If the first two episodes of this year’s Dragons’ Den are anything to go by, it seems you can make all manner of mistakes in your pitch and still walk away with money, providing your idea is good enough. First we had Georgette Hewitt, who went to pieces during her presentation in last week’s show and still secured a £60,000 investment; then, last night we saw the husband-and-wife team of Liz and Alan Colleran lose all grasp of figures in the face of the Dragons’ scrutiny, and still wangle £80,000 out of newest addition to the panel Hilary Devey.
However, despite these two successes, it’s hard to escape the conclusion that, in both cases, the investment was secured in spite of the pitch, not because of it. In fact the Collerans’ mattress-and-duvet combo might well have secured an even better investment from one of the Dragons had they not made such a dogs’ dinner of their financials.
In real life, a pitch with such obvious flaws may not have received such sympathetic treatment – so it’s important to avoid the mistakes the Collerans made if you pitch for investment yourself. If an investor asks you for hard facts, and you reply “we’d know when we get back to the office” as Liz Colleran did, many angels and VCs would eat you for breakfast – so it’s important you know your business inside and out before you sit down to present your vision.
Here are five tips to ensure you’ve got all the answers at hand before you meet the investors:
When pitching to an investor, you need to be able to talk about your financial history – not just the sales, profit and turnover you recorded last year, but for every year since you started trading. It’s also important to have firm figures for overheads such as fuel, bills and rent, and for your overall wage bill.
An investor will be really impressed if you can tell them about economies of scale. Daniel Priestley, a business guru who has previously hosted training events with ex-Dragon James Caan, told us:
“Many products are expensive to make in small runs, but as soon as you hit certain numbers, it’s all profit – that’s the point at which an economy of scale is reached. You need to know exactly where this point is.”
As well as thinking backwards – how do I explain what’s already happened to my business? – you also need to be able to explain your strategy, and map out the way you want to take the business forward in as much detail as possible. According to Daniel Priestley, “you need to look at your product strategy. What is the product, and how does that product make money, how much money is available to market that product, and what could be the second or third product down the line?”
Like the Collerans, the trio of Christian Hartmann, Tom Callard and Martin McLaughlin managed to snare a Dragon’s investment with their mainstream popcorn product. However, once again, their pitch was riddled with errors and omissions.
According to Daniel Priestley, they were “quoting their costs, rather than how much they would sell the product for. They needed to tell the Dragons how much they would sell to retailers for, how much mark-up they would make, and what they would make further down.”
If you’re going to make a big claim, you need to be able to back it up – as we saw when the two DJs talked about jumping from £40,000 to £500,000 profit, without any substantiating evidence. The Dragons ripped them to shreds for this throwaway forecast, and what had begun as a promising pitch lay in tatters.
If the DJs had been able to cite forward orders, or asked an independent source, such as a business mentor, to back up their forecasts, they may have been able to convince the Dragons that their ambitious targets were achievable. If these resources hadn’t been available, they should have set their sights much lower. As Daniel Priestley told us, “if they’d quoted a more normal forecast, say £80,000 to £120,000, they’d have had more chance.”
When the hopeful with the bath Bluetooth system said he wanted to charge £400 per unit, you knew he’d lost his audience. He had fallen into the classic trap of judging the product through his own eyes – convinced of the genius of his invention, he had set a whopping price tag on it without thinking about what consumers would actually pay.
In working out the market rate for your product, you can use forward orders, written expressions of interest, customer receipts – even quotes gleaned from your own market research. With this kind of supporting information behind you, you stand a chance of luring an investor – but if not, you’re probably going to leave empty handed.
Ultimately, you have to try and put yourself in the investor’s shoes – why would they put their hard-earned cash into your company? An angel or VC isn’t going to risk their money without good reason, so you need to have a clear picture in your own mind of what they’re looking for.
With this in mind, it’s crucial that you market your company as a grown-up, fully-fledged enterprise, rather than a fleeting dream. As Daniel Priestley said, “most of [the Dragons’ Den applicants] refer to what they had as an idea, and descried it as an idea. It’s much more powerful to describe what you’re offering as a product or a business. When you suggest an idea to your mate in the pub, that’s appropriate – but an investor wants to know whether you’ve got a product or business.
“You need to show you have intellectual property, you have distribution, you have brand, you have market acceptance, you have a passionate team committed to the project, and you’ve got some sort of barrier to entry. Remember that entrepreneurs aren’t talking in the language of speculation – they’re talking in the language of value.”