Million Dollar Deal with no Numbers

Caution: Spoiler Alert – visit Dragons’ Den on CBC to watch the episode if you have not already seen it.

If you are an entrepreneur, you likely know the importance of keeping accurate records, and that potential investors will be taking a careful look at those numbers before deciding to invest in your company. Apparently, someone forgot to tell James Krane and Ron Whittick to bring their numbers along when making their pitch – and it didn’t matter.

James Krane and Ron Whittick appeared on the March 10, 2010 episode of Dragons’ Den to pitch their business – Insect Defend Patch, which could double as a hang-over cure. It works by releasing Vitamin B1 into the skin, which acts as a deterrent to mosquitoes and other insects. As well, one of the effects of alcohol is a reduced ability to absorb vitamins, which does not affect the patch, which works by absorption through the skin.

Asking for $5 million for a 75% stake in the company, it would have been safe to assume that there would be impressive sales to back that up. Maybe there were, but James and Ron didn’t know what the sales were, beyond the fact that the company was, in fact, profitable. Their inability to show specific numbers meant that some of the Dragons, at least, were not going to be interested.

But not all the Dragons were scared off. Starting with Brett Wilson, then joined by Jim Treliving, an offer was made, despite the lack of numbers. From his perspective, due diligence would turn up the company’s revenues, costs, obligations, and so on. He was more interested in the idea, which, with the right marketing, could easily become a multi-million dollar deal.

The offer was for 75% of the company – for $500,000 in cash, and the balance of the $5 million to be paid as a royalty from future sales.

Shocking? Yes, but remember, we only see part of the presentation on the show. James and Ron may have known a lot about their product, and the company’s rights to the technology. While they may not have been able to justify a valuation of $7 million, from Brett’s perspective, they merely need to earn $500,000 for him to recoup his investment (after paying the royalty), and the applications of their invention certainly have that potential.

If you’re planning to pitch your idea, it may not be that important to know your numbers at the first presentation. What you need to be able to present is the viability of the product as a business, and that it is making money (even if it isn’t much at the moment.

  • http://www.insectdefendpatch.ca/ James Krane

    Hello Elie.
    James Krane here. Thanks very much for the nice words. After reading your article I felt compelled to drop you a line and fill in a few blanks for you and your readers.
    I would like to begin by thanking Brett and Jim for making the biggest deal in Dragons' Den history with the Insect Defend Patch. It is going to be the first line of defence in mosquito protection around the world.
    Ron and I were in front of the Dragons for about 40 minutes. 7:21 minutes made it to air. It must be obvious to everyone that there was much interaction between us that ended up on the editing room floor.
    We had the numbers that mattered.
    -4 million units sold.
    -Approval so far in 14 countries.
    -23 more countries under development.
    -Product raw cost
    -Retail pricing
    We were on the show representing the inventor and his partner in the US who own the patents (they had given us power of attorney) . 2 weeks before our filming day the inventor had a heart attack. We were not able to get the financial statements. We were faced with a big decision. Do we bail out on every entrepreneurs dream or do we go on the show try to convince them with what we had? As the Canadian rep, I DID have all the Canadian numbers for 2008 but they really were not interested in those because we were offering them the worldwide rights.
    I think the key to our success was hidden in Brett's words. If you get a chance watch it again on YouTube. Brett states “I saw these at a trade show earlier” Kevin asks “Do they work?” Brett's response is…”Yes”.
    Brett had hit our booth last year at the Green Living Show and had been given samples. I suspect he was the only Dragon who had actually used them personally before we filmed for the show. Jim, the ex-Mountie, seemed to be studying us and figured out at the last minute that Brett had “inside info” that's why at the very end he said “I think you have something here. I'm in.” Robert was the only one really hung up on “numbers”.
    Just to confirm the deal made on the show was for $5million for 75% paid $500,000 initially and a 5% royalty on sales for 30 years. This timeline was also left off the actual show. This was exactly what we asked for when we walked down the stairs. The largest deal in Dragons' Den hisory.
    We were obligated to speak about other products the inventor sells in other countries because we were offering them the wrldwide rights. The only product we will be importing and selling in Canada is the Insect Defend Pach.
    It will be available this season at many fine retailers in Canada including WalMart, Home Hardware, Zellers Pharmacies, Loblaws Pharmacies, Giant Tiger, Metro Stores, Rexall, Pharma Plus and many more. The list is growing daily.
    Remember, the patch is 75mg of vitamin B1 and it is perspiration activated. The more you sweat the better it works. I lasts up to 36 hours and is safe for children as young as 1 year old. Thanks again for helping us get the word out.

  • http://blog.optimalupgrades.ca Elie

    Hi James,

    First, thanks for your feedback! I've been writing about Dragons' Den since the beginning of Season 4, but don't usually have the chance to see the entrepreneur's side of the story. I'm well aware that what appears on the show is heavily edited, and my comments are obviously influenced by that.

    I'll be correcting the terms of the deal in my article, as per your comment. I don't think the terms of the royalty were disclosed on the show, just that there would be one, and so I'll stick with that version in the article.

    You make an excellent point about Brett's recognition of the product being a major factor in the decision to invest. When the investor already knows your product and that it works, you've already won half the battle. Usually, however, you would still need numbers (i.e. the first presentation is to convince the investor that you have a worthy product, the second is to convince them that you have a worthy business).

    In your case, what was being weighed on the show was a lack of knowledge of relevant numbers. Is that a fair representation? No, because, as you point out, in the time not aired you discussed Canadian numbers, as well as overall units sold, raw cost, and retail pricing, which can give a good estimation of profitability.

    So, congratulations on making the deal! If you want to write about what the experience has been like, or how you moved forward once the show was over, please drop me a line.

  • http://blog.optimalupgrades.ca Elie

    I believe the due diligence is done by KPMG, and as you say, it’s just as important as the initial presentation that you get it done right.

  • Dori B

    Great article Elie,
    I would only add one thing: after the deals are made and the editing room is finished cutting the show down to size the one and in my opinion most important step that is often overlooked is the due diligence process that is done behind the television curtain. Its good entertainment to purchase business ideas over a conversation and or a presentation but I am absolutely confident that the dragons do their due diligence in looking at the owners personality, their accounting practices, their credit records, criminal records …etc before any cheque gets signed. That may not be good entertainment but its a crusial businss step!

    That’s my food for thought…