Dragons' Den Episode 10 – A Review

Having watched Dragons’ Den for a few months now, I’ve developed a certain expectation for the show, and each episode in particular. There’s a certain sense of drama that is played out over the show, with the entrepreneurs fighting to win the coveted deal from one or more of the Dragons. As usual, there were 8 pitches on this week’s episode, and as is also becoming the fashion, there were 2 deals, and 2 follow-ups to past pitches on the den (one going back to last week and the holistic healer).

I’ll briefly recap the two deals here, but then I intend to focus on one pitch in particular which highlighted a potential pitfall for hopeful entrepreneurs.

The first deal was for a smoothie company (Euphoria Smoothies) which was started by a husband and wife team, Sam and Bisma Haider from North Bay, Ontario. They asked for $500,000 for 20% of their company in order to grow from 40+ stores internationally to hundreds of stores. Unfortunately, their product was not unique enough to interest most of the dragons, as there was a strong risk of another company starting up with a similar product. However, their pricing model was different, charging licensing fees instead of franchise fees, and making a margin on their branding. Different enough to interest Jim Treliving of Boston Pizza to invest, but for 50% of the company. While they had $2,500,000 in sales in 2008, the market for their product is quite flooded, the risk high, and sales alone don’t dictate a valuation.

The second deal reeked of sleaze. Mark Chadwick and Neil Currie of Vantage Wire, a company which provides real-time stock quotes, came out with 2 girls and a pitch targeted directly at Kevin O’Leary. The girls had nothing to do with the product, which insulted the other dragons, and showed the entrepreneurs to be out for the quick sale. It also undermined their integrity, which caused the other dragons to bow out.

Kevin, however, wanted to hear more – they had sales numbers to back up their valuation. However, Kevin looked past the girls and saw their lack of integrity, and therefore refused to trust them with his name. He therefore offered the $150,000 for 50% of the company, plus a 5% royalty to be paid until the investment had been repaid. This would allow him to protect his name from being mis-used (Kevin suggested he would likely rebrand the product entirely). Mark and Neil took the deal.

Now comes the more interesting part of the episode – two deals that failed.

Eric Brideau of Augenstern Diamonds came on the show asking for $275,000 for 30% of his company, which manufactured diamonds from human hair. In addition to having the dragons find his product creepy, he also made a crucial mistake – he claimed to have a personal net worth in excess of $10 million. With that kind of personal finances, his need for the dragons is highly questionable. While he claimed that the dragons could provide him with contacts that would help him rapidly grow his company, this also shows that he lacks a certain degree of trust in his own idea.

The other failed deal that provides an even greater lesson is that taught by Claire Copp from Vancouver, B.C. and her software called Trader II. She walked on the set without a demo, a valuation of $3,375,000, and no sales. She talked about the size of the market. She talked about growth forecasts. But she couldn’t talk about her product.

When pushed by the Dragons to explain her product, and how they would make back money, Claire explained how sales of a certain degree would earn back the investment. But she couldn’t explain why anyone would buy the product, nor why she had been unable, in the 20 years she had been working on the product, to sell any copies.

The lesson here is fairly simple. When an entrepreneur comes onto the Den, (s)he needs to be prepared to state the following:

  1. How much money do I want, and what am I prepared to give up to get it
  2. What is my product, and why would anyone pay for it
  3. Who is using my product today, and what are past sales numbers
  4. What is the investment money to be used for

An entrepreneur who cannot answer these questions should be asking themselves whether they’re in the right business in the first place. They can also expect that even if a deal is offered on the Den, it will likely cost them at least 50% of the company, because these questions are of the type that any leader of a company can answer about the company they run.

10 Questions to Keep Asking About Your Business

Since this morning, I have seen several posts on Twitter in regard to the Forbes list of 10 Questions You Should Never Stop Asking published on November 20, 2009. A summary of those questions is copied below, for the full commentary, I recommend you read the original article.

  1. What is our purpose for existing?
  2. Who is our target customer?
  3. Why does anyone need what we’re selling?
  4. If there is a need, is it enough to support a profitable business?
  5. What were our competitors up to?
  6. Can you reduce expenses–without harming the product?
  7. Do we have the right leadership?
  8. Do we have the right employees?
  9. How will we continue to drive revenue?
  10. How are your employees holding up?
Courtesy of Flickr.com by misallphoto

Courtesy of Flickr.com by misallphoto

This list, however, is targeted to a business of a certain size and upward. What should you be asking if you are a one-person shop? To complement this list, I’ve prepared some additional questions that you may find useful, that will hopefully lead you to being in the position to use the list from Forbes.

  1. What am I trying to accomplish?
    Similar to the first question on the Forbes list, this question makes you look at your goals. If you don’t have any yet, then you should sit down and write a few down. It’s hard to get somewhere in particular if you don’t know where you’re going. Alternatively, the answer to this question might be “nowhere in particular” and “let’s see where this takes us”. Both of these are valid, but you should be aware of the answers.
  2. How am I going to reach my goals?
    This question addresses both short-term and long-term goals. If the answer to your first question was to build an application soon to be included on all mobile devices, then the answer to the second question will include points such as:

    • Develop the key components to the application
    • Contact mobile device manufacturers
    • Monitor available applications for those devices for possible improvements
  3. Do I have all the skills needed to reach those goals?
    No one person is perfect for all tasks involved in running a business. You may be really business savvy, but lack some technical skills, or you might be an expert salesman, but don’t know how to deal with copyright laws. You’re either a Jack-of-All-Trades, Master of None, or, more likely, you are the Master of One. If you don’t have a needed skill, how are you going to fill in the gap? (The answer might be that you’ll hold out for a little while.)
  4. Who will pay for my skills or product?
    This corresponds to questions 2 and 3 on the Forbes list. Your idea might seem to be really good to you, but do you know whether or not it’s viable as a business? Have you spoken to any potential clients about it?
  5. Who am I competing against?
    If you don’t understand your competition, then you might not understand your own product. Be aware that your clients will know about your competition and ask you about them. You can demonstrate your expertise by being aware of the differences between what you offer and what your competition offers. If it’s exactly the same as what the competition is offering, however, most potential clients will prefer the business that’s been around longer. Which leads to the next point:
  6. How do I expect to succeed against them?
    This is also known as your Secret Sauce by some business writers. This is the factor that makes you, or your business, different. It might be a customized algorithm. It might be a new approach to an old concept. Whatever it is, this is what will set you apart from your competition.
  7. How am I spending money, and can I reduce that?
    It is incredibly important to keep track of your expenses and revenues, and to constantly review that record. You should know where every dollar is coming from, and where it’s going. For example, if you have a small office with a coffee urn, do you know how much it’s costing to run it? How much did you pay for your business cards? Who owes you money, how much, and for how long? What does it cost you to keep your website running? Are you getting good value for your dollars?
    Only by keeping track of your budget can you hope to keep your business profitable, and be able to grow. How else will you be able to reduce your expenses without compromising your product?
  8. Is it time to hire someone?
    Hiring your first employee can be an extremely difficult decision to make. You become responsible to pay them, and they will get paid before you do, always. In order to make your first hire, you should know what it is that employee should be bringing into the company. Do you want someone with the same skills you have, or do you want a specialist? If you find yourself spending excessive time on administrative tasks instead of working on your clients’ projects, your first hire might be an administrative assistant who can do most of that work for you.
    What’s important to remember is that the hire needs to be worth the investment. If you pay them $40,000 a year, then they need to be adding that much value to the company and then some. In other words, you should see as a result of hiring that person your revenues go up by more than $40,000 per year. Some would say that this number should be around 3 times their salary, or $120,000 per year. The exact number is not relevant, though, but what is relevant is that the employee be worth their salt.
  9. What are my clients saying about me?
    In the age of social media, word about you and your business can spread extremely quickly. It’s important to be listening to what your clients are saying about you. This will let you address issues before they become problems, or to head off potentially damaging rumors (which are not, in fact, correct, or at least, not correct anymore). Gone are the days where customers and clients could be treated with impunity, as they now have outlets to vent against individuals and companies. Make sure you’re listening! (Chris Brogan talks about how to do this.)
  10. Am I balancing my work life with my personal life?
    Too often overlooked, it’s important that you don’t lose track of the bigger picture. Are you spending some time on your family and friends, or are they all forgetting about you? Yes, you’re busy running a new business, but remember to set aside some time on a regular basis to keep those aspects of your life strong.

This list is by no means complete, but hopefully, it will give you a start on keeping your business strong and growing. If you have a question that you think belongs here, please let me know in the comments. I would love to hear what you are doing to ensure that your business is on track to success!

Dragons' Den Episode 9

I particularly liked the deal made last night on Dragons’ Den (if you haven’t seen it yet, click here to watch it online). There was another deal made during the show, between Clayton Hollingsworth and Brett Wilson, for $5000 ($500 of which Clayton received before he left the set), but while Clayton was providing a service, it was not an investment.

The deal which was more interesting was between Ross Lipson & Howard Migal of Grub Canada, and Brett Wilson (yet again). They came in asking for $200,000 for a 20% stake in their company. According to their site:

GrubCanada.com allows you to order food online from all your favourite restaurants for delivery or take out. We make ordering food, fun, fast, easy and much more convenient…

How It Works?

  1. Place order online for delivery or take out.
  2. Restaurant receives and confirms order via email.
  3. Restaurant prepares and delivers or you pick up your meal.
  4. You enjoy the hot, fresh food that just came so quickly and easily!

However, once they presented their numbers, it was clear that their valuation was priced too high at $1,000,000. In the month before their appearance on the show, their income was a mere $12,000. Extrapolating based on their growth and sales forecasting, their annual, after-tax income for that year would be about $70,000.

Ross and Howard, however, knew their company, and the numbers. Their membership was growing consistently between months. Sales were on the rise. Their biggest issue was marketing, and pushing their site around. While their valuation was high, consideration was being given for the fact that they were a young company, and still undergoing natural growth.

Kevin O’Leary started the negotiation with an offer of $200,000 for 50% of the company, to which Robert Herjavec joined in, but contingent on the willingness of Jim Treliving or Arlene Dickinson to join the deal. Arlene, however, was not interested, as she found herself attracted to the business smarts of Ross and Howard, but not the idea itself. Jim was also not interested on account of their business model.

The business makes money by taking 9% of the price of any food ordered from the restaurant as a royalty. Jim, as owner of Boston Pizza, found this to be quite steep, and felt that Ross and Howard would have a hard time getting franchises to be interested in working with them. As soon as Jim declined the deal, Robert backed out, and Kevin decided to withdraw his offer.

At this point, Brett made his offer – $200,000 for 50% of the company, and 1% of the 9% royalty being charged to the restaurants. The other dragons encouraged Ross and Howard to accept the deal – at a $400,000 valuation, they were still getting a higher valuation than their numbers justified, and they were not likely to do better from anyone else (not that there was any other deal to discuss).

The end result? Ross and Howard accepted the deal, and Kevin was left asking if this was the deal that got away from him.

The Art of Customer Management

I was reading a post by Jeremy Lichtman about Website Development where he raised an interesting point – he mentions the concept stage of development, where the initial idea is evaluated, and says:

It isn’t easy to tell a potential customer that their ideas are terrible, or to try and make them modify their concepts in order to allow them to work better online.
Part of that is that developers and designers are by nature creative people, and we don’t like raining on somebody’s parade.
Part of it is also the risk of losing a possible customer.

This triggered a brief discussion in the comments about how to learn the skills required for dealing with [potential] clients. It’s not something covered as part of a standard degree in Computer Science or the like. It’s not part of a certification in web development for most colleges. As a result, many would-be web developers working for themselves fall into one of the following two categories:

Customer Management Chart

Customer Management Chart

  1. They treat the client’s opinions and ideas like gold, and implement them regardless of whether or not it’s a good idea. While this is good for getting work, it’s not good for developing a business, as you end up spending too much time dealing with the whims of ill-informed clients. This prevents you from developing your business of building quality websites that fill real needs. In the end, your clients are not happy because the site doesn’t live up to their expectations (regardless of whether those expectations were reasonable) and you end up losing the client.
  2. You build what you like building, or what you think is a good idea, and if the client likes it, that’s great, and if not, they can go bother someone else. I don’t think this method needs much explanation as to why it’s a bad idea.

What’s needed here is to find a good balance between the two extremes, a sprinkle of tact, and some of your business experience.

Evaluate what your [potential] client is proposing, and try to figure out what the client is trying to achieve. Then confirm your guess with the client. For example, the client talks about creating a blog where every web developer in the world will spend all their time (not going to happen). But what the client really wants is a way to market their new product for web developers.

Now, rather than putting down the idea completely, gather some facts about what the client is trying to do, and what they’re trying to achieve. For example, you might collect some articles about how many web developers have A.D.D. or the fact that there are thousands of sites out there for developers, and the largest such site only has 200K members. Get some examples of how similar products are marketed (e.g. show Eclipse vs. Rational Application Developer for a Java IDE) and what their numbers look like. Try to gather as many quantifiable facts as you are able.

Next, present an alternative to the client, from the perspective of someone who understands what they are trying to achieve. “In order to market your software using various social media platforms, how about we run through some options, and what some companies which are similar to yours are doing.”

There, you’ve said it – what you’re trying to do (market software), there will be choices (some options), and where they came from (other companies). Now, outline the ideas clearly, and demonstrate the breadth and depth of your knowledge by having answers ready for common questions to each option. Don’t show off, just be knowledgeable, and if you don’t know, ask: “Can I get back to you on that?”

Knowledge is Precious

Knowledge is Precious

Not every client is reasonable, but then again, not every client is yours. The key here is not to attack their ideas, but to understand where they are coming from. Why did they choose you for the project? It’s because you know more than they do about how to do it. Share your expertise, use your special knowledge. Make sure your opinions are clearly delineated from the facts.

At the end of the day, you may be able to reason with your [potential] client and land a project that is a good idea, that’s well structured, and balanced.

Some [potential] clients will still insist on a bad idea, despite your feedback. However, you’ve already told them it’s a bad idea, just not in those words. You’ve outlined what they’re trying to do, and you got that right. You’ve outlined some real options that would reach that goal, and they’ve been turned down. What now?

Now you need to look at your business, and the impact accepting this client, and their bad idea, will have on the rest of your business. Will it help improve cash flow because it’s a short project (i.e. high profit margin for minimal resources)? Will this client refer you future business, thus making this a strategic move? Is this a client who has other projects with you, thereby putting pressure of losing other contracts?

Or will this project keep you busy, stressed out, and prevent you from pursuing better clients who will help your business reach its goals?

The answer to these questions will help you determine if you should be accepting or rejecting the bad idea. (Note that while you may refuse the project, treat the client with respect, and you may end up with a valuable connection as a result.)

Review of Dragons' Den Episode 8

I finished watching last night’s episode of Dragons’ Den a few minutes ago. If you haven’t yet seen it, watch is now on the CBC website, then come back here for the review.

There was, much to my surprise, only one deal last night, although there were a couple of offers. The lucky entrepreneurs were Wendy Johannson and Claudia Harvey from Dig It Handwear who were fortunate to have two dragons competing against one another for a stake in their company. The two offers were as follows:

Jim Treliving offered the $50,000 investment in exchange for 25% of the company, changing the total valuation from $500,000 to $200,000.

Kevin O’Leary, on the other hand, also offered $50,000. His initial offer was to act as a line of credit for the company, and take a 10% royalty. He adjusted his offer a moment later for 10% equity (staying with the $500,000 valuation), plus a 3% royalty on the product demonstrated.

Before we discuss the choice Wendy and Claudia made, look for a moment at the theoretical cost. With Jim’s offer, they would be giving up a large portion of their company, including any future products they might create. Since the cash offer was the same, they could not ensure that they would get a future investment for a new product, and they have 3 other products in various stages of development. However, they would be giving up the same percentage of any sales on their additional products.

Kevin, on the other hand, is taking a smaller stake in their future in exchange for a fixed royalty on sales. This provides Wendy and Claudia the possibility of future investment when they launch additional products. However, the royalty is paid first, before the expenses, which means that 3% is likely to cost them even more, since it will have to be paid from the profit. Additionally, since they are paying the 3% as a royalty, they have no assurances that Kevin will stay around to help them, despite the fact that he’s being paid a royalty.

However, it was clear that Wendy and Claudia valued equity in their company quite high, to the tune of $500,000, and were not open to compromising on that. They called their business adviser who agreed with them, and decided to go with Kevin’s offer. The deal was sealed.

Dragons' Den Episode 8

I watched the first section of tomorrow night’s episode of Dragons’ Den and really enjoyed it. The first pitch of the episode is for a strong business that made a crucial mistake – they over-valued their business. While they have strong sales and a growing business, the founder of the company forgot to pay himself a salary. The price he quoted was based on revenues of $250,000 per year, however, once he took salary ($100,000 per year), that number fell accordingly, and now his business isn’t worth as much as he said it was.

That being said, I think that other investors may come forward and help Dan Mez of Fitness on the Go with an influx of cash, as his business is fairly successful, and the risk is low.

Of the other pitches coming up, Ocean Organics looks promising, if they can justify their $1.6 million valuation. Scratchlab DJ Institute also looks hopeful with a good idea, and a valuation of $250,000 which they may be able to validate. Looking at some of the other pitches, I have a feeling the show will not only have some good deals, but also some good amusement.

Dragons' Den – Scribble Live

I read in the National Post yesterday, in their weekly review of Dragons’ Den, that the Scribble Live deal didn’t make it, although the founders are in talks with other investors, including Brett Wilson, one of the dragons who did not make a deal on the show.

Interesting.

Trading Cards

Recently on LinkedIn I asked a question about business cards and etiquette – do you always reciprocate handing out a card? That is, if someone gives you their card, should you give that person one of yours? If you hand someone your card, should you request one in exchange?

Before going any further, one thing needs to be clarified. I was asking the original question for a particular reason, and it was not so that I could write this article. I’m planning on attending a speed networking event next week, in which participants are seated at tables with five other people and get two minutes to make an introduction. The last time I attended, before anyone spoke, I had 5 cards in front of me, one from each person. After the introductions, however, I only really saw value in 2 or 3 of the connections.

The second half of the issue is that I did, at that event, reciprocate the handing out of my card. I ended up on 3 distribution lists as a result, and it took a while to get taken off one of those. All three people who put me on their mailing lists had something in common – they were all mutual fund salesmen. The question I was trying to get answered was whether I could [politely] refuse to give my card to the mutual fund salesmen at the next event.

I got many answers to my question, some of which addressed my concerns, others which seemed to ignore that aspect of the question. However, I did learn a few things about such events, and the ramifications of sharing a card.

  1. Speed networking events are of limited value, because, while they allow you to meet many people in rapid succession, they often do not allow you to establish a solid connection with any one person.
  2. Given then I will be attending this event (although this may be my last such event), sharing my card is considered to be a necessity. That is, I cannot politely decline to share my card with any one person or group of people.
  3. I can control when to share my card – I can wait until it’s my turn to introduce, thus linking my card to my introduction.
  4. I can make mention that I do not wish to be placed on any distribution lists – while I welcome networking opportunities, please keep my e-mail off any type of mailing list you may have.
  5. When receiving cards, make notes on the back regarding the person who gave me the card, and any other information that may be relevant.
  6. You never know where your next successful connection will come from, so don’t try to guess. Instead, hand your care to anyone who will take it, but always include a brief summary of what it is you do, and what it is you’re looking for.

What do you think about sharing your card? What value can you find is such events?