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37 things I've learned watching Dragons' Den

Dragons' Den (Shark Tank in the US) is a television show where entrepreneurs pitch business ideas to angel investors, seeking capital investment in their businesses. One can learn all kinds of things about people and business life by watching it. It's fun see how close your analysis of the business propositions come to that of the investors'.

I myself have almost no education in the fields of business or economics. At the time of writing this I'm a soon-to-be-unemployed factory worker at Nokia. On my own time I do some creative nerdy things. Everything I know about start-up businesses, I've learned from watching Dragons' Den.

I'm going to list the things I've learned. These are my observations only, I offer no analysis at all.

Investors

The investors are self-made millionaires, and they do come across as rather sharp people. They get quickly to what is relevant about each business idea. They have common sense too. Despite their fortunes, they don't live in an ivory tower. Sometimes they don't ask just the right questions regarding technologies. Apparently not many of them are engineers by background.

Professional investors bring more than money to the table, namely their know-how. In some cases they have an infrastructure and a staff in place to help their partners. Sometimes they have the necessary contacts to push the enterprise forward. Entrepreneurs seeking investment should ask what else besides money the investor can offer.

Funny thing is, the investors want the entrepreneur to know all the numbers of their business, but when they are asked to explain their own input to the enterprise, they never tell numbers, it's all back to vague slogans.

Investors will not want to participate in the business too much either. They don't want to run the business for the entrepreneur. The entrepreneur will have to be able to handle the daily matters.

For some reason the investors are not keen to invest, if the entrepreneur doesn't seem to need the investment. The money should have a use thought out, something that helps the company achieve its goals. If the entrepreneur only needs the money to build stock and he already has orders, the investors will tell him to go to the bank. Duncan Bannatyne seems to think differently. According to him it's desirable that the entrepreneur doesn't need the money, because that makes a foolproof investment.

Investors want to have an exit strategy thought out. It might be selling the shares after some years of operation. For that purpose they don't want the company to pay dividends, instead they want the company to grow.

Entrepreneurs

Investors invest in the company, but also in the entrepreneur. They will want to know the entrepreneur's background and qualifications. They are even more important than the product itself. Investors will want the entrepreneur to be a sensible and reasonable person who can be worked with.

It is important for the entrepreneur to be able to pitch his idea clearly and with confidence.

The entrepreneur will have to know his numbers when he seeks investment. They are needed to assess the investment opportunity, and it reflects poorly on the entrepreneur if he doesn't know his own numbers.

Investors don't want the entrepreneur to have other projects besides the company in question. They would take his time and attention and distract him from making money for the investor.

Investors will prefer for the entrepreneur to invest his own money to the enterprise. Otherwise all the risk would be on the investor.

Investors do not want the entrepreneur to pay themselves wages during the first few years. This would mean that the investor's money is going into the entrepreneur's lifestyle instead of into growing the company.

Quite often the entrepreneurs lack an understanding of realities. Their product might be something that nobody in their right mind would imagine ever buying. They might be emotionally attached to the product, after all it is their own brainchild. They will need a sensible outsider to tell them if their idea is bad. Often the investors urge the entrepreneur to give up their hopeless business, but they rarely listen.

I have seen versions of the show from the Unites States, Canada, Great Britain and Finland. For whatever reason, it is the entrepreneurs from Great Britain that most often forget their words in their nervousness. When they are interviewed after the pitch, they can be quite analytical about how the negotiations went.

The product

Usually the entrepreneurs overestimate the desirability of their product. Typically they've only heard opinions from family and friends, who tend to be supportive regardless of the product. Also, their estimate of the market size is usually way too high and not based on any real data.

The innovations brought forward by the entrepreneurs are often quite trivial. Often they solve a problem that doesn't really exist. Often they solve a problem that wouldn't exist if some other product wasn't badly designed in the first place. Sometimes entrepreneurs like to think they are innovative, when all they have done is combined two existing products (panties and snap fasteners, pencil holder and water bottle etc.)

The product can't be something that will bring in the entrepreneurs salary, but doesn't produce profit for the company. Such companies are called lifestyle businesses by the dragons. They may be good businesses, but they are not good investments.

The product can't be a one-time fad.

Investors will want the product or service to be growable. Return on investment is mainly possible through growth, and that will require that new business can be built on top of the old.

On the other hand, the product mustn't be too easily copyable by others. Patents and trademarks will make investing easier.

The product should have some special selling point that differentiates it from other similar products.

If the product is an accessory to an existing product, it must cost substantially less than this other product. The consumer will not want to use the same amount of money to augment his device as what he just used to buy it.

Investors are especially interested in the kinds of products that somehow fit in their existing portfolio. For example, they might already have a distribution channel for a particular product.

Company value

The entrepreneur will ask for amount of money M and offers in return a percentage of his company called equity E. By calculating 100 / E x M we get a figure that represents the entrepreneurs idea of the value of his company.

Investor Kevin O'Leary has said on different occasions that the company value is 1.5 or 2 times its yearly sales.

Entrepreneurs usually overestimate the value of their company. On the extreme, they might even value it at two million pounds, when it has no sales at all. Usually they justify this with the future sales. They price their company speculatively, because naturally they will believe in their own business idea.

Company evaluation will depend, among other things, on how far along it is. If it's just an idea, it's practically worthless. Company will be ever more valuable if the product design process is finished, the production has been started, or the product is already in the stores. If there is a patent but no production, the investors might be interested in buying the patent or taking part in licensing it.

Investors will be especially interested in hearing how well the product has sold thus far, and what the profit has been. The difference between selling price and the production cost is so called profit margin, and that is one highly interesting figure.

Investors are interested in projected future earnings, although such figures are necessarily speculation. They will often themselves point out the impossibility of the numbers, and yet they always ask for them.

If the investors are interested in a partnership at all, they will usually ask for a higher amount of equity than what is on offer. A large portion of their investments will fail, so the few successes will have to cover for all the losses. More equity is therefore necessary to reduce the investor's risk.

Sometimes the amount of equity necessary to balance the risk would be too great, because then the entrepreneur would be left with almost nothing, and he wouldn't be motivated to grow his business. In such cases making the investment is impossible. Exception would be the cases where the investors offer to buy the whole company, or all the patents and intellectual rights to the product. In such cases the investor is often looking to buy out the entrepreneur, because he doesn't want to be in partnership with him. The entrepreneur might be offered royalties for future sales of his product.

In some cases the investors hope to share the risk with another investor. Then they will usually offer half of the desired capital. Shared investments occur especially when the expertise of two investors complement each other. On the other hand sharing an investment is not desirable, if managing the investment is going to take a lot of the investors time and effort. Then the investor will want all the profit for himself.

In some cases the investors can't invest, because the entrepreneur asks for too little capital. The amount would not be enough to help the company grow, and the investor would not get his money back. Especially building a brand or a franchising chain are more costly than the entrepreneurs realize.

Miscellanea

Investors have a saying according to which a bad idea gets investment from the three f's: family, friends and fools.

Partners will shake hands in the show, but the actual contracts are signed weeks after, when the due diligence has been conducted. Sometimes the deal doesn't materialize.

In some episodes we've seen what's happened to the entrepreneurs since their appearance in the show. It has become clear that they benefit greatly from the mere exposure. Therefore it is hard to say whether they have succeeded because of their efforts, or because they gained visibility in television.

You can be a succesful entrepreneur despite wearing silly socks.


As you can see, a lot can be learned simply by watching a tv-show. Now, about Big Brother, don't get me started...


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