Advice for Small Business Owners » CBC

Den Pitches Rise and Fall

Elie Kochman — Fri, 21 Jan 2011 11:45:44 +0000

There’s something interesting about the show Dragons’ Den that seems to appeal to a certain type of business person. People come on the show with their businesses, hoping to leave the set with a potential investment from one of the five dragons, yet in the average show, only 2 businesses will get lucky. Having watched the show for a few seasons, I’ve started to notice a change in the businesses.

There are a few types of businesses that make appearances. There are the truly good businesses, with solid number behind their smooth pitch, realistic expectations, and they generally walk away with a deal. These are the businesses that could have acquired an investment elsewhere, though the relatively easy access of the dragons leads them into the den. Not that getting the investment is easy, but getting the investors to listen is a lot more straight-forward.

On the other end of the spectrum are the spectacularly bad businesses, with lousy pitches, no numbers, and unrealistic expectations in regard to the value of their business. While some get deals, it is unusual, and often not because of the merit of the business, but rather to support some other cause (Brett Wilson is often the investor in those cases).

This week, one business arrived with a new reason for needing money – speed.

Sometimes, even a profitable needs money for rapid growth, for the simple reason that expansion happens in one of two ways. Either it’s done in bits and pieces as the cash flow in the business allows, or it’s done in a sudden spurt, in which case, outside financing will be required.

John Rowe and Justin Rowe from Honibe understood this. Their dehydrated honey business, offering a unique product with wide appeal, was already quite profitable. They could have continued along their path, slowly expanding into new markets as their internal finances allowed. However, they wanted to expand into the US, and for that, they needed money – a lot of it.

Robert Herjavec felt that the request for money was perhaps short-sighted, and that giving up equity for the cash would be a decision they would eventually regret. But the other dragons didn’t care about that – it was a good business, profitable, and the money was being directed toward something likely to provide a return. They were willing to back it to the tune of $1 million, split between an investment and an operating line of credit.

John and Justin took the offer, because $1 million is not an offer to walk away from lightly. I suspect that following their appearance, they’ve taken a look to see if they could acquire alternative forms of financing that would result in them keeping a higher percentage of teh company. However, they also recognized the value in having the dragons as major stakeholders in the company, and the eventual advice and experience they would have access to once the deal completes.

How well do you know your own business

Elie Kochman — Mon, 13 Dec 2010 11:45:32 +0000

When Carl and Maria Griffin entered the Dragons’ Den to showcase their business and hopefully land an investment, they were awakened as to the true nature of their business. Their business, LiteLocker, makes it trivially easy to install and remove Christmas lights, by installing the system alongside the eaves of a building. The units can be painted to blend in with the rest of the building, and a handy contraption means that ladders are no longer needed either, once the system is in place.

The price, however, is what hit the business hard. A typical home would cost about $500 to get set up with the system, significantly more than what the average homeowner would pay. While cheaper that hiring someone to put up and take down the lights each season (which was estimated at about $750 for the same home), most homeowners are hanging the lights themselves to save the money.

However, one Dragon saw past that flaw, and focused on a market that would be only too happy to pay for such a product. Stores and offices, which typically do hire people to hang the lights, would see this product as saving them money. While in the first year the savings might be relatively minimal, by the second year, the savings can be quite significant.

Jim Treliving, with 350 branches of Boston Pizza to outfit with lights, calculated the savings in his first year at about $80,000. The following year, this number would triple with no more outlays needed. The money for the investment ($200,000) could come directly from the savings in the first two years of using the product.

The problem, however, was valuation. While the product was clearly good, sales were still non-existent. The million dollar valuation had to go, but the question remained how to balance out the $200,000 with the company. On air, the counter offer of 35%, which converts to a valuation of about $570,000 was accepted. The premise, of course, is that the business can do quite well.

It’s unclear from the site whether or not the deal has gone through. While they are clearly celebrating their airing on CBC, there is no indication that they have actually adapted their business model to approach businesses rather than homes. Why they would choose not to target stores is, to me, a mystery, since those are the customers who can afford their solution, and are likely willing to spend it to save in the long run.

However, more interesting is the fact that Carl and Maria learned on the Den that the focus of their business, or the market they should be aiming for, was not the same as what they came on the show airing. The question, though, is how well they learned that lesson, and whether or not it will translate into a stronger business, with or without dollars from the dragons.

Your Biggest Asset and Liability

Elie Kochman — Mon, 06 Dec 2010 11:45:48 +0000

In last week’s episode of Dragons’ Den, one pitch went sour for the simple reason that the biggest asset in the business was also its biggest liability. This is a fairly common problem in family-run businesses, often a function of one member of the family remaining in control of a business even when it has grown far beyond their ability to manage it.

In this particular case, Kim and Paul Nolet were unlikely prepared for the reception their business would receive on the show. Their product, an electric scooter with some pizazz, was driven out of the den for the simple reason that the creator of the scooter was not a savvy businessman, yet would not relinquish control of his company to make it profitable.

Paul Nolet manufactured the scooters in his garage, and would sell them for a price competitive with wheelchairs. With his margins so small, Kevin O’Leary suggested he raise his prices to about $6,000 a unit, which would provide a healthy margin to make the business viable. Paul’s response was admirable, but businesses are not built that way:

I prefer to make my living the honest way.

It’s very noble to not fleece your customers when you have a product they clearly want, and would pay any price for. However, there is still the issue of charging fair rates for the products, and Paul’s price fell far short.

Kim Nolet, who appeared to be more business savvy, was asked what the biggest problem her business had. She seemed amused when the Dragons informed her that Paul was the biggest liability, but they weren’t joking. With every decision needing to be cleared through Paul, there was a limitation on the ability for the business to grow. Paul was set in his ways, and had his opinions as to how the business should operate, and appeared reluctant to move from his position.

This is not a surprising issue. Perhaps one of the more difficult tasks investors face when working with a new business is in determining which portions of the existing management can bring the business to the next level, and which portions need to be trimmed and removed. The biggest obstacle is often the egos involved – people who have put incredible amounts of effort into growing the business don’t like to be told that they are no longer needed.

In various articles I’ve written about succession planning, this is one scenario I didn’t discuss, though it is relevant and perhaps one way succession happens that people partially plan for. How will the business transition under the new owners, and how will the current management team evolve to a new team?

If your business is prepared, this transition can be smooth, making such opportunities a dream to execute. Unprepared, though, and even the best of businesses can fail for the sole reason of lack of foresight.

Investor Takes a Bite Out of a Business

Elie Kochman — Mon, 27 Sep 2010 11:45:12 +0000

Last week was the premier episode of Dragons’ Den, the CBC show where entrepreneurs pitch their business ideas to five investors. The point of the show, from the perspective of the entrepreneurs, is two-fold. First, there’s the exposure on national television and the chance to get a fair bit of marketing value with minimal risk. While I don’t under-rate this purpose, though, there is another which is the topic of this series of articles.

The second purpose of the show is to land an investment, and to that end, the pitches are meant to showcase the business as a lucrative investment. As a result, there are many lessons to be learned from the show for any business owner looking to attract a bevy of investors over to their company.

When the father and son walked onto the Den to talk about their business, they were introduced as running a waffle business. From past observation, food generally does not perform well on the show in terms of garnering an investment, for a variety of reasons. Part of this is the fact that one of the five investors is Jim Treliving, owner of the Boston Pizza chain, among other businesses. He knows about the difficulties in selling and marketing food, both at the wholesale and retail levels.

Renaat Marchand of Wannawafel, however, wasn’t pitching food. He was pitching a franchise, something else that Jim Treliving knows about. But in order to get Jim and the other dragons talking, he fed them the product.

The unit looks much like a hotdog stand, which can be hitched behind a trailer or car and set up pretty much anywhere. Capable of serving about 100 waffles an hour, the business is intended to operate as a franchise, with the owner of each unit operating in a certain area independantly of all other units.

Renaat served the dragons a sample waffle, and they were all hooked. Using a Belgian recipe that results in a recipe that had all five dragons smacking their lips, he was able to convince the dragons to listen to the idea for the business. As he runs a successful unit in Victoria, BC which has gotten favourable reviews, Renaat didn’t need to go any further than explain why he was talking to the dragons in the first place.

As it turns out, Renaat needed the money to enter the franchise business, to set up the legal side of things, and to get more branding that would be recognized everywhere. While the cost of the trailers is not insignificant ($20,000 each), that money was to come from any potential franchisee.

The dragons saw that Renaat knew what he was about, and once Jim Treliving expressed an interest, there was little the others could do to become involved. While Jim asked for 50% of the company for his money, he made it clear that he wasn’t planning on running the business.

Although, with 50%, he can exert significant influence on the company if necessary. But he’s coming in as an investor, not a business manager.

Lights are on in Dragons' Den

Elie Kochman — Fri, 05 Feb 2010 12:45:51 +0000

This week on Dragons’ Den on CBC the deals returned to normal – entrepreneur comes on the show, demonstrates his product, and leaves with a deal. Or perhaps, it wasn’t quite that simple.

Courtesy of WarriorWriter on Flickr.com

Robert Simoneau of Saint Laurent, Quebec, came on the show representing his company, Posilight. His company has developed a product which, if not completely innovative in nature, has an interesting application. They manufacture light bulbs for refrigerators in stores which use a large number of LED lights to provide directed light with higher energy efficiency. He had, at the time of the show, secured trial runs in two large grocery stores.

He was asking for $75,000 for a 10% stake in his company. Jim Treliving, thinking of his company Boston Pizza, commented that merely using the efficient lighting in his stores could recover the full investment in a single year. Robert Herjavec, though, couldn’t get excited about a light bulb, and bowed out.

Kevin O’Leary, acting typically aggressive, tossed an offer on the table. Trading equity for royalty, Kevin offered to invest for an 11.5% royalty until the investment was paid back, reducing to 5% thereafter. In addition, there would be 1% equity. Jim quickly offered to join him, followed by Brett Wilson.

With three of the Dragons in on the deal, Robert Simoneau tried to get Robert and Arlene Dickinson to join the deal. However, Robert was not interested. Arlene, however, decided that this would pose an interesting marketing challenge, and liked the idea in general, and so she tossed her hat into the ring. That put 4 dragons together on a deal which was rapidly accepted.

What’s interesting about this deal is the nature of the product that caught the interest of 4 dragons. The product doesn’t have to be exciting. It doesn’t have to be a market leader. It just has to strike the right chord with the investors. Having solid numbers behind you when presenting make it easier to seal the deal.

Dragons' Den Makes Business in Court

Elie Kochman — Fri, 29 Jan 2010 12:00:39 +0000

I was fascinated by this week’s episode of Dragons’ Den on CBC and the usual two deals that were struck. No, the first deal wasn’t particularly unusual, as there was a solid business with sales that was looking to expand. The valuation was fair, and the royalty-based deal was fairly simple.

Patents and Money

What was surprising was the second deal, which was not typical of the show, and the reactions of the various people involved was not surprising.

Richard Abramowicz of Yo Mama Gear came on the show asking for $3,300,000 for 30% of his business – in US dollars. His business model, however, had little to do with clothing or equipment (although that would turn out to be a part of the model).

Richard owned the patents and derivatives on the phrase “Yo Mama”, held here in Canada since 1988 and in the US since 1998. That means that anyone who uses the phrase is violating his patent – for example, Urban Outfitters, Zazzle, Cafe Press, and American Apparel. (His claims have not been verified, but those companies were the ones he mentioned on the show.) His business plan is to sue them for patent infringement.

Naturally, Arlene Dickinson was disgusted by the business model, and would have no part of it. Brett Wilson wanted no part of it, and neither did Jim Treliving.

Kevin O’Leary, however, loved the idea. Robert Herjavec talked about the technology sector, where this is a viable business model, and can be quite successful. (As an example, look at i4i and it’s case against Microsoft.)

The two of them decided to take the deal, but on very different terms. Kevin proposed that he pay $1.00 for 51% of the company, which would give him the ability to file suits against whoever violated the patents. Should those suits be successful, he would pay Richard from the proceeds of the case the balance owing: $2,999,999 US dollars.

This was an unusual deal, as the money is not made from the ability to sell or market a product or service, but from the ability to protect a patent – and in this case, the patent of a phrase that many people have been using for decades, unaware that it had been patented, or even patentable.

Dragons' Den Episode 3 – The Air Mouse

Elie Kochman — Fri, 22 Jan 2010 12:00:44 +0000

This week’s episode of Dragons’ Den on CBC featured one of the smoothest deals I have yet seen.

Mark Bajramovic and Dr. Oren Tessler of Ottawa, Ontario, presented the Air Mouse. Originally developed in order to reduce Carpal Tunnel Syndrome, it has applications in a variety of areas. The invention looks like a glove, and works like a mouse on a dedicated pad. They expect to retail the device for about $100, which is a good price point for a quality mouse.

They came on the show asking for $75,000 for a 15% share in the company. To back them up, they pulled out a letter of intent from a manufacturer agreeing to produce the device, pending them getting sufficient funding. The investment was to be used to refine the prototype and to move into production.

Robert Herjavec and Kevin O’Leary got into a brief debate about how to market a product like this. Robert felt that it could be marketed as being a “cool” device, appealing to the gaming industry. Kevin disagreed, saying that for people who suffered from carpal tunnel syndrome, a device like this could become a necessity, thereby pushing up the price.

Jim Treliving was concerned about the asking price – why weren’t Mark and Oren asking for more money? (Their response was that rather than get into an argument with Kevin O’Leary, they just made a fair evaluation.)

Brett Wilson was quiet for this deal – only saying that he liked the idea, but wasn’t going to invest.

Arlene Dickinson then made an offer – $75,000 for 15%, with the caveat that there was not yet another such product on the market (there isn’t). With such an offer, the other Dragons did not have much room to counter – after all, Arlene was offering exactly what Mark and Oren were asking for.

After some pushing, Mark and Oren managed to get Robert to go along with Arlene on the deal. Robert, with his experience in the computing industry, could really help them move their product through the computing world. Arlene’s marketing expertise would balance that, pushing the product out at the gaming industry.

The deal was struck.

This deal shows that if you know what you have, and know what you’re worth, it doesn’t have to be so tough on the Den!

Dragons' Den – Musical Mayhem

Elie Kochman — Fri, 15 Jan 2010 12:00:51 +0000

With perhaps the most gutsy presentation on Dragons’ Den from CBC so far, two friends made an audacious offer, and secured a deal. Interestingly, however, Arlene Dickinson, the marketing maven, did not participate in the deal, despite the fact that her background might be exactly what the entrepreneurs needed.

John Marr and Jonathan Mackenzie of Mackenzie and Marr Guitars came on the show with a handmade guitar that retails for about $1,000. In a daring attempt to prove the quality of the guitar, they had Kevin O’Leary do a blindfold test of their guitar against a $5,000 guitar made by an established brand. When Kevin was informed that he had chosen the $1,000 guitar as the better instrument, he was sold.

The two friends were asking for $35,000 for 35% equity – valuing their business at the price of 100 instruments (of course, costs need to be subtracted, but still, not a large amount). Their plans for the money included moving manufacturing to China, and increase their ability to build more of the instruments.

The catch is that they are selling their guitars solely via their website, which means that potential buyers aren’t going to be able to try out the guitars. Therefore, they will need endorsements in order to encourage potential buyers that it’s worth the risk. Arlene Dickinson, concerned about precisely this issue, declined to invest. Likewise, Robert Herjevec declined for similar reasons.

Jim Treliving, Brett Wilson, and Kevin O’Leary decided to put in a group offer, but not at the terms on the table. Each of the three investors would put in $5,000 for 5% equity in the company. The balance of $20,000 would be given in exchange for a royalty of 5% once the initial investment had been paid off. Until then, the Dragons wanted a 10% royalty.

John and Jonathan felt that 10% was too steep, and wanted to start at 5% from the beginning. The Dragons countered back with 7% from the beginning, with 5% once the investment had been repaid. The offer was accepted, but not before it looked like the two friends would talk themselves out of a deal.

Putting your product to the test on national TV is a big risk, especially when you can’t do a dry-run beforehand. But when it works, the risk can prove to be very rewarding!

Dragons' Den Season 5 – Tools of the Trade

Elie Kochman — Fri, 08 Jan 2010 12:00:52 +0000

Kelvin.23 - a great multi-tool

Wednesday night was the first episode of Season 5 of Dragons’ Den on CBC, and it was fantastic. Also called the Celebrity Episode, 3 well-known TV celebrities were on hand to endorse great business ideas.

For fashion, there was Jeanne Beker from fashion television. Mike Holmes was there to check out the tools (and inform one Den hopeful that she better make sure her liability insurance is paid up). Debbie Travis, a well known expert in home decorating, was there to check out the Kelvin.23, the subject of this post.

Kevin Royes from Vancouver invented the Swiss Army Knife of home decorating, and everyone on the show loved it. Called the Kelvin.23, it features a variety of tools that will let you do most light to medium jobs around the house:

With 23 essential features integrated into this one compact design, kelvin.23 is ideal for anybody in need of a quick fix. It hammers, screws, measures, levels and even shines a bright light when you need it most. Made from cast aluminum, zinc, carbon steel and ABS plastic…kelvin.23 is built to last.

The deal Kevin was asking for was $200,000 for 10% – and he had $250,000 in sales during the preceding 6 months prior to the filming of the show to back up his $2 million valuation.

The first Dragon to decline was Kevin O’Leary on account of the initial description of what the money was to be spent on – manufacturing. There’s risk in manufacturing that Kevin O’Leary felt was not intrinsic to the business. While further questioning of Kevin Royes revealed that he intended not to set up a factory, but to directly negotiate the manufacturing process, Kevin O’Leary remained out.

Jim Treliving, however, saw a bargain at $200,000 for a solid business, and offered his money. When Arlene Dickinson asked to go in on the deal, Jim balked, and so Arlene made the same offer on her own. Robert Herjevac offered to match Jim’s offer in conjunction with Jim (that is, combined at $400,000) for 25% of the company, and Arlene joined the partnered bid.

With three of the Dragons vying for a piece of his company, Kevin Royes stepped out for a quick consultation with his wife and his marketer for the U.K. On his return, he countered with an offer for $500,000 for 25%, which, after some brief discussion, was accepted by all three.

This was someone who played his cards well. Kevin had a solid business, impressed Debbie Travis, who would then feature the product on her show and record an infomercial as part of the deal. He had sales to back up his valuation, putting him in a strong bargaining position.

But most of all, he impressed the Dragons as soon as he did his demo. At that point, they were interested in investing, and he could stick to his valuation, and they would pay for it.

Are You Getting Ready To Succeed?

Elie Kochman — Wed, 16 Dec 2009 17:30:19 +0000

With all the buzz about entrepreneurship, and running your own business, many people are getting ready to succeed at starting a new business and working for themselves. However, all the effort they are placing in preparing for this may be for naught – as George Bernard Shaw said, Those who say it cannot be done should not interrupt those who are doing it. The effort put into getting ready to do anything is not nearly as useful as the effort put into doing it.

Chris Brogan of social media fame writes:

I think we’ll see more solo people tucking in with bigger organizations. I also think we’ll see smaller groups banding together to form stronger groups, not just in marketing, but in any of the newer businesses out there.

This is reality. There is safety in large companies, in that they are better equipped to handle fluctuations in the market, in the demand for their products. A small business which does $50,000 in sales per month is going to be much harder hit by a 20% reduction in sales one month – a large business can absorb that more easily (at least in the short term).

What does this have to do with preparing to succeed? The fact that many people (myself included) do not want to live under the fear of their business going under. We like the security, we like shifting the risk to someone else. Therefore, before we dive into a new venture, we will work as hard as possible to reduce the risk as much as possible. But as Robb Sutton says, ‘One Day’ is too late.

At some point, you need to jump, you need to take some risk. All the time spent preparing could be better utilized by doing. Take the following as an example:

On the CBC show Dragons’ Den, Claire Copp of Vancouver, BC came on the show looking for an investment in her software product, Trader II. One particular point that Claire made was that she had been working on this program for 20 years and had yet to sell a single copy. Now, there are a lot of lessons that can be learned from her presentation, but I’m just going to talk about one. Claire Copp had spent 20 years preparing to succeed, instead of going out there, finding out if there’s a real demand for her product, how much people would pay for it. (As a side note, if you search for “Trader II” Claire Copp, the first two results are Dragons’ Den, and my other blog where I posted a review of the episode.)

Of course, Claire is an extreme case, but the lesson remains. If you want to succeed, then you need to act now. If you keep waiting until all the risk has been removed, you may find that you’re left with nothing at all.

Dragons' Den Special Holiday Episode

Elie Kochman — Thu, 10 Dec 2009 18:27:33 +0000

I watched the holiday special episode of Dragons’ Den, and it a great way to end Season 4. In case you’re wondering, Season 5 will start January 6, 2010 and looks to be even better than Season 4, and I’m really looking forward to it.

There were, as usual, two deals on the Den. The second was a case of Brett Wilson helping to boost creativity and dreams on the part of two girls, 11-year olds Abby Somer and Megan Boudreau who invented a game called Let’s Dance Board Game and came on the show asking for $10,000 for 50% of their company. Rather than invest in the abilities of the two girls to sell their product, who had yet to sell a single unit, Brett gave them $500 to get them started. If they made money within a year, they could pay him back, but if not, he would write it off. This went against the rules of the Den, which state that you have to get all the money you ask for in order to get a deal, but hey! it’s the holiday spirit!

The other deal, which actually happened first, was presented by Allan, Patricia, Melissa, Jordan, and Amanda Kotack for their company, Cosy Soles. Retailing at about $40 a pair, the family developed the product in response to a need for heated slippers, and have created a second product, heated mittens, which retail at about $25 a pair. Their business was growing, with a steady increase in sales over the last couple of years.

They came on the show asking for $150,000 for 35% equity. The problem, however, was not in the valuation, which seemed fairly accurate, but in the fact that none of the 3 children would get involved full-time in the business. This aversion to taking risk drove most of the Dragons away from the deal. It was as though the family wanted someone to come in and take over the business, and pay them a salary for their work.

Brett did give them a deal, but on different terms. He gave them $30,000 in exchange for 10% equity in their company. The balance of the money, $120,000 was given as a line of credit to help them offset their expenses in the short term. He made a clear point, however. The family would not be getting his time.

The lesson here to future entrepreneurs – going on Dragons’ Den is not like going to the bank with a pitch for a business. At the bank, all you want, or can expect to get, is money. On Dragons’ Den, the coveted deal includes expertise.

Dragons' Den Episode 10 – A Review

Elie Kochman — Thu, 03 Dec 2009 19:41:38 +0000

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:

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

Dragons' Den Episode 9

Elie Kochman — Thu, 26 Nov 2009 18:18:51 +0000

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?

Place order online for delivery or take out.

Restaurant receives and confirms order via email.

Restaurant prepares and delivers or you pick up your meal.

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.

Review of Dragons' Den Episode 8

Elie Kochman — Thu, 19 Nov 2009 18:28:53 +0000

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

Elie Kochman — Tue, 17 Nov 2009 16:57:23 +0000

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

Elie Kochman — Tue, 10 Nov 2009 19:14:32 +0000

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. Related posts:Dragons’ Den – Episode 6 Review [...] Related posts:

Dragons’ Den – Episode 6 Review

Elie Kochman — Thu, 05 Nov 2009 16:58:13 +0000

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.