Survive the Dragons' Den
Dragons' Den pits entrepreneurs seeking
funding for their businesses against a panel of celebrity investors. Aside from
the entertainment, there are a number of valuable lessons that can be taken
from the TV programme. Below are the top five lessons to be learned from previous
participants' pitches.
1 Prepare a business plan
A business plan is an essential component
of starting up a business. To stimulate interest from the reader/investor, you
must ensure that the plan is researched thoroughly, explained clearly, and is financially
water-tight.
Many of the entrepreneurs on the previous series'
shows were excessively ‘product focused', and when they were asked a broader set
of questions relating to the competitive environment or the predicted demand,
they struggled. A well-prepared business plan addresses a broad range of issues
that investors will be interested in and will not focus on just ‘the product'.
2. Perfect that pitch
Once a business plan has been formulated,
it must then be communicated effectively. Many entrepreneurs fail to clearly articulate
the key customer benefits of their new venture.
In response to the opaque language used by
many Internet-era entrepreneurs, business planners introduced the concept of
the ‘elevator pitch'. An elevator pitch is your idea, supported by your
business model, company solution and marketing strategy, all articulated concisely
and clearly in the length of time it takes for a short elevator ride.
This simple idea reinforces how important
it is for entrepreneurs to think carefully about the language they use when
describing their new venture (particularly technology-based ones).
The elevator pitch is a reminder to remain
customer-focused and concentrate on describing the customer benefits, as
distinct from focusing on just the product features.
There must also be something unique about the
business plan, and it must be pitched with conviction, so as to grab the
attention of investors who deal with hundreds of plans every week. This was
neatly summed up by Simon Woodroffe in the first series of the show, when he
said: "You gotta make me feel like I'm gonna miss out".
3. Secure a route to market
In an increasingly competitive landscape,
it is vital that an entrepreneur has researched their ‘route to market' or how
they intend to access their customer base. Most new businesses will consider a
multi-channel route -- however, this is significantly more expensive than
single-channel routes, particularly so for non-established brands. Similarly,
many resellers and retailers are increasingly reluctant to take on new products
without some sort of upfront marketing commitment or ‘hello money'.
Internet marketing is one attractive route,
as marketing spend can be tracked with greater transparency. Once there is
evidence of demand through online sales, it is easier to expand into more
traditional routes with confidence.
Alternatively, identifying current
suppliers who service a similar market niche can give some indication as to
which marketing activities are most effective. Of course, this assumes the
incumbent has got it right!
The prospective investor will be keen to
understand how exactly you intend to reach your market. You will also need to
articulate the following:
- Is it a retail or Business-to-Business (B2B) sale?
- How will you secure direct sales?
- How much will it cost to secure reseller distribution?
- Are there downstream revenues, or is it a one-off transaction?
4. Establish value when seeking investment
If you are seeking equity investment in
your business, it is important to clearly describe the investment opportunity.
Why would the investor be better off investing in your business rather than
leaving their money in a bank account, or investing in another business?
- What is the Unique Selling Proposition (USP) for the business?
- Why will people part with their cash to buy your product or
service?
Beforehand, work out the following:
- Percentage of the business you are prepared to sell and its
value.
- Predicted level of future cash flows.
Use a multiple to estimate the value of the
business and then decide what is an acceptable level of equity you are prepared
to offer in return for a cash investment. Most investors you will meet are
sophisticated when it comes to financing, and hence, you will be at a
disadvantage. After all, it's not called the Dragons' Den for nothing!
This is their area of expertise; they are
seeking an appropriate risk/return for their investment. Their primary interest
will be to assess the ability of the company (including management) to generate
free cash flows to enable the business to grow while also returning cash to
them.
Professional advice is highly recommended if
you do decide to go down the equity investment route and it is important that
you have the above points worked out prior to being put on the spot.
5. Negotiate Confidently
If you have succeeded in generating
sufficient interest after your pitch, the level of questioning is likely to become
more in-depth, as the prospective investors assess whether or not there is an opportunity
for them.
In these instances, the presenter is on
trial as much as the business plan, especially if the entrepreneur is seeking
large amounts of funding and intends to continue to run the company themselves.
It is worth remembering that the
negotiation is not like haggling for a souvenir at a market, where the
transaction is a one-off and neither party is likely to engage with each other
again.
It is not about small victories and getting
the better of your opponent. The negotiation takes place in the context of a
relationship and hence must be approached differently.
Alan Gleeson is the Managing Director of
Palo Alto Software, Ltd., creators of Business Plan Pro® 2006. He holds an MBA
from Oxford University and is a graduate of
University College Cork, Ireland. For further information on Business Planning,
visit www.bplans.co.uk and www.paloalto.co.uk.
