Here is a short summary of the main reasons funding was not received by the participants in the show:
They could not ‘talk’ to their numbers. When asked for explanations there was much dithering. The Dragons often had to point out gaps in their plans. Their sales projections were largely ‘pie in the sky’ – they could not substantiate them by basing them on structured research or tests carried out – in addition, the Dragons often had to point out costs that they had not even considered. Many had only developed prototypes of their products and had made no actual sales. The worst in this regard were the inventors. Investors do not invest in hypothetical plans. Neither do bankers lend money to them – but I’ll get to bank loans in a later post on this blog.
The participants also grossly overvalued their businesses, some wanting large amounts for a 10 to 20% stake in their businesses. While the desire to want to own most of one’s business is understandable this is the question that needs to be answered; would you rather have 100% of nothing or 50% of something?
The Dragons who are obviously not stupid people often had difficulty in understanding exactly what business the people were trying to get into. It often became clear that the participants also did know. In this regards here is an extract from one of my books:
“What business are you in?
This is a question that puzzles many people. After all, we brew beer, make computers or grow trees. So we are in the brewing or computer or forestry business aren’t we? Not necessarily. The reason you need to able to answer this question is to enable you to know which part of the business to focus on in terms of measuring and managing performance. South African Breweries may brew beer but the most important part of its business revolves around its packaging and distribution. A large forestry business growing trees and supplying timber to the mining industry focuses more on transport than it does on growing trees and is therefore effectively in the transport business. In the same vein, people who buy computers use them to process information, so a computer business is in the information technology business.
Before continuing, pause for a moment and ask yourself what business you are in. This will give you direction regarding what the most important areas are to manage and which part of the business deserves the most attention from a financial management point of view.
Use the following questions to guide yourself.
What products do we sell?
To what use do customers put them?
What is the most challenging part of your business: Making the product?
Selling the product?
Getting the product from your business to the customer?
Which parts of your business could you safely sub-contract to other businesses?Any part of the business that you can safely sub-contract out is not the business that you are in. The business that you are in is sometimes referred to as your core business. Your core business is probably the most challenging part of your business and, the one which will require the most attention from management. Funders will try to gauge if you are capable of that.”
The Dragons also struggled to establish what unique competitive advantage the participants thought they had. I got the impression the most did not understand what the term meant. It is also important to establish whether you are entering the right type of industry. Michael Porters ‘Five Forces’ gives insight into what this means. See: http://www.quickmba.com/strategy/porter.shtml
The Dragons often remarked that the participants in the programme clearly did not understand business at all. The area of their biggest down fall was their lack of understanding of the numbers and that investors require a healthy return on investment.
The above may seem a bit harsh but the business environment is harsh.
It was not just the naive that failed to obtain funding. One applicant was a high flyer who had worked in investment banking. She had had big jobs, advised clients how to invest their money, had an MBA but received no funding.
There were, of course, people who received offers of funding. I was left with the impression that the Dragons were investing in the person rather than in the business venture. They invested in the vision that the person had. People like this are scarce and are valued by potential investors.
Note on ‘talking to numbers’:
In my experience people only draw up business plans because they have been asked for them by funders or bankers. Most of them get accountants to draw up the financials and when questioned they cannot explain the numbers.
The most important person that the business plan is drawn up for is the owner!