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.