How to face the Dragons and win: Six questions every business owner should be able to answer
The concept is tried and tested: Budding entrepreneurs pitch business ideas to multimillionaires. Series 13 of Dragons’ Den is currently airing on the BBC and has even more entrepreneurs jostling for investment from the Dragon investors. There may be three new Dragons in the Den joining stalwarts Peter Jones and Deborah Meaden, but they’re still looking for the same information from those pitching for investment. Taking a look at the questions Dragons’ fired at the applicants in the opening episodes, it’s clear that whatever your dream, whatever your project, you need to understand the mechanics of your business before anything else, whether you want investment or simply want your business to succeed. Time and again the same questions are asked by the Dragons to those looking for investment. Get them right and you are on a much firmer footing to securing investment.
What are your key financial figures?
In episode one, when digging deeper after an impressive opening pitch, Deborah Meaden focused on the very basic figures every business person needs to know – revenue and profit. The inability of Farnaz Khan to provide these on her ‘big knickers’ brand led to her pitch falling apart.
Understanding the difference between gross profit and net profit is essential if you want to be taken seriously in business, but you also need to know the figures that go with them. Annual figures for the past three years, if you have been going that long, immediately give you credibility – even if they are not massive figures. Indeed, even if the initial figures show a loss, that’s fine (see later). Investors understand it can take time to make things profitable. Even your loss, its value and the timescale for it are important when it comes to understanding the viability of a business. Your burn rate, the rate at which a new company spends its initial capital, shows how long a company can survive before it must turn a profit, which is important to know for any investor.
Know what your turnover is, has been and is projected to be. Know the same for your cost of sales and be realistic about the potential higher costs for new equipment, increase in staff numbers, etc. You should also know your margin. All of these are figures that are simple to memorise, which will give you initial house points with potential investors. Make sure you understand them, how they are arrived at and what they mean too. You need to be able to answer questions from investors and not be found floundering like Farnaz in the clip above, which ultimately led to her becoming un-investable.
Having these basic numbers to hand, doesn’t necessarily show you are the best company to invest in, but it does show you are a business person worthy of investment. Without them, most investors won’t take you seriously and will doubt your business acumen. Somebody who clearly cares about the figures within their business and knows them off the top of their head understands their business and where it is heading. Without solid figures to give to would-be investors, everything else will be difficult to believe.
What is your cashflow projection?
Some would argue this is wrapped up in your other financials above but its importance can’t be overemphasised and it deals with financials on an ongoing basis and not just a moment in time. Once your business is up and running this is the figure you need to pay most attention to. A negative cashflow means the end of many businesses every week because they simply can’t pay their bills. Projections won’t be certain but should be based on expected income and also expected investment if that is a possibility. However, the need to borrow money to pay bills you have already racked up should ring alarm bells as the health of your business.
New Dragon Nick Jenkins built his fortune with an online greeting card brand and understood the burn rate quoted by Oliver Tezcan for his online men’s clothing retailer, the Idleman.com, wasn’t as bad as some of the other Dragons thought. Even a cashflow loss thus far seemed to have a healthy outlook over time in Nick’s eyes @ 21:21 :
Everything else stems from cashflow. Knowing your revenue and your outgoings means that you can plan a budget and build your business. Don’t over estimate your cashflow either – you’ll get found out, either by a curious investor or in the long term by a lack of cash! Unlike your other financials which tend to be annual snapshots, your cashflow is ever changing and needs to be looked at regularly. Estimates should be made on monthly or weekly cycles. The other financials can often hide cashflow issues because over an annual cycle things work themselves out. Unfortunately, a strangled cashflow can mean you don’t even make it to the end of the annual cycle.
What is the advantage of your product over things already on the market?
In the opening episode this was Peter Jones’s first question to Ben Fridger who was clearly prepared. His response was quick, informed and engaging as to why his clothes steamer is better than a traditional steam iron.
Knowing your market is important before you enter it. There may be reasons those already out there haven’t tried the slight variation you are planning. Know what your unique selling points are. How do you differ? Why would somebody buy yours when they already own something very similar already? Is your price point right? Understand not only the market but also your product and the products of your rivals too. You can’t do too much research before you move into a new business sector.
What’s the longevity of your product/brand?
In episode two, new Dragon Sarah Willingham immediately showed her passion for food and drink with an obvious interest in the West Africa inspired snacks from Chika Russell. However, she was keen to make sure the business had a long-term future.
Whilst some may mock, having a vision for your company is not a bad thing. You need to have a dream to aim for if you are to be successful and a vision is only that – one potential outcome – so it can be flexible and change as need and circumstance dictate. However, without a vision your proposition will lack depth and long-term appeal to potential investors.
Longevity is a concern to most investors. For many, it is not the desire to build long-lived brands, but the desire to build a company that makes sufficient profit over a long enough time to give them a return on their investment. If anybody can copy your product quickly and easily, your life cycle could be short-lived with potential competitors able to use technology to have a rival on the shelves within weeks. New models, new ranges and new markets are all things you should be considering as you embark on your first launch. You are thinking about building a business not just selling a single product.
What do you want from an investment by a Dragon?
Global fashion tycoon Touker Suleyman liked Ben Fridger’s steam cleaner in episode one but, having seen a product that clearly worked and was clearly selling, he wanted to know how his investment was going to make a difference.
This is a common concern from investors. Some like to be hands on and heavily involved in projects – especially those they can see will be fun to join in with. However, many are simply looking for an investment vehicle, perhaps with the odd bit of hand-holding and maybe some introductions to their contacts. It’s important that you are clear in your mind what you are looking for in your own dragon. Do you simply want money and to be left alone to move things forward once you have that investment, or are you looking for a business partner who can share the load and share the pain of strategizing? Once you have decided on that, be honest with the investor too. They can make a business decision if you have the right financials but they also need to look at the bigger business picture. How much time will it need from them and how much are they prepared to give? Time is money so it all affects the true value of their investment. In Ben’s situation he actually turned down the offer from Touker to take investment from two Dragons (Deborah and Nick instead) which fitted with what he needed from his investors.
How did you come to the valuation you’ve put on your company?
A £20 million valuation was a shock to Peter Jones when he asked this question of Fraser Fernhead of property crowdfunding platform The House Crowd in episode two of the current series.
The valuation of your company is probably the most important figure for your investor as it tells them what they’ll be getting for their money. If they are investing for a percentage share of your company, the valuation will tell them how much they need to pay to get their desired share. Getting your valuation right is vital. If it’s too high would-be investors will just see you as a joke. Too low and investors may worry that you don’t fully understand your business, or perhaps that you lack ambition. If your company is not trading, or is trading without a profit at the moment, giving it a multi-million pound valuation is unlikely to be realistic. If it means a lower valuation and a higher percentage given away to an investor so that your business can survive and take the next steps in growing then seriously consider that. Retaining a smaller percentage in something that becomes profitable quicker and more securely is far better than a large percentage in something that trades at a loss or struggles to make a serious profit.
Watch the remaining episodes of Dragons Den. These six questions will come up time and time again. They form the fundamental core of assessing a business’s health, wealth and potential. If you want your business to succeed you need to consider them all and understand how you would answer whether you are looking for investment or not. If a proven successful business person wouldn’t think your business is worth their time and investment, then why should you?