Once again, we are treated to a wide variety of pitches tonight, including Ginch Gonch,
Goody2Chews and a portable BBQ perfect for Tailgating.
Once again, we see the importance of valuation, personality fit, and flexibility.
So let's talk valuation for a minute and set the record straight:
1) valuation is an art not a science.
It is based on the following formulas:
Value of the company = amount invested / % offered
so if you offer 5% for $700,000 you are setting valuation at $14,000,000.
Valuation is an art not a science, especially for seed and angel deals like the ones on Dragons Den.
Investors, seek to make 10x their investment over 5-7 years. So they need to figure out the company's TERMINAL VALUE, i.e. what they can sell the company for, and then ensure they can get their 10x.
Take Ginch Gonch, they set their valuation at $14M and offered the Dragons 5% for $700,000. So for this to be a good deal that 5% would have to equal $7M and therefore the company after 5 years would have to be worth $140M. The Dragons, simply did not think that would be the case.
There are lots of benchmarks used by investors, but Kevin deploys a revenue multiple in this case. He says he doesn't think the boys' company is worth 13X revenue. Last year the typical M&A transaction in Canada went for an average 2.6X revenue. So you see the gap.
2) 50%+ is not required for control.
Any investor can control a company with a shareholders agreement or by buying shares with special rights. If I wanted to control a company with 5%, I would simply buy %5 worth of pref A shares, with the special right to sign all cheques over $500. I may not have enough shares to vote control, but I control the purse strings and thus the company.
It is a myth that you need 51% to control a company. However, the Dragons often seek 50% so their can have a true stake in the company and have equal footing in the minds of the entrepreneur. Notwithstanding, on each deal done their will be a standard shareholders' agreement which will give true control .
Now in tonight's episodes, I might have negotiated differently, and if I was advising the Ginch Gonch guys, or if I was a Dragon, I would have sought 25% for $1M. This would give the company a $4M, post money valuation, would have been a closer reflection of the revenue model used today, but would have given me a large enough stake in the company to matter.
However, it is easy to sit hear and say that, a lot harder on national television with the lights blaring in your eyes.
What do you think, did the Dragons miss out on Goody2Chews and Ginch Gonch? Post your pitch spefic comments at http://www.cbc.ca/dragonsden/e05/ and post your general comments below.
