that will determine whether or not a deal can be struck.