Dragons Den

[artie]

OK so here's where I demonstrate my lack of business knowledge.

I like to watch "the den" and predict what they are going to do, sometimes I even get it right.

Sometimes!.

What I don't understand is when they say, "I'll give you £50,000 for 15% of your business and if I get my money back in 2 years I'll drop to 10%.

If someone gave me £x for X% of my business and I gave them their money back in two years, I'd expect them to f off. Or at least retain only the % the business had grown.

 

[southendwoodworker]

I think it is around motivating, by reward, the inventors to achieving success sooner, if they meet a defined valuation (or arguably liquidity) goal.

Lets put it a different way:

In your example 15% for £50k puts a value of the business at £333,3333 today.

If in two years time, if the business has been successful it will have increased in value. Lets assume it is now worth £1,500,000. Thats a huge increase, almost 5 fold, but I'll explain why I chose that number shortly.

so the dragon owns 15% of 1,500,000 meaning £225,000

IF the business pays back £50,000 assuming its now valued at £1,500,000, the dragon would now only own 10%.
£50,000 paid back, plus 10% of £1,500,000 = £200,000

This £25,000 difference is the immediate reward to the inventors at year 2. BUT they also get 5% increase in equity of the whole business as it continues to grow in subsequent years.

The dragon does this to motivate the inventors to push forward and make the business successful sooner. This gives the dragon a quicker return, possibly even meaning their day to day involvement in the business decreases even.



Why did I choose £1,500,000? because if I chose £1,000,000 it is these numbers:

If they DONT pay back the £50,000: dragon owns 15% of £1,000,000 = £150,000

If they DO pay pack the £50,000:
paid back £50,000 + 10% of £1,000,000 = £150,000

Meaning the cost to the inventors is the same £150,000, except the inventors have lost 5% equity

Some people when they start a business dawdle about. What the dragon is doing is motivating the inventors to move fast.

 

[Blackswanwood]

The Dragon is simply hedging their bet. If they tie up their money in a venture that turns out to be lacklustre they need a bigger share in it to make it worth their while. It also tests if the person seeking the investment is really confident in the plan they are putting forward.

 

[Sporky McGuffin]

If someone gave me £x for X% of my business and I gave them their money back in two years, I'd expect them to f off. Or at least retain only the % the business had grown.

That doesn't give them much incentive to invest if all they get back is what they put in. Where's the profit?

The core aim of every business is to generate profit for its owners.

 

[doctor Bob]

I'd rather stay small than have to work with them, I find them too smug and arrogant, not great characteristics whether you're minted or not.
Being driven purely for financial gain would be soul destroying for me.
Don't get me wrong, it's worked out nicely for me but ultimately it's about enjoyment and satisfaction.
Taking big risks and rapid growth would mess me up.

Love this


I find the interrogations, cringe worthy, like being in front of a school teacher. How could you work with someone like meaden who treats people like dirt!!! However bad your presentation or business idea, people should be treated with respect and kindness.

 

[doctor Bob]

That doesn't give them much incentive to invest if all they get back is what they put in. Where's the profit?

The core aim of every business is to generate profit for its owners.

They get their money back but still keep their share of the business.

 

[Sporky McGuffin]

They get their money back but still keep their share of the business.

Yes - that's the point of investing in a business.

If all you got was your money back you might as well stick it under the mattress.

 

[artie]

I think it is around motivating, by reward, the inventors to achieving success sooner, if they meet a defined valuation (or arguably liquidity) goal.

Lets put it a different way:

In your example 15% for £50k puts a value of the business at £333,3333 today.

If in two years time, if the business has been successful it will have increased in value. Lets assume it is now worth £1,500,000. Thats a huge increase, almost 5 fold, but I'll explain why I chose that number shortly.

so the dragon owns 15% of 1,500,000 meaning £225,000

IF the business pays back £50,000 assuming its now valued at £1,500,000, the dragon would now only own 10%.
£50,000 paid back, plus 10% of £1,500,000 = £200,000

This £25,000 difference is the immediate reward to the inventors at year 2. BUT they also get 5% increase in equity of the whole business as it continues to grow in subsequent years.

The dragon does this to motivate the inventors to push forward and make the business successful sooner. This gives the dragon a quicker return, possibly even meaning their day to day involvement in the business decreases even.



Why did I choose £1,500,000? because if I chose £1,000,000 it is these numbers:

If they DONT pay back the £50,000: dragon owns 15% of £1,000,000 = £150,000

If they DO pay pack the £50,000:
paid back £50,000 + 10% of £1,000,000 = £150,000

Meaning the cost to the inventors is the same £150,000, except the inventors have lost 5% equity

Some people when they start a business dawdle about. What the dragon is doing is motivating the inventors to move fast.

Excellent explanation thanks.

 

[artie]

That doesn't give them much incentive to invest if all they get back is what they put in. Where's the profit?

The core aim of every business is to generate profit for its owners.

I get that.

If you buy x% of a business and it grows your investment is worth more, you've made money.

It just seemed that getting the money back seemed like having your cake and eating it.

Thanks to southendwoodworker I get it now.

 

[Terry - Somerset]

It's reality TV - although reality is missing as most investors need rather more than a superficial 5 minute presentation to come to a conclusion on value and terms. At best it is like watching just the goals from a 90 minutes football match.

The offers made seem like the Dragons are exploiting the inventors - but I suspect that for every business that succeeds, four just about survive, and five others go bust in the first two years. Dragons (and most other people) prefer to publicise their successes, not their failures!

 

[artie]

I read somewhere that only 50% of deals made in the den actually happen.

The other 50% fail when all the details come to light.

I know it's only TV, but deals do happen and money gets made.

It wouldn't suit me, I'd rather live modestly and be my own boss.

(Don't tell the trouble and strife I said that)

 

[Phil Pascoe]

Time was you went to your bank manager with a good business idea, but now as my wife (40 years of working for banks) said long ago there is little banking any more it's just pawnbroking. If you haven't the assets you won't get the loan.

 

[Sporky McGuffin]

It wouldn't suit me, I'd rather live modestly and be my own boss.

I think that's very sensible.

Where the aim is to grow a business (usually with the aim of eventually selling it when you retire) there are very often points where in order to grow you need to make a significant leap - bigger premises, more staff, more machinery, that sort of thing. Investors provide the cash to make that leap.

 

[shed9]

The Dragons Den model is not a reality tv construct, it's how a lot of angel investors have assessed that form of business investment for a long time, usually because the banks won't or can't touch them. I used to be part of a similar process many moons ago (albeit not an investor myself or applicant), you would be surprised how many people turn up with 'perpetual energy' devices??? More often then not angel investment resulted in shared investment as opposed to competing one on one in the real world.

In response to having cake and eating it, of course they want the value of their initial investment and more, that's what investment is, especially when they are putting money into a high risk venture with typically no viable guarantees. Although the guarantee aspect is why a lot of early agreements fail to translate into signed deals because some investors ask for collateral from the applicant in the form of their house (which used to be less than the investment ask) of which most applicants walk away from because they won't or their mortgage won't allow that. I wonder if that is why a lot of Dragons Den deals fall through.

Most applicants are asking for angel investment because they have exhausted every other avenue. That in itself is extremely high risk, hence the demand for edible cake. In reality crowd funding is making angel investment less relevant these days.