Phone rings. “Aloha, thank you for calling Palapa Tours.”
“Hi guys, this is Molly from Dragons’ Den. Congratulations, you have been selected.” Cue the fanfare music in the background!
Even though it has happened before, you still get a little lightheaded realizing that you beat out thousands of other applicants. In fact, given that Dragons’ Den went from 20 episodes per season to 10 only made it that much more competitive.
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Now the real work begins. On the phone, we are told that we will be getting an email with lots of information, including all sorts of disclaimers and non-disclosure agreements, along with a guide to pitching the dragons. A date is selected and you are told that a producer will be calling you to help you prepare.
Now, Palapa Tours has a tiny little problem: there is no way we can bring our boats to Toronto and they stopped doing virtual Zoom auditions with the last season. So how do we make this exciting? How do we recreate the vibe and attractiveness of our business? This is where the producer helps; they want good television.
We “float” some ideas around and decide that we will use a combination of our video footage with the props we used in our Zoom audition. The stagehands will see if they can recreate a mock boat. We are skeptical, but go with the flow. There is a giant screen in the den and our video should give a good perspective.
But what we really need to focus on now is our numbers. What’s the ask? If it’s too high, you lose credibility. If it’s too low, the dragons may opt out because you lack sustainability.
If you are going to walk into the den asking for $250,000 for 10 per cent of the business, you better be ready to defend that your business is worth $2.5 million. Although there are many valuation formulas to use, the dragons keep it relatively simple:
(Investment Ask) x 100
———————— = Valuation ($)
Stake on Offer
If you ask for $100,000 for a 10 per cent stake, you are telling the dragons your company is worth $1 million.
(100,000) x 100
———————– = $1,000,000
10
Your mom’s encouraging valuation of your business is not a valid valuation. Potential clients are not going to get the dragons to open their wallets. Explaining the vast market share means nothing if you don’t have any sales.
Now, if you are pre-revenue and really have an amazing idea, they may invest, but it’s going to cost you equity. The biggest mistake we made in the past was overvaluing a business model based on “what if.” Confidence drains out of you when you are being hammered with number questions you can’t defend. They film for 50 minutes and air seven minutes. You can only imagine how much good stuff is left on the cutting room floor. Remember, this is made for TV and getting scolded makes for great entertainment. Everybody loves a good rags to riches bootstrapping Rocky story, but let’s face it, it’s the tabloids that sell.
Based on Palapa Tours’ sales last summer, we knew we had an amazing product. But if we ask for $1 million for 10 per cent of the business, they will sink our ship. Of course, we believe our business will grow to surpass a $10-million valuation, but to convince the dragons, that’s a whole different story.
The next challenge is to articulate our business model and plans for expansion. Palapa Tours has a hybrid license partnership model. But will our valuation be based on Ottawa operations or corporate partnership operations? Two different numbers. Do we lump it all together or keep it separate?
The hardest questions are when the dragons drill you on why you wish to give up company equity when you could instead find money by taking out a loan, reinvesting profits, borrowing (more) from family and friends, selling assets, or applying for government grants.
The dragons are well prepared to roast you if they feel you are there just for the publicity. Yes, they are paid for their segment and realize it’s a reality show, but they are also serious investors and, of course, the publicity is a win. This is where the back and forth with the producer is key. Refining our pitch and practicing for perfection. What’s next? Pulling it all together. Stay tuned.
