The BBC2 show Dragons

This article attempts to shed some light on the key mistakes being made and recommends some key changes required by future entrepreneurs pitching to investors. Obviously, the lessons here will apply regardless of which finance sources you intend to approach.

1. Complete a business plan in advance

The first thing that is evident is that many of the entrepreneurs appearing on the show have a business idea, but have no clue as to whether the idea is commercially viable or not. A business plan forces entrepreneurs to cover all aspects of the business – not just the idea. If a thorough business plan has been produced, entrepreneurs should be able to handle most questions the Dragons throw at them. They are not trying to catch the participants out. They are simply trying to assess the opportunity to determine whether it is a credible investment option for them. Usually the idea is easy to grasp from the presentation – what prospective investors really want to understand is whether there is a demand for the product, what the scale of that demand is, and how these markets can be accessed.

2. Know the basics

The investor is seeking to diversify their portfolio, investing in some high-risk ventures in return for some attractive upside return. The entrepreneur is seeking investment to develop the idea further. If the company is currently trading, you will be required to have clear answers as to the current actual turnover, gross profit and net profit. Any vagueness regarding these rudimentary financials will set alarm bells ringing. Any credible business person will be expected to have a grasp of these numbers, and an investor will need to know them to make an informed decision as to whether to invest.

3. Share data and information truthfully

There is an information asymmetry between the entrepreneurs and the Dragons, i.e. the entrepreneurs have a lot more information to hand than the Dragons. The investors have to rely on the data the entrepreneurs provide when they assess the risk and the likely return. Hence, unless the entrepreneurs provide the information in their presentations, the investors are going to be asking for it. The information that is provided had better be accurate, as the due diligence that follows will examine the data in detail and will need to substantiate the figures provided in the Den. While it is natural to not want to divulge a lot of information, without it the Dragons may be reluctant to invest.

4. Research the Dragons’ backgrounds

One of the classic tips for any presenter is to ‘Know your Audience’. This is particularly important if you believe one of the Dragons can offer you more than just finance, e.g. distribution and access to a market. The Dragons tend to cover a number of different industries – if your product is relevant for one of their industries, you’d better be sure you know that in advance and have your facts right! Similarly a recent entrepreneur had 3 equal offers and needed to select 2 – he chose the 2 he was more familiar with whereas he should have researched all of the Dragons or at the very least asked the last Dragon what additional value they could bring over and above the cash.

5. Make sure there is evidence of demand

Before you enter the Den and before you spend a lot of money on trade marks and patents, you must establish that there will be a demand for your product or service. Do not be too precious keeping your idea secret – people do not routinely run off with others’ ideas. It is better to discuss it with a number of confidantes who are willing to give objective feedback, rather than develop a concept in isolation. A recent Dragons’ Den participant had spent £200,000 developing a shower head holder – the SHUC – for which I, personally, saw negligible demand. Is there really a significant latent demand for such a product? Enough of a demand to achieve the monthly break-even targets required? This idea struck me as something that a very small group of people may actually want – and an example where this participant’s focus was more on protecting their idea than undertaking sufficient market research to ensure there was a demand for such a product.

6. Polish your pitch

The Dragons’ Den is not a jumble sale for ideas. The investor is investing in the business as a going concern, and hence the entrepreneur will be required to continue to play a role in the company. In many ways the Dragons are making two investment decisions – is the idea investible, and is the entrepreneur investible? If you produce a competent pitch, demonstrate a command of the numbers, and the idea appears commercially attractive, the Dragons will be very interested. A good idea and an entrepreneur lacking business acumen is unlikely to fly. Like everything, practice makes perfect – it is recommended that the business plan pitch has been practiced and honed a number of times before you step into the Den.