Dragons’ Den: Series 13, Episode 11
With investment for two Startups 100-listed companies, the latest Den episode raised important business lessons for entrepreneurs to consider in 2016
Every year Startups.co.uk publishes it's prestigious index of the UK's top 100 businesses and, if Dragons' Den is anything to go by, it would seem the dragons would agree with the index's predictions as two Startups 100-listed companies walked away with investment deals in the latest episode.
From wine-proof suits and Russian dairy drinks, to wireless exercise and freebies, the episode featured an array of interesting pitches including one that caused Peter Jones to comment:”This is just too good to be true”.
Each pitch also presented several business lessons for start-up entrepreneurs to think about when raising investment including valuation concerns, legal considerations and the importance of actually being “investment-ready”.
Read on to find out more…
Concept: Protective coating solution for shoes and fabrics
Investment sought: £100,000 in exchange for 5%
Investment received: £100,000 in exchange for 50% (Touker Suleyman)
Featured among the top 100 Startups of 2015, Liquiproof is an invisible, non-toxic, odourless solution which quite literally makes fabrics “liquid proof”. Pitching the product to the dragons was founder; former financier, Caner Veli. Veli demonstrated how Liquiproof worked by pouring red wine on his suit; a demonstration which warranted a round of applause from the investor panel.
While Veli got off to a good start, intellectual property (IP) issues showed that the pitch wasn't as watertight as it first seemed. Following questioning from Touker Suleyman, Veli explained that he didn't acutally own the technology – the liquid part of the product – but had partnered with the R&D lab that owned the patent to it and has secured sole exclusive rights to sell the product in a number of markets. This revelation gained criticism from Willingham who said that “unless you have the IP, everyone [the panel] is going to sit here and rip you apart”. Veli deflected the comment by citing his ownership of the brand and trademark name.
Jones then questioned the product entrepreneur on his £2.5m valuation and declared himself out of investing when Veli revealed he had valued the business at 10 times current revenue (£213,000). Veli then faced further questioning from Deborah Meaden on the company paperwork as it became clear that the contract with the lab wasn't a licensing agreement.
This finding led Jenkins to bow out of investing;' “If you're going to ask for a £2m valuation, spend a couple of grand on your contract. Lawyers exist for a reason!” And Willingham and Meaden followed suit; “There's two fatal errors you've made here; your contract and the fact your valuation is off the scale.”
While having lost the interest of four of the dragons, Suleyman was still keen to know more and felt there was “potential” in Liquiproof. With his only concern around the IP; the retail mogul made Veli an offer of the full £100,000 for 50%, subject to the issues of the contract being resolved and an agreement secured that would “enable us to grow the business”.
Veli accepted the offer; 45% more equity than planned, as he felt that Suleyman would be “able to take us to where we need to be. The connections he has in the industry are amazing.”
Start-up business lesson: Veli successfully secured investment in the Den but his pitch raised some key issues for raising finance; namely don't cut corners with contracts and present reasonable and solid evidence for your business' valuation – overestimating your business can cause serious damage.
Matt Boyles and Dom Thorpe
Company: Wireless Fitness
Concept: Music-based outdoor fitness classes via wireless headphones
Investment sought: £100,000 for 15%
Investment received: None
With a goal to make their business “the biggest name in outdoor exercise”, early-stage entrepreneurs Dom Thorpe and Matt Boyles presented their business Wireless Fitness: a concept which combines wireless headphones and an app to enable instructors to run music-based outdoor exercise classes to music in any location without disturbing residents. The duo explained that the app enabled users attending the classes to connect via their mobiles and use their own headphones, outside of using the wireless headsets.
Jenkins seemed unconvinced from the get-go in how the business would attract users while Jones flagged up a “major flaw” with the technology of the mobile app – arguing the case that some users wouldn't be able to connect on 3G and 4G. Meaden shared Jones' concerns and said she wouldn't be investing, Jenkins also said he wouldn't be investing as Thorpe and Boyles couldn't answer his questions around the lifetime value of a customer.
In a more direct approach, Suleyman informed the founders that”they should “stay with their day job as there's a lot of I don't know the answer to that. […] You've got more chance of seeing me doing a marathon then investing in your business!”
Jones declined to invest as he felt the exercise app had a long way to go before being investment ready; “You should have come here with the right tech and understanding. I don't want to risk £100,000 so I'm not going to invest.”
Willlingham ended the founders time in the Den when she said she didn't feel she could invest in Wireless Fitness as it was “way too much of a punt.”
Start-up business lesson: Before you go looking for start-up finance, you should ask yourself the pertinent question of whether your business is actually investment-ready. Have a minimum viable product (MVP) and, if you're a technology business, know your technology inside out.
Company: Bio-tiful Dairy
Concept: Kefir-based dairy drinks
Investment sought: £250,000 in exchange for 10%
Investment received: None
Russian entrepreneur Natasha Bowes entered the Den with the intention of getting the dragons to buy into her fresh food business Bio-tiful dairy. A “new take” on the traditional Russian drink Kefir, the business specialises in dairy yoghurt drinks of the “miracle food” which is cultured in order for bodies to absorb minerals that we aren't normally able to from normal milk.
On tasting the Kefir-based drink, Willingham was immediately sceptical as she didn't believe the taste would be one for the mass market; “It needs a lot of money spent on the principle of this. […] It's not for the sweet tooth.”
Suleyman followed up Willingham's feedback with questions on price and the product's place in the market. At £1.99 a bottle, Bowes said she felt it was in the price bracket for a luxury product and listed a number of impressive clients such as Ocado, Riverfood Organic, Wholefoods, Selfridges and Harrods etc. There was some debate in the Den when Bowes wouldn't share details of a national supermarket she was in talks with but, after reasoning from Meaden, she revealed that Waitrose had also taken an interest.
Yet Bowes' pitch came unstuck when it came to the valuation. Jones couldn't understand how Bowes could value the company at £2.5m when she had no profit and “only” £218,000 in revenue and Bowes' “take it or leave it approach” left Jones speechless. Willingham wasn't convinced by the valuation either and said it was “crazy”; “you're not there yet, it's not one for me”.
Jenkins also agreed:“Only 2% of the UK population will appreciate it's a great product, you haven't demonstrated you can break this into a tiny niche.”
In a surprise turn of events, Meaden made Bowes an offer of the full £250,000, including access to all her connections, but Bowes immediately rejected the offer and explained 20% would be the absolute maximum she would go to. Meaden then echoed Willingham and said that she was out as Bowes' valuation was “crazy”. A point that Suleyman also agreed on.
Jones summed up Bowes' pitching error in his closing statement; “You've made yourself ‘uninvestable' by setting such an incredible valuation. I'm out.”
Start-up business lesson: Valuations are always a crunch point in the Den and if you can't offer investors solid evidence to back up your valuation, your business immediately becomes less attractive as an investment proposition. Bowes' “crazy” valuation came under criticism from all of the dragons as she couldn't convince the panel of her company's worth.
Concept: Freebie website
Investment sought: £50,000 in exchange for 10% equity
Investment received: £50,000 for 10% (Deborah Meaden)
The final pitch of the day was a slick one from web entrepreneur Deepak Taylor, founder of Startups 100-listed LatestFreeStuff, who presented a case for his freebie website where you can order free samples of products such as make-up and food. Taylor detailed how his platform worked for consumers and businesses by enabling consumers to ‘try before they buy' while also giving brands the chance to raise awareness for new campaigns.
With a client list including Vodafone, O2 and Uber, 300,000 visitors a month, and an email database of over 140,000 users, Taylor's presentation of the “UK's largest freebie website” caught the interest of the entire investor panel as he explained that he was looking to use the investment to monetise more content on the site.
The business' profit margins impressed the dragons further when Taylor revealed the company was on target to hit profit of £200,000 and had achieved £130,000 profit in the previous year; on revenue of £250,000. What's more, Taylor explained that he had grown the company organically and had attracted users without any marketing spend.
On learning more about the start-up's success, Jones said he felt it was “quite bizarre” as he felt it was “like the thing you dream of happening. It's almost too good to be true”. Given the business' achievement milestones, Suleyman was the first dragon to make Taylor an offer of investment; “I'm offering you all the money, daily contact with myself and in-house developers but I want 20%.”
Jones and Jenkins had doubts over competition so declared themselves out but this didn't alter Willingham's view and she upped Suleyman's offer: “I'm really excited, all you need is a bit more support and you'll fly. I'll make you an offer of 15% for £50,000. I don't want to be greedy”. Meaden also wanted a piece of the LatestFreeStuff pie and presented an offer of the full £50,000 for 10% equity; the terms Taylor had asked for.
With three offers on the table, Taylor chose to go with Meaden's offer and left the Den confident that he had made the “best decision”.
Start-up business lesson: With a popular website, good profit margins, and organic growth, LatestFreeStuff was an attractive investment opportunity for the dragons. This combination is one which start-up entrepreneurs should keep in mind when thinking about getting investors on board.