TV's Dragons Den has announced the first failure of one of its investments. JPM EcoLogistics called in the administrators last week. Deborah Meaden and Theo Paphitis had put in £100,000 for a 40% stake and they put in a further £27,500 after an emergency cash call despite asking all the right questions.
No Guarantee of Success
While Duncan Bannatyne was swift to point out all his investments were doing fine, both he and James Caan supported Meaden's views that Investors tend to look at a portfolio of investments to spread their risk and increase chances of a success. Meaden is right in saying '....if you don't take risks you have no economy.'
Of course, this is cold comfort for the Directors of JPM, Jerry Mantalvanos and Paul Merker, who went on the show in 2007 to seek investment in their haulage firm which ran its fleet on bio-diesel. They must have thought, as many do, that having high-profile investors you have a greater chance of success. It is also a body blow to firms which Lord Mandelson has described as contributing to the longer term view of decreasing emissions which seems curious that he has not selectively moved to help save it. But I would have thought it was just another soundbite in the sea of them from the Government at the moment.
The Reality of Business
What JPM's demise shows is that programs like Dragons Den are for entertainment value only. The reality is that there is no substitute for investors who are going to pitch in and support you. Fair play to Ms. Meadon and Mr. Paphitis for responding to the emergency cash call but I suspect that the Directors probably rued the fact their choice of investors was more based around celebrity than hard business facts.
I have no formula of success to reveal here but sometimes in a business like that, it would be wiser to look for investors who are like-minded or in the business. Unless you have a patentable, new technology that is ground breaking, firms of that nature are just a new, green take on an existing model and success was highly likely to be dependent on a few factors - 1) the price of bio-diesel as compared to normal diesel, 2) the comparative cost of maintaining the vehicles as compared to traditional haulage vehicles, 3) the comparative fuel economy of the vehicles but most importantly 4) the response of the competition.
Assumptions are usually the things that conspire to kill a business and sometimes it is too easy for an entrepreneur to get seduced by their own subject or idea to see how the market may respond. The haulage business is very traditional and mature and in austere times when cargo rates have been dropping, it was not the time to introduce premium rates to help satisfy Corporate and individual consciences about the environment.
Cost is king at the moment and so it is not surprising that such noble thoughts fly out of the window.
Sympathetic Investors vs Practical
One way around such a problem of having a fresh approach to an old, established industry with no greater innovation than a green edge was to have sought a long term investment by another haulage or similar firm who may have a vested interest to start a more green business. The reasons for this may be several but the most obvious would be that the industry is going to be forced down that route at some point in the future by legislation, it may be possible to seek greater help from Government if an old-style firm is seen to be practically investing in the future even by shareholding, and finally, it may actually be a really good bet.
How this could have practically helped is by JPM having a more practical investor. For instance, more business might have been able to flow to JPM from its investor on a spill over basis or because it is premium or the investor might have been more amenable to running JPM as a loss making investment for longer for reasons of legislative moves as explained above and by supporting it through the profit of the main company. It also provides a ready 'exit strategy' for all parties.
The problem with Dragon style investors is that they are investing purely on the worth of the business opportunity as they see it and from portfolio of risk point of view. They are not looking at it from a long term compliment to their own business or portfolio of businesses which may have afforded better protection to JPM.
The Dragons have responded with James Caan suggesting in future Dragons will want a bigger stake for their investment and I think that is very indicative of why Dragons are not good investors for everyone, although Duncan Bannatyne has still said his decisions will be made on a case by case basis.
No Right Answer
From an entrepreneurs point of view, there is no real right answer. Investment money is investment money. But as a rule of thumb in my book, if you do not have a patentable idea just a new take on an existing business, then you are going to run at loggerheads with the existing market. For that reason you must, must, must get your assumptions right and test them to destruction before you start because the incumbents in the industry will see you as a threat and treat you accordingly. So your Value Proposition, marketing, service levels and cost base must be able to stand the test.
In JPM's case, clearly they became victim to the desperation within a tight haulage industry. The Value Proposition around green haulage depends on the buyer's belief in a greener future. Today, and very sadly, that is not a strong enough reason to prefer the service when every major firm is looking at its cost lines.
Together with that, and their choice of investors, JPM walked into a trap of their own making. If only they had a business centred around environmentally carrying bank executive bonuses or disposing of bail outs more effectively - that would be a good business to be in.
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