2 years ago
One of my favourite TV programmes at the moment is The Dragon’s Den.
It's usually on BBC2, and makes compulsive viewing for anyone interested in the business of making money. Just in case you haven't seen it, here's how it works...
Five multi-millionaires (well, one of them recently went bust, but we'll gloss over that) form a panel who sit in judgment on a series of would-be entrepreneurs and their ideas. A bit like The X Factor, but for business people.
But here's where this is different....
Each of these entrepreneurs needs money to take their business forward... something that the Dragons have in abundance. What the entrepreneurs have to do is pitch their idea to the Dragons in a way which will persuade one or more of them to invest their own money - in return for a stake in the business.
Sounds simple, but these Dragons didn't get mega-wealthy by investing in 'duff' propositions... or by suffering fools gladly.
And boy does this programme attract its fair share of fools.
If the Dragons don't like the ideas... or the person presenting them... then the contestants can count themselves lucky if they leave with the last vestige of their self-esteem still intact.
Simon Cowell would be known as ‘the good guy’ in this company.
But I have to say, most of the aspiring entrepreneurs are the architects of their own downfall. Either their business ideas are unviable, their expectations unreasonable, or their presentation ill-prepared and naive.
The typical contestant who leaves The Dragon’s Den with a flea very firmly in his or her ear, makes one or more of the following mistakes:
1. Poor personal presentation.
It's an old adage that you never get a second chance to make a good first impression, but it's no less true for that. Several contestants who have turned up dressed for an evening in their local, have scuppered their chances before they've opened their mouths. The Dragons know only too well that in many businesses, potential customers and business associates will also expect a certain level of personal presentation from the company owner, and anything which falls short will cost money. They also know that poor personal presentation is unlikely to be an isolated shortcoming. It will be an indication of standards and attitudes across a broad range of actions and activities.
2. Poor attitude.
Contestants who are confrontational, prickly, or don't respond well to criticism are quickly shown the door. The Dragons know that business... all business... can be tough, and you can't afford to respond aggressively just because someone doesn't agree with your point of view. They also know that someone who behaves in that way will be very difficult to work with as a business partner.
One of the key questions all contestants are asked is "What are you going to do with the money you want me to invest?" Anyone who mentions their personal salary (and many of them do) is immediately doomed. The Dragons know that true entrepreneurs never even consider the issue of a personal salary until the company is profitable and all other financial needs are fully covered. A salary mentality is for employees, and employees and entrepreneurs are completely different beasts. A Dragon might invest in the latter, but would never invest in the former.
3. An ill-thought out idea.
Most contestants go into The Dragon’s Den with a defective concept. They haven't researched the market properly, or worked out the figures correctly, or planned out how the business can be grown and turned into a huge pile of cash... which is what your average Dragon is interested in. In short, they've got an idea, but want someone else to give them some money - and work out the not-inconsequential detail of how to turn it into a viable business. They have an unrealistic view of the value of what they have. An idea is nothing without a comprehensive plan for converting it into cash.
4. They over-value their business.
The idea of the show is that The Dragons invest a sum of money for a share of the business. Both the sum and the share are determined by the contestant. So for example, a contestant may say that he's looking for £100,000 in return for 10% of his business. Fine, until when questioned, it emerges that his total sales to date are about £15,000. And he's valuing his business at £1 million. On what basis?
Most contestants can't answer this question convincingly, but will usually mumble something about 'potential', and the 'massive amount of work' they've put in. The Dragons realise that neither of these has any immediate monetary value. Potential is just that - potential. And as for the work that's been put in? So what? Time put in has no value. It's gone.
5. They don't understand pies!
Not all contestants are idiots. Some turn up appropriately dressed, display laudable personal characteristics, present a workable and well thought out business plan, value their business reasonably accurately... but still leave empty handed.
Why? Because they don't understand pies.
I think I'd better explain.
Let's take the imaginary contestant I mentioned earlier. He's trying to sell 10% of his business for £1 million. But let's assume this time that the business really might be worth a million. Sales have been low so far, but there's realisable potential there, and one of the Dragons recognises it. "Okay," they say "I'll invest in your business, and you'll get my personal input, but I want a 40% stake for the £100k."
This... or something like it... happens a lot. And most of the time, the entrepreneur turns down the offer in disgust and walks away with nothing. When interviewed later they say that they couldn't possibly dispose of so much of their business so cheaply.
So are they right? No, in most cases they are very, very wrong. And it's all because they can't see beyond a fixed pie.
You see, if we assume that a business, in its current state, really is worth £1 million, giving the Dragon a 40% stake for £100,000 looks silly. It looks like you're throwing £300,000 away.
But take a closer look at that Dragon - the bloke who's got a personal fortune in excess of £100 million – he isn't going to be content with 40% of a measly £1 million business. He won't be investing so he can make a quick profit of £300,000 just a few years down the line. He will have seen much bigger potential in the business than that - potential which his contacts, knowledge and business synergy can work together to realise.
So the very fact that this guy is coming on board shifts the potential from a £1 million business to a £10 million business. So let me ask you now, which would you rather have - 90% of £1 million or 60% of £10 million?
The answer really should be obvious, but most people don't see it because they only look at percentages and forget all the pies. Pies are rarely, if ever, of a fixed size, and all business deals need to take account of the impact of the deal on the size of the pie, and not just the percentage share for all the parties.
In my own modest little business this issue of pies is one that raises its ugly head on a regular basis. Many of the products and services I market are sold on behalf of third parties. Quite often, when I tell these people the slice of the pie I need, they're taken aback. Or rather they are, until I tell them that...
I can make them a really big pie!
You see, my advertising database runs into reaching possibly hundreds of thousands of people in any given campaign. And this is a part of the 'pie' which my prospective business associate will only get access to if he or she decides to work with me.
It may be that someone else offers them a 20% royalty, rather than the 10% which I am offering - but that other company only has a potential of 5,000 customers. So what's it to be... 20% of the revenue from 5,000 customers, or 10% from 300,000? The correct answer, I hope, is obvious.
Now before you have me down as some megalomaniac tyrant, taking advantage of the poor impoverished product originator, you also need to consider this - I've spent the last 30 years honing my pie making skills. And this pie I've got cost a large fortune to build. So it's a fair deal... you bring the product and I'll bring the pie!
But this also works the other way too...
Say some of my own exclusive products are sold through third parties. When I’m negotiating a deal, the size of the pie (the third party company’s customer database) is always of more interest than the share of the pie I’m going to get. Overall revenue and profit is always more important than your relative share of the revenue and profit.
I've seen an awful lot of people... both on Dragon’s Den and in my own business dealings... dig their heels in and proudly walk away with 100% of nothing, when they could have had 50% of something really big!
So when you're appraising a deal, never lose sight of the
possible impact on the size of the pie - and then consider
the percentages in that context.
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