Interesting.

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Can you accurately guess, for each of the 8 pitches, whether there will be an offer, and, if there is an offer, how much equity will it ultimately cost, and will it be straight equity for cash, or will it have an alternate financing structure (e.g. establishing a line of credit/operating line)?

There is no prize for the right answer, although I will be getting in touch with anyone who gets it right to know what it was about the summary of the pitch that tipped you off.

For me, my guess is that the Fazzari Push-up Machine will get one of the offers, because they seem to have a reasonable product that can be leveraged. They are asking at a value of $300,000, but without knowing the details of their past sales, there’s no way to know how accurate that evaluation might be.

Alternatively, Techno Logic looks optimistic as well, with a product that fills a need with an exercise machine that takes up little space, but they have a very high valuation (just under $1,500,000) which they will likely have a hard time backing up with numbers. If they can convince one of the Dragons that the company is worth at least $1,000,000 then they may be able to strike a deal. Alternatively, the Dragons may offer an operating line as part of the cash to help deal with the high valuation.

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As is usual for the show, there were eight pitches and two deals, with 6 strikeouts. The deals were of interest, because neither deal was quite the way the entrepreneurs expected.

The first deal went to a company that makes edible dough, asking for $500,000 for 25% of the company. The deal was finalized on 3 dragons ultimately joining the offer to provide the funding in exchange for 10% royalties until the investment has been repaid (that is, 10% on the first $5,000,000 in sales) and 3.5% royalties on all sales after that. The reasoning of the dragons was actually fairly simple – the investment was going to be used almost exclusively to launch the product in North America, and there was no guarantee that more money would not be needed later on.

From the perspective of the entrepreneurs, this is likewise a good deal – they shift the risk of launching the product to their investors, and don’t have to give up equity. The royalties they pay are only for the North American sales, which means that they can expand elsewhere without losing out because of the deal. The only way they could lose is if the company is ultimately worth a fortune, in which case, everyone wins.

The second deal was also different than expected as well. The pitch was for $30,000 for 30% of the company, which sells hand-crafted Elvis costumes. The deal that was ultimately brokered was from 2 dragons for $5,000 for 5%, and $25,000 as an operating line. In this case, the entrepreneurs ignored one piece of information when accepting the deal – an operating line includes interest payments, and that needs to be negotiated as well. The investment was small, but that is to be expected with an extremely niche market, where the profit margin may not be very high.

The concept of an operating line is that if a company requires the money, rather than send them to the bank, the dragons will loan the money instead, but not as an investment. The question that is only sometimes answered on the show is the interest rate of that loan, and what guarantees there are that the rate will remain the same for a given period of time. However, from the perspective of an entrepreneur, there is little risk in accepting the loan, as they can always pay it off immediately if they find better rates elsewhere. Based on the interest rates that have been quoted on the show in the past, however, it seems that the current standard is about 10%, while the dragons seem to offer about 7%. At that rate, it’s unlikely that the entrepreneurs will be able to beat the offer.

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The most common mistake I’ve seen, and it seems to permeate entrepreneurs, is that of a false sense of self worth. The entrepreneur states an amount of money they want (for example, $400,000) and the amount of equity they will give up to get that money (for example, 25% equity). In the example provide, that puts a value of $1,600,000 on the company, and the first thing the dragons are going to do is figure out if it’s worth that amount.

Knowing this, the pitch will include nice numbers – $300K in sales last year, new contracts to distribute the produce, and so on. But then the entrepreneurs start to show their weakness – they don’t mention the debt until prompted (in one case, $300K of debt), nor the fact that they have negative cash flow (in one case, $30,000 per month). The valuation they’ve placed on their business is suddenly much too high.

To be fair to the entrepreneurs, they often know why they need that amount of money, and they are desperate to get it. They are unable to get a loan for some reason (and that should be a warning of its own) and are hoping for an investor. They are also concerned that the dragons will lower the valuation of the company, so they start way to high in the hopes that it will end high. Not to worry though – one group pitching their idea only had to give up an additional 2% to get what they wanted (33% became 35%) which shows that accurate evaluations will be treated as such.

The other question that many entrepreneurs seem to struggle with is what they have planned for the money. Before handing anyone cash, the dragons want to know that their investment will be handled wisely, and that the person they are trusting with their money has already proven they can handle that kind of responsibility.

Pitching on national TV may be daunting, but it’s really no different than pitching to a venture capitalist in private (except for the national embarrassment when the entrepreneur’s idea is incredibly lousy). Make sure you have an accurate idea of what your company is worth (keep in mind active and passive income, expenses, debt, growth projections, past increases in sales – better yet, get an accountant to do this for you) and how much money the company really needs to grow to the next level. If you set a reasonable expectation, you have a better chance of succeeding to get the capital you need.

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Of course, everyone knows the simple answer – buy when the price is down.

The question, however, is how do you know when the price will be down, and how do you know when it has reached its lowest point? Of course, in hindsight, the answer to this is easy, but how do you predict it?

There is, in fact, no way to know when the price has finally bottomed out. Look at any stock chart, and you will see the price rising and falling, and rarely in a nice smooth curve. There are many peaks and valleys, and knowing which is the last one is impossible to predict.

As an investor, you must therefore guess, but at the same time, protect yourself in case you’re wrong, and here’s how.

For our example, let’s say you have $1000.00 to invest. You could invest it all today, but then if the market tanked tomorrow, you would lose the difference. For that reason, you spread your risk. Split your investment over 2 days in equal parts, and you’ve now paid an average price for your stock. The more portions you split your investment into, the more you mitigate your risk.

Of course, if prices start to rise, you won’t have invested all your money at the bottom. But, as prices fall, or if prices are uncertain, this can protect you. Additionally, it is easier to invest $100 per week for 10 weeks than it is to invest $1000 in one day. This can help you budget better, and help you with general savings. It is always easier to save in stages, even if each stage is small, than it is to put away a lump sum infrequently.

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