After 25 minutes of rapid-fire questions, the pace began to slow, and the Dragons began to settle in. The Dragons had gathered the information they needed and were now evaluating my business and their options. Was Custom Car Posters a business they should invest in? Could they help grow it? Was the valuation reasonable?
Everything had been going according to plan so far, but I was not at all prepared for what happened next. Michelle was the first to break the silence with an offer of $250,000 for 25% of the business. “I did it” I thought to myself, “I got an offer on Dragons’ Den!”. Before I could even process the offer, Vincenzo upped the ante by offering 2 Dragons (Vincenzo and Wes) at $250,000 for 30% of the business. Game on, the Dragons were now in a bidding war for Custom Car Posters! Arlene jumped in next with an offer of $250,000 for a 10% royalty until she received 3x her money back. Finally, Manjit came in with $250,000 for 10% royalty and 5% equity. I could barely believe it; I had swept the Den receiving offers from every single Dragon.
In this last article of my 4-part series on Dragons’ Den, I will discuss the 4 most important things you must do to get a deal on the Den. By watching numerous hours of Dragons’ Den, taking detailed notes, and doing in depth research, I figured out the rules of the game and played to win. Here is what it takes to be successful on Dragons’ Den:
1. VALUATION
The very first thing in your pitch is the valuation. In other words, you tell the Dragons’ how much money you want in exchange for what percentage of your business. Using these two numbers, one can determine the value of your business. After watching numerous episodes of Dragons’ Den, I determined this is the first place where entrepreneurs go wrong. Many entrepreneurs value their business way too high and the Dragons love to jump on that because it is extremely entertaining. Once this happens, it is game over.
Entrepreneurs in this situation do their best to defend their valuations saying it is based on their projections of the future sales/earnings. At this point however, Manjit loves to crush the spirits of the poor entrepreneur by asking a totally nonsensical question. She will ask in an almost incredulous yet accusatory tone “you expect us to pay for future earnings of your business?”. The clear and obvious answer is yes…that is generally how business are valued. Unfortunately, the entrepreneurs are so flustered by this point that they fumble and often make a fool of themselves.
In coming up with my valuation, I used companies that were successful on the Den as a guide. Specifically, I looked for companies that had similar revenues and margins as our business. Most companies on the show provided their revenue figures, so it was easiest to do the valuation based on revenues. I decided to come with a valuation of 2.5x revenue for a valuation of $2.5 million. Although this valuation was lower than what I believed our business to be worth, I thought it was at the upper level of what would be considered acceptable by the Dragons’.
2. THE PITCH
As you might expect, the best pitches are well rehearsed and are delivered with energy and confidence. Since the opening pitch is only about one minute the delivery part isn’t as hard you might expect. The challenge is cramming a pitch that is engaging, entertaining and to the point into just one minute. You need to explain what your business does and more importantly how it makes money. A lot of pitches get lost here don’t get to the point fast enough. If the Dragons can’t figure out how you’re making money and have to question you about it, that is a bad sign.
It is also important to remember the Dragons are sizing you up as an entrepreneur, so it is important to have some of your personality show through. You also want to exhibit some standard qualities that anyone would want in a business partner (confident, enthusiastic, knowledgeable, etc.).
The last thing to consider is having a “hook”. A unique story, a surprising twist, anything that will get the attention of the Dragons while making for good TV. I decided not to go for this as I felt like the uniqueness of our business had enough draw to provide the “hook” and that I would be better served by using this time to explain how our business worked.
Here is my complete pitch:
Hello Dragons, my name is Jonathan Wong, I’m from Vancouver, BC, and I’m here seeking $250,000 for 10% of my business, Custom Car Posters.
I’m a CPA, CA, an Accountant, formerly a Director of Finance, turned full time Artist. My business, Custom Car Posters got its start by selling customizable fine art prints to car enthusiasts. I’m a major gearhead and have restored, modified and raced cars over the years. The basic premise of my business, and where the magic happens, is that if you have a particular car in a particular color, you can purchase a print that matches your car exactly.
We are a print on demand business, meaning that we only print orders as they are received. As a result, we run a very lean operation.
While we started out in the business of car prints, we soon realized that we could apply our business model of customizable art, and our production capacity, to other areas in the home décor market. We’ve recently started to expand, such as with the customizable print for couples that you see in the Den. This particular design become a #1 Best Selling print on Amazon in the lead up to Valentine’s day.
I’ve been working full time as an artist for the past year 3 years and with my background in finance and accounting we have been profitable since our very first year. This year we are on track to sell well over $1,000,000 in art. So Dragons who here is feeling creative?
3. QUESTIONS
If you make a strong pitch, the Dragons’ will ask follow up questions to get a better idea of your business. They genuinely want to learn more about your business, so as a general rule, the more questions they ask, the better.
One thing you absolutely must do is have all your numbers completely memorized. If you provide the numbers with absolute certainty, it will show the Dragons that you really know your business well and are the type of entrepreneur who is prepared. If you don’t know your numbers (Revenues, Gross Profit, Net Profit, Cost to Acquire a Customer, etc.) You will get eaten alive by the Dragons.
The Dragons’ do tend to ask the same sorts of questions in almost every pitch, so you should also be prepared for their standard questions. Refer to part 3 in this series, where I provided the complete list of questions that I was asked on the Den.
4. FIELDING OFFERS
Assuming the first 3 steps went well, you should be receiving offers from the Dragons. Wohoo! In general, it seems like it is an acceptable practice to thank the Dragon for their offer and then respectfully ask the other Dragons if they would like to make an offer. Although it may be exciting, don’t be too quick to jump on the first offer that you receive! Also, don’t be thrown off by the implied valuation in the offers. Dragons will commonly want 2-3x more ownership of your company than you initially presented, substantially diminishing your valuation. For example, I offered 10% of my company for $250,000 and most of the Dragons’ wanted 20-30% for that same $250,000.
With any luck and some patience, the Dragons will start to make more competitive offers if they know others are interested. Generally, it pays to hear them all out. After watching numerous episodes of the show, it appears there is some room to negotiate with the Dragons, although it doesn’t seem like much. If you do decide to negotiate, it is best to come back with a firm offer that is somewhere in the middle with a solid justification that supports your valuation.
In the end, I got an offer that didn’t require giving up any equity, so I decided to not risk a failed negotiation and accepted the offer as presented.
Overall, I had an amazing experience being on Dragons’ Den and I’m so glad I was able to leave the Den with an amazing offer from Arlene. After appearing on the show, I had so much interest and questions that I thought the best way to share it would be through this 4-part series. I hope you enjoyed reading and if you have read the previous parts, you can check them out here (Part 1, Part 2, Part 3). Follow us on LinkedIn to stay up to date with Custom Car Posters latest adventures!
