Dragon or Pussycat?

'Entrepreneurs say they got burnt by investors' demands', shrieks the headlines in this week's Sunday Times.

'What a surprise' some may say in response. I listened to that nice James Caan's talk recently at the EREC in London when he described the Dragon's Den Show as terrifying at first as the Dragons had to make instant investment decisions without foreknowledge or due diligence. A 20 minute pitch and you make up your mind.

The article basically says that a few entrepreneurs have endured the nerve-wracking TV exposure and got their deals with a Dragon only to find that subsequently for one reason or another the deal falls foul.

TV Reality reflects Life

For once it seems a TV Reality show actually mimics reality. Gaining investment is not an easy process and inevitably it means that the two parties must ask deep questions about the veracity of the entrepreneur's claims, knowledge and ability to execute on the plans. If not then the Dragon may as well put their large sums on the 5.30 at Kempton Park with as much hope of a win.

In one instant, an Australian entrepreneur had an agreement in principle from two of the Dragons only to find 4 months later that it fell through. In a further instant, a chap who had a Foot Deodoriser had an agreement to invest but the deal fell through when it was found that he did not have a patent on the product although the entrepreneur claimed it was the Dragon who had put him under as much cosh as an employee.

How good is a deal anyway?

Some entrepreneurs have claimed the deals are not healthy. Lara Goodbody (surely an Ian Fleming name), the co-founder of YogaBugs, declined £200,000 for a 30% stake in her business and later got £250,000 for 15% in the business from another unrelated investor.

And here is the reality. Dragons Den is all about making good TV. Sure the Dragons have made a lot of money but they did not do it by chucking £100 or £200,000 down the pan on poor ideas. Likewise, people who give away 40-50% of their company for inward investment are effectively making themselves an employee at best and certainly the voracious ability to own your idea has been diluted greatly. Moreover, where is the equity left to hand out to diligent employees in the future when the share-grabbing Dragon has such a large stake.

Entrepreneurs switch off your TVs

The reality is that the Dragons Den model is not good for real investing. The Dragons are making multiple investments for small cash in their terms that would normally consume large portions of their time to make the business successful. The entrepreneurs meanwhile seem to want to desperately give away huge chunks of their equity for relatively small capital stakes in the vain hope that James Caan or Duncan Bannantyne knows someone that can get them a quick hit to make millions.

In practice, gaining inward investment needs a strong business idea, an even stronger business plan which has sound research and strategy and then people who can execute. Entrepreneurs come in all shapes, sizes and backgrounds yet it is rare that you get the combination of all those things. Most commonly missing in people who have great ideas is the ability to take the idea to market or sustain that market. These people may be great at selling the concept but seeing a deal through to fruition may be very different.

My advice to would-be entrepreneurs is to build a proof of concept first. This means building a prototype business with the minimum possible outlay and creating the first few sales to prove your idea has legs. The first thing you may realise is that the idea actually pays its way so the investment required is for expansion only rather than getting the product built. The second thing you may realise is where your deficiencies lie and so the investment may be to get the correct manufacturing contract to build or people to sell etc. Proof of concept pinpoints exactly where the money will be spent rather than the investor seeing only large salary cheques being paid with their money.

It also means the entrepreneur has the upper hand. It will not mean you have to give away large chunks of your company for comparatively small sums. What you have proved is that you can take a small share of a large market and so you can sell the end scenario rather than next year's - the idea that the £250,000 for 15% is not an investment in a company with a small market but one that can take 10% of a £multi-billion market. If the investor cannot see that then walk away.

Dragons are real

What the article shows is that the Dragons in the Den are real. They don't actually give away all that money without due diligence and there are plenty of caveats before the entrepreneurs get their cash that are not shown on camera. However, the reality is that unless the entrepreneur can see a distinct and real advantage of taking a Dragons' money other than for the money itself, then this is exactly not the way to get inward investment in a great idea.