Dragons’ Den: Series 13, Episode 8
Several pitches but no investment - this week's episode offered key insights on what NOT to do when pitching to investors...
Stumbling over your figures, being overly-ambitious and an inability to compromise – these were just three of many issues raised in the Den this week as the Dragons negated to part with any cash.
From a children's teething company which the Dragon's were reluctant to take a bite out of to a cycling adventure company which ignited road rage in a bike-averse Peter Jones, we've recapped the latest pitches and the business lessons you can use to get investment ready…
Company: Old London Underground Company
Concept: Renovating a disused underground station into a tourist attraction
Investment sought: £2m for 51%
Ajit Chambers entered the Den with a clear vision to transform Down Street Station – a disused tube station which had previously been used as shelter in World War II. Having spent five years getting the company “in position”, Chambers explained that he was looking for capital to pursue three revenue streams including a tourist adventure site (recreating what happened in World War II), an event venue and a food and drink area.
Chambers concluded his pitch with a major revelation; he was seeking a staggering £2m for an unusually large equity amount of 51%.
Jones was first to discuss the deal on offer and, having said he felt £2m “was a lot of money”, quizzed Chambers on his personal background. It came to light that Chambers had already spent £160,000 on the project and had sold his house to fund the business which alarmed Meaden; “you have literally put everything on the line”.
Having taken a huge amount of risk already, Suleyman wanted to know what Chambers' second option was but Chambers assured Suleyman that “someone would be interested” and made it clear that, first and foremost, he was looking for investment and not necessarily mentoring or dragon involvement.
The entrepreneur's pitch then began to go off the rails as a question from Jenkins highlighted the small capacity of the tourist attraction space with just 1,800 square feet and a subsequent discussion with Willingham revealed that turnover was projected to hit £1.1m – “If I took a side with £2m invested, I'd want to have a lot more than £1m turnover” – and Willingham declared the business was “not for her”.
Jones took more of an issue with the tourist attraction: “Are you not building the very experience that no-one would want to experience anyway? If I said to my son that I'm going to take you to experience what your grandfather went through in the second world war and you're going to be riddled with fear I can't see it being appealing! I'm out.”
Suleyman followed suit and declined to invest as he felt Chambers' plans were too ambitious and was “concerned for [Chambers'] well-being”, while Meaden was more concerned by Chambers' investment requirements: “You're not looking for anyone to add value […] you just want our money”.
The deal then came to the end of the line when Jenkins found that Chambers didn't actually own the lease to the site. Chambers agreed with Jenkins' statement that if “someone came in that was more credible with a couple of million pounds and wanted to buy the lease they could” which left Jenkins with no choice but to reject the pitch.
On exit, Chambers agreed with the dragons that his pitch was “not good enough” but assured that he “would be going out to speak with other investors”.
Start-up business lesson: Investors are natural risk takers and are inclined to back business owners that take risks but those risks must come with the potential of success and financial returns. If you can't demonstrate evidence to back up your valuation,business traction and don't have a solid ‘plan b', you're unlikely to secure funding.
Jenny McLaughlan and Lorraine Young
Company: Gumigem Ltd
Concept: Range of children's products for teething and chewing aids for the sensory market
Investment sought: £30,000 for 15%
Investment received: None
Jenny McLaughlan and Lorraine Young's pitch had plenty of bite. Having launched their teething and chewing devices four years ago under the Gumigem brand, the duo had already turned a profit, had sold over 100,000 units in 15 countries via franchising and had endorsements from dentists, doctors and midwives.
With plans to launch a clothing range, the entrepreneurs were looking for dragon capital to give their business a boost and the investor panel were given much to chew over, particularly when McLaughlan detailed turnover of £288,000 with a gross profit of £105,000 and net profit of £16,000.
Meaden was keen to find out more about the company's franchise model and it was this subject that saw the pitch unravel. Having claimed that America was the business' biggest overseas market with 15% of overall turnover, the dragons were “aghast” when McLaughlan revealed she had already sold the entire US franchise for a £2,000 upfront fee, rather than selling individual US territories.
This fact immediately removed Jones from investing: “I'm struggling with the potential to scale this business, you've already assigned your franchise territories and it would be difficult for you to renegotiate so I'm out”.
The upcoming clothing range then came under the spotlight but, with McLaughlan admitting she was “very inexperienced” with clothing and was only working on prototypes, Suleyman offered ‘Touker Time' advice: “You want £30,000 and you want to launch a clothing range as well? Focus on your existing business. If you can't get it right there then where? Clothing will bring you down and […] you'll drown. That will kill you, make some profits and reinvest.” And with that Suleyman was out, followed by Jenkins who shared similar concerns.
Yet it was McLaughlan's failure to get to grips with the financials which ultimately saw her leave the Den empty handed. Meaden highlighted that the margins didn't match up with the profit and turnover figures presented and McLaughlan then realised she had misunderstood what turnover meant and had simply used an accountacy software package to get the figures.
Unable to “get behind the numbers”, Meaden and Willingham were out of investing and the duo's time in the Den was up.
Start-up business lesson: Figures and franchising were the flaws in Gumigems' pitch. When it comes to financials, you need to have a solid grip of your figures and be able to draw down on your profit, turnover and margins. When it comes to franchising, have a clear strategy as to how you plan to maximise on your business offering – don't just give away your business to a prospective franchisee.
Concept: Cycling adventures
Investment sought: £250,000 for 25%
Investment received: None
Next to appear in the Den was Startups 100-listed company Ride25 and its co-founder John Readman. Specialising in cycling adventure holidays, Ride25 enables people to cycle all of the way from the UK to Australia in 25 individual four-day chunks and covers everything from food, accommodation and medical for £1,250 a trip.
With a target audience of corporates, charities and the consumer cycling market, Readman delivered a passionate pitch as he shared his ambitions to grow the business to 4,000 cyclists by 2018 with turnover of £5.3m and £900,000 profit.
Responding to Willingham's enquiry about his goals for the business, Readman explained that he planned to take 1,000 people cycling this year and already had 800 committed but said he saw the Den “as an opportunity to create a cycling travel brand that could be much bigger”.
Yet Readman's goals for the business weren't shared by Jones who felt Readman was steering down the wrong path; “The thought alone of 500 cyclists clogging up busy roads because they're rich enough or have the time to do it […] is real issue. I think it's bloody annoying”. Suleyman, on the other hand, was interested in why Readman was in the Den altogether as it was clear the company had a lot of cash in the bank but Readman asserted that the dragons' knowledge to drive growth of the business was what he was looking for.
While the business appeared to have traction, Readman's pitch punctured on the revelation that he only had five of the 25 trips on offer and needed investment to expand into new territories. This news raised eyebrows among the sragons and Jenkins immediately responded that he would not be investing as he didn't believe in the company's expansion plans.
Willingham agreed; “Where I struggle it with is that you're going to have a lot of loss-making trips, and you're already trying to open new territories. To me, it's not an investment opportunity”. As did Meaden: “As you grow, you're going to find the logistics tougher than they've been so far. I think you're going to need a lot more cash. I'm out” and Jones – “I worry that you're not quite there with the model so I'm out”.
It was left to Suleyman to decide Readman's fate in the Den but it didn't end on a high: “Red flashing lights came to my eyes when you said you're looking to open in all these new territories. You're looking to run before you can walk. I like your big thinking but your big thinking can get you into trouble and it's not going to get you into trouble with my money.”
Start-up business lesson: Be upfront from the start with what your business is and what you have to offer. Revealing key information at a later stage could cause problems with investors and set alarm bells ringing.
Readman has detailed his experience of appearing on Dragons' Den and what it's really like to pitch to the Dragons with Startups.co.uk here.
Company: British Cassis
Concept: Alcohol mixers
Investment sought: £50,000 for 10% equity
With a successful multi-million turnover agricultural business under her belt, fruit farmer Joe Hillditch was looking for financial backing for her English cassis drinks business made using left over berries. Having already secured deals with Fortnum and Mason, Wholefoods and Waitrose, would the dragons drink to the business opportunity?
After tasting an array of the alcohol mixers, the dragons showed interest in the punchy pitch but Willingham wasn't impressed by the branding; “You said that you're a British brand but your cassis are called ‘Poire', ‘Fraise' and so on”. Despite Hillditch's assurance that the labelling was “tongue in cheek”, Willingham said she was struggling to get past the branding – “I think the irony is missed but I love the product and taste”.
Suleyman then took issue with the valuation as Hillditch admitted it wasn't based on the business today but the business in five years time to which Suleyman retorted “God knows where I'll be in five years time!” and told Hillditch he would not invest. Being “two raspberry daiquiri's away from making a bad decision”, Jenkins also declined to invest as he felt Hillditch wouldn't be able to focus on her start-up business away from her established company.
Jenkins and Suleyman's worries weren't shared by Jones however who decided to make an offer of the full £50,000 for 30%. But this offer was immediately rejected by Hillditch who explained that she would not give away any more than 25%.
Willingham then presented an offer of all of the money for 40% and suggested that Hillditch could tap into “all of her contacts in the industry” but this too was rejected as Hillditch explained “I can't do it.” The restaurant mogul then made Hillditch a counter offer of all of the money for 40% with the ability to buy back half the shares at the same price once the company doubles turnover BUT this was also rejected – “I'm not going to 40%, I'm just not”.
Jones then came in: “What about if I made an offer with Meaden for 15% each would you still not accept that?”. Hillditch rejected this fourth offer but Jones tried to get her to compromise “Do you not think [it's worth] the difference of 5% when you see where we could take this business and what we can do?”
Hillditch remained determined but this “stubbornness” wasn't appealing to Meaden who explained that the entrepreneur's inability to compromise meant she wouldn't invest. Jones repeated his offer one last time but Hillditch turned it down, deciding instead to walk away from the Den with no investment.
After the pitch, Hillditch appeared to regret her decision: “I know that Sarah could have opened hundreds of doors, perhaps I should have taken that one, darn it” while Meaden shared some words of wisdom; “People forget accountants are advisors, a real entrepreneur takes the advice but actually makes their own mind up.”
Start-up business lesson: Sticking to your guns on investment and valuation can often work in your favour but you will need to be willing to negotiate. It should also be remembered that when it comes to accepting an offer, you should follow Meaden's advice and “make your own mind up”.