After 4 days of taping Dragons' Den season two, the Dragons have already spent more than a million dollars and done several deals. But even with such great stats, some deals are still dying on the vine.
CBC and I want more deals to close. The more deals get done, the better the show, and the better it is for entrepreneurs across Canada.
So with that in mind, here are the top 5 reason deals are missing the mark:
1) Valuing what you have too much.
If you think your pre revenue startup is worth millions because the size of the opportunity/market is so large, you are sorely mistaken. Most deals will get done at 2x revenue or 5x EBITDA.
If you don't have revenue yet, then the dragons have to look at two things: (1) how much you have invested to date (ussually the dragons will give you 2x investment of cash to date and (2) how much money they can make (2 x revenue in year 5 x the percent they own).
So keep the valuations as low as possible to increase the probablity of getting a deal.
2) Not offering the Dragons a significant equity position.
The dragons want to make 7-10x their money over 5 years. You deal must allow them to do so. If your revenune in year 5 is 2M and the dragons own 30% then they would value their return at around (2Mx2 x 30%) 1.2 million. So a deal for 100k would be seen as a good one for 30% since it would generate 1.2 million of value for the dragons.
But you also have to keep in mind that the Dragons won't get out of bed for less than 10%. It just isn't worth their time. After all they have to do the same amount of work for 10% as for 40%.
3) Asking for too much cash
You should only seek the money you need for the next 12 - 18 months. The money you need to take your project to "the next level".
The sweet spot for the dragons is 200-400k. It is hard to commit to a larger investment based on a 60 min pitch.
Pitchers need to remember that this the first, not the last, money the dragons could invest. So let them get in for a small investment, work with them for a year, prove that you are a good bet, and they may put in more money.
4) Not having sales
Proof of concept used to be "I turn on the lightswitch, and the light goes on", post dot.com bubble, proof of concept is now "I turn on the lightswitch, the light goes on, AND SOMEONE IS WILLING TO PAY ME TO READ UNDER IT."
Having sales helps validate the need for the product and the opportunity for the business. I realize that it is hard to generate sales early on, but too many pitchers are coming in and saying once I have your money I will go after sales. This does not sit well with the dragons. So pick up the phone and try to drum up some interest before going into the dean.
5) Not wanting to run the business.
The dragons are looking to invest, not take over your business. They each have their own empires to run. Empires that don't allow them to run your business at the same time.
So while they are willing to offer strategic support and guidance, don't expect them to want to do more.
If you feel that you don't have the skills to run the business yourself, be open about that, and explain to the dragons, once of the first uses of their money is to bring in proffessional managment. Managment that both you and Dragons will recruit.
