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.


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?

Book Review – Web Startup Success Guide

I just bought a copy of The Web Startup Success Guide by Bob Walsh. It was an impulse purchase – I was actually looking for a book on PHP and MySQL and the cover caught my eye. I never heard of Bob Walsh, but I had heard of the guy who wrote the foreword – Joel Spolsky, CEO of Fog Creek Software, and author of the blog Joel on Software, among other things.

The book, according to its back cover, claimed to provide all the answers to build a successful web startup. Joel Spolsky, in his foreword, claimed he learned something new on every page (there are over 400 pages in the book, which works out to about 5 cents per lesson. Considering I’m in the middle of developing two ideas into potential businesses, I figured this was the book for me.

I’m now reaching the end of the first quarter of the book, and already I’ve learned enough to write a review. The book was worth the money spent, even were I to read no further. So far, I’ve learned something about the history of creating software companies, the various ways there are to start a company, and what the pros and cons of each are. I’ve learned some questions to ask myself when looking at a potential idea. I’ve learned to be critical of my own initiatives, and to separate emotion from keeping ideas alive long after they should have died.

Bob mixes his lessons with interviews with various people. Don Dodge, Director of Business Development at Microsoft, discusses the differences between starting a company now versus starting one ten or twenty years ago. Rick Chapman of Softletter discusses the business model of Software as a Service and various billing systems used. These are just a few of the many (I counted 36, but I might be off by a few) interviews and e-mail exchanges recounted throughout the book.

The book is divided into 10 chapters, each of which focuses on another idea crucial to the success of a web startup. The first chapter looks at the history, which has shaped how such companies are built today. The next chapter focuses on the ideas that build your company – filling a need (and where those needs come from), having a new way to solve an old problem. The third chapter looks at platforms, and the various places you can put your idea (SaaS, PaaS, Mobile, and so on).

The fourth chapter discusses support groups and tools for founders. The fifth looks at money and financing. The sixth looks at how social media impacts your business (and it does, whether you realize it or not). The seventh chapter discusses the importance of clarity in your business. Chapter eight is about how to get all the pieces in place, and how to turn an idea into a business.

Chapter nine suggests several people you should listen to, who provide advice that can be invaluable to a new business. Chapter ten is all about where to go from here, now that you’ve read the book.

I’m not done the book, as I pointed out above. But Bob manages to deliver his points about starting a business in simple language, with relevant examples scattered throughout the book.

If you are thinking about starting a company, or already have, which has as its business model the sale or distribution of software, whether you’re a site that facilitates the use of a service, or selling desktop software directly, this book is for you.

Oh, and I did find a book on PHP – it was called PHP, MySQL, and JavaScript by Robin Nixon, and seems to be quite a good book as well. So now I’m two for two on Friday’s book purchases.

Dragons’ Den – Episode 6 Review

Apparently I’m not very good at predicting deals. My last article in which I predicted who would get a deal went flat with me guessing wrong on both counts. However, I can still review an episode, so here we go. Note, if you have not yet watched the episode, do that now, and then come back here.

To start, there was the disaster of the first pitch. While I am not an expert in copyright and trademark law, what the first entrepreneur did was foolish. Branding herself with a name similar to a franchise empire owned by one of the Dragons, and then stressing that point, is a way to increase the risk of investing for any of the Dragons. First rule of pitching to potential investors – don’t piss them off. While I think she has a viable business model, she may be forced to re-brand her business to prevent a lawsuit.

The first deal that was made was pitching to the fact that the Dragons would like the product (which they did) and that there would be a solid business plan behind it, reflecting an accurate understanding of the product and the market (which there was). Schmotoboard is essentially an electronic skateboard or snowboard, and there is definitely some appeal there. Entrepreneur Trevor Bielby worked hard to develop his idea and bring it to market, working part-time on the project with a few other people.

This idea appealed to the Dragons on multiple levels. First, Trevor knew where he stood, why he needed the money, and exactly how much he needed. Second, the product demo sold several of the Dragons to make a purchase even before they heard what the deal was. This immediate interest and ability to make quick sales, coupled with the fact that he already has stores willing to carry his product, makes this a viable business. Brett Wilson was sold on this, and gave him a rounded up amount (by $0.65, to be exact) for 50% of the company, which was accepted, and Jim Treliving joined the deal at the last minute. This was a fast deal, and will likely be successful for all parties.

The second deal was something more along the lines of what I spend much of my time doing – working online on a variety of sites. Scribble Live allows people to create a linear feed of information from a variety of sources, and has already been marketed to various large companies. Their business model is not built on ad revenues, but on subscription fees, which is more stable, predictable, and better paying. They also provide services to customize their product for their clients.

After various squabbling between the Dragons, two offers were tabled. One was between Arlene Dickinson, Jim Treliving, and Kevin O’Leary, giving the full amount ($250,000), but for 50%, and Arlene wanted the right to confirm that the site was as marketable as they were claiming. The other offer was exactly the same, from Brett Wilson, but without the verification. The pitchers, Michael DeMonte and Jonathan Keebler, countered with 30% equity (up from the initial offer of 20%). Brett gave the trio of Dragons the first choice of accepting the counter-proposal, or negotiating from there. However, Arlene, Jim, and Kevin had already agreed they would go as low as 30%, and, rather than risk losing the deal to Brett at that price, decided to take the 30% for their investment.