Dragons’ Den: Series 14, Episode 14
This week: Lessons about realistic company valuations and sky-high start-up costs as a baby product company won over Touker Suleyman
There were raised eyebrows in the Den over ambitious company valuations this week with just one company, a baby product manufacturer, going on to secure investment from fashion mogul Touker Suleyman.
Elsewhere an effervescent vitamin tablet company failed to close a deal, a custom headphone start-up was advised to prove its business model, and the benefits and drawbacks of running a part-time business were explored in a pitch from a teacher-turned-beauty entrepreneur.
Read on for the business lessons you can learn from this week's Dragons' Den pitches…
Company: Comb and Blade
Concept: Online men's grooming retailer
Investment sought: £45,000 for 15% equity
Investment received: None
This week's first pitchee was Kevin Moore, seeking £45,000 for a 15% stake in his male beauty business Comb and Blade. Started with £1,500, the business offers a range of traditional grooming products including hair pomades, wet shaving products and moustache care products.
Moore's company financials quickly came under fire when he revealed he had generated just £50,000 from 4,000 sales in the last two years.
Suleyman acknowledged that “it was a small business” and felt that “with a turnover of £20,000”, the aspiring hair and beauty entrepreneur “must do something else”. Hearing that Moore was a full time IT teacher cemented Suleyman's concerns: “With all due respect, you can't expect me to invest in the business when you dip your toes in as and when you've got an hour here in your lunch break or the evening. It's really not a business”.
Nick Jenkins, on the other hand, praised Moore for running a part-time business and said he was a classic example of how to develop a business with a few simple internet skills “while still holding down a full time job”. Although he thought what he'd achieved so far was “amazing”, Jenkins warned that at some point he had to give up teaching and asked: “Are you sure you'd want to give up your day job?”
While Moore said he felt uncomfortable discussing this response on TV – because he had a responsibility to his employers and students – he admitted that “realistically, if the business was making a significant amount of money and I felt that it could grow, that is a decision that I would have to make and have to think about very carefully”.
“I actually think the scale of the opportunity is actually going to be determined by the effort and focus of the individual that's founded the company”, said Peter Jones, “but I don't think you can do both”.
The company's modest financials were a sticking point for Meaden who assessed that “there's no demonstration of profit. In fact it's gone down.” while Jenkins' initial enthusiasm seemed to diminish.
Worried that the brand story would be lost the moment Moore moved into wholesale, at which point he would be “part of a supply chain”, Jenkins became the first Dragon to exit the deal. Willingham followed, announcing herself out of investing because she felt there was too much of a conflict between Moore's current job and business interests.
Meaden also declined to invest and, while Jones said Moore had demonstrated that it was possible to set up a “cool” business in your spare time, he also announced himself “out” of the deal.
Left to Touker Suleyman to decide his investment fate, Moore would find himself leaving the Den empty-handed as Suleyman – Moore's “preferred Dragon” – said he “hated” the business for using US products instead of British brands.
Start-up business lesson: The Dragons liked Moore's brand and what he'd achieved so far, but couldn't invest in what was ultimately a part-time operation. Investors will want the promise of full-time commitment to give them the confidence to back your business. Male haircare was one of our top business ideas to start in 2017 – read all about it here.
Company: Nutrifiz Ltd
Concept: Effervescent health tablets
Investment sought: £75,000 for 10% equity
Investment received: None
After his last business led to financial failure, the stakes were high for the Den's next entrant; David Hastie.
Hastie was seeking £75,000 for the “world's first effervescent wheatgrass tablet”. Hastle explained that wheatgrass is a highly nutritious plant full of vitamins, minerals and plant nutrients with a worldwide market worth £15.5bn.
Hastie said the Nutrifiz product delivered energy, immune support, sports recovery and general wellness, “without the grit or horrible bitter taste of other wheatgrass products”. To date, the company had sold more than 12,000 units and secured listings in over 500 retailers nationwide including Holland & Barrett and Asda.
The company was projecting turnover of £367,000, netting a gross profit of £150,000.
Suleyman complimented Hastie on his pitch but said it was a very competitive market and asked about potential competitors to which Hastie responded; “between multivitamin effervescent tablets on one side and wheatgrass on the other. This product is effectively bridging the two.” He went on to explain that the company had conducted consumer research to make sure the taste was palatable to the majority of people.
Meaden and Willingham were unimpressed by the artificial sweeteners used in the product. Willingham: “That would deter me from drinking it, but it would definitely deter me from giving it to my children”.
Hastie said he'd developed ‘Nutrifiz for Kids' at the request of the CEO of ASDA and was selling two to three packs per week in store. Willingham was confused by this claim and questioned why the supermarket brand would still be stocking if it didn't appear to be selling well. However, Hastie was quick to respond: “There are plenty of other companies that are trying to get that shelf space so if it wasn't selling they wouldn't maintain the listing”.
Forgetting stockists, Jenkins took issue with product IP: “What's to stop anybody else putting wheatgrass in their effervescent tablets?” Hastie admitted that he couldn't get a patent but asserted that he had ownership of the formula and good relationships with manufacturers. This wasn't enough for Jenkins: “You don't have enough of a brand to defend your position […] I'm out”.
It was at this point that Hastie admitted he'd taken voluntary bankruptcy on a previous business. “I think you've taken the easy way out”, said Jones, “that doesn't really sit well with my moral compass. I've been and lost everything […] I don't like the fact that you walked away from it”.
Suleyman said that if the business was as promising as Hastie claimed, the existing shareholders would have found the money to invest and so declined to make an offer.
Willingham, who said she was initially excited by the concept, revealed she had been discouraged by the poor sales so far and withdrew from the deal. Meaden followed suit as she was unhappy with the use of artificial sweeteners, leaving Jones to bring an end to Hastie's time in the didn't think £75,000 was sufficient and couldn't invest.
Start-up business lesson: Hastie's limited in-store sales didn't assure the Dragons that Nutrifiz would grow into a big business. Had Hastie entered the Den boasting more robust sales figures, a patent, and evidence of success, then the outcome may have been very different.
Concept: Custom fit earphones
Investment sought: £80,000 for 5% equity
Investment received: None
Next into the Den was founder of custom fit earphones manufacturer Snugs, Paul Jobin. Describing them as”little Saville Row suits for your ears”, Snugs are made of soft silicon to “perfectly fit the ear” and, Job claimed, never fall out which results in “vastly improved” sound quality.
Retailing for £199, the company performs a 3D scan of the ear and inner ear and then produces individual headphones with a 3D printer. With only two 3D printer scanners in London outlets, Jobin announced that he looking to roll out the product across the city and, eventually, across the country.
With each scanner costing £10,000, Willingham was concerned the cost would have a huge dent in profits: “You're going to need to sell 300-400 of these before you're even getting to the point where you're covering the cost of the scanner. That many people are not going to walk through the door and buy this product, therefore there is no roll-out model”.
Jobin then pointed to an offline/online model, citing that the business had been able to take online orders by sending customers to a local audiologist. Willingham wasn't impressed though and said she wouldn't bother waiting ages to get an appointment.
Jones didn't agree with Willingham's feedback and said he could see a comparison between Snugs and photo booths in their early days: “I think you have come up with something that you will see in the open market, so I'm not going to criticise what you've done because I like it a lot”.
Jenkins then enquired about company financials to which Jobin revealed projected turnover of £300,000 for year one, £800,000 for year two and “optimistically” £2m for year three – netting 10% if the business was “lucky”. “Not terribly exciting”, said Jenkins, “It's hardly worth the risk is it?”
Meaden shared Jenkins' criticism and was the first to drop out: “I instinctively know you're good at business, but you haven't really been able to financially demonstrate what it's going to cost us to get there […] I think the single biggest thing is you're going to need a lot more money […] I'm out”.
Suleyman followed: “You haven't convinced me you have business that is sustainable […] For that reason, I'm out”. Next to decline an offer of investment was Willingham who felt Jobin hadn't yet proved he could make the headphones and deliver them for a price that would work for the business and potential customers while Jenkins, worried about how defensible the product would be in the long term, asserted that he was out.
Jones, who thought the concept was “first class”, noted that he couldn't invest as he didn't like the business model “at the moment”but said he “he hoped to see Snugs on the high street”.
Start-up business lesson: Again, Snug was too early-stage for the Dragons to invest and Jobin was unable to prove the business model and convince the investors that the “risk” was worth taking. Jobin was advised that he would need to attract a lot of customers to make the business work – find out how to attract new customers here.
Sinead and Adam Murphy
Concept: Designer baby products
Investment sought: £75,000 for 5% equity
Investment received: £100,000 for 25% dropping down to 15% when targets met
Husband and wife team Sinead and Adam Murphy were the Den's final contestants this week and, based on the investment received, the most successful. The founders of Shnuggle, who have four young children themselves, announced that they had created “clever baby products for modern parents”.
Due to their experience of caring for their sickly baby, the couple had focused their attention on creating better baby products and launch them under the Shnuggle range. The first product was an updated Moses basket, made from plastic, hypoallergenic and easy to clean. The second product, a baby bath with a “bum bump in the bottom to stop the baby sliding”, had sold 45,000 units in 12 months. Their products had secured listings in Amazon, John Lewis, The White Company, Mothercare and Tesco.
Finances were also positive: the Murphy's claimed Shnuggle had generated revenue of over £600,000 in the last year with £3.2m forecast for year three.
Jones was sceptical about the £1.5m valuation of £1.5m with “the traffic light and alarm going off” but the entrepreneurs justified their valuation by saying they had a new product range on the horizon. Jones wasn't convinced; “it's stupid, ridiculous and ludicrous”.
Undeterred, the duo went on to reveal that the business was about to become a supplier to Bye Bye Baby and Babies'r'us in the US, had produced a white label bath product for global children's products manufacturer Dorel, and had a deal underway with a major Chinese distributor to purchase a “40 foot container every month”. “Not bad going”; Jenkins admitted.
This export focus was music to Suleyman's ears: “I think the fact that you are thinking international makes the product a lot more viable. I just happen to be in that little sector at the moment”.
While the entrepreneurial pair said customers were really getting on board with the Shnuggle brand story, Jones, Jenkins and Meaden didn't understand what made the business unique; “I don't think your branding's strong at all”, argued Meaden, “I think you've got three brands there”.
Willingham also didn't think the brand was strong enough to invest in while Jenkins wasn't keen on the probability of the business hitting £3.2m in three years – both declined to invest. Jones took a similar apprach; noting that he couldn't get past valuation.
Suleyman didn't share the views of his investor peers and thought he could “add a lot of value” to Shnuggle, offering £100,000 for 30%. Suleyman sweetened the deal by suggest that he would return 15% of the equity when he got his money back.
The pair made a counter offer of 15%, buying back 5% if they hit their targets. Negotiation followed and the duo eventually agreed to give away 25% equity, dropping down to 15% once KPIs had been met.
Start-up business lesson: While some of Dragons were sceptical about the company valuation, Sinead and Adam Murphy's ambitious global strategy and evidence of previous sales success were a winning combination for Touker Suleyman. The pair also managed to successfully negotiate a deal with the angel investor, a skill that you can learn more about here.
Inspired by the pitches on Dragons' Den? Take a look at the show's most successful businesses to date here.