Everyone’s entitled to their own opinions about Dragons’ Den but one thing’s for sure: it’s brought about more awareness of business angel funding and its possibilities than the billions of taxpayers pounds wasted over the years on Government investor-readiness ‘programmes’. However, when a world that was previously shrouded in mystery has the light suddenly shined on it by reality TV, there will inevitably be misconceptions about the people and the process. Even with a respected newsreader anchoring the programme, real-life funding opportunities give way to dramatisation and editing in the interests of maximum entertainment. ‘Good TV’ after all is more compelling than ‘good business’. Here are seven myths expunged:
Myth 1. Investors will always want half your shares
Is it just me or are the Dragons getting greedier? Inflated by perceptions of their own value perhaps, figures of 50% are being bandied around without a glint of opportunism. Business angels – the type of investors who give advice as well as financial backing – typically, in our experience, require up to a third of the shares in a business. In fact the following formula seems to be the norm: 1/3 for the angel, 1/3 for the inventor/founder, 1/3 for the management (often the same person/people as the founder/s)
Myth 2. Investors will always be better than you at negotiation
Typical angels are successful and will probably have made their ‘fun money’ from building-up and selling a previous business. Indeed we’re reminded in every episode that the ‘Dragons’ are serial-entrepreneurs. Whilst success is unquestionable, this alone does not automatically grant everyone top level shrewdness… a lifetime’s hard graft could be the more likely reason.
Myth 3. A fifth of investors are women
The BBC producer is tasked with ensuring the panel of five is represented by at least one woman. In reality, it is sad to say that 95% of business angels are men, this despite 46% of High Net Worths are women. The men in suits may well follow investment advice from their wives but few will readily admit that is how their decisions are made.
Myth 4. Investors make an offer on the spot
Investors will want to see a business plan, or executive summary at the very least before requesting a meeting. They will want time to consider the opportunity and conduct due diligence. Even at the height of the dotcom boom the fastest investment made (Atlas Venture putting £2.5m into Toby Rowland’s Clickmango) took 10 days of endless meetings and number crunching. The Press seems to delight in stories of Dragon funding promises being broken on the back of things not being quite what they first seemed in the Den.
Myth 5. Investors are media-savvy ultra HNW egotists
Investments in private equity can start as low as around £10k and the average is around £100k. There are a growing number of people with this level of funds at their disposal, who are attracted by the prospect of actively following their money into a business and benefitting from a high risk/reward ratio.
They certainly do not tend to be intimidating, just normal business people looking for a new opportunity.
Myth 6. The opportunities to meet investors are very restricted
Where, for heaven’s sake, do you go about meeting a business angel without taking the risk of fluffing your presentation on national TV? Investment Fairs can attract a lot of business angels wishing to invest in start-ups. They’re informal and intimate events with room for a small group of investor-ready companies, fielding questions from potential suitors about their business expansion plans. As a successful format tried-and-tested, historically around a third of the companies attending the Fairs attract equity funding through contacts made.
Myth 7. Failure to attract investment will result in humiliation
Whilst the questions posed might be pertinent, the way in which they are phrased is not true to life. Nor is the humiliation: even winners are made to feel small. In the real world, off camera, business angels will want a civil conversation where unanswerable questions are simply parked. Semi-retirement is common among business angels and an invitation to meet at their home is not uncommon.
What you can learn from Dragons’ Den
Interestingly, the Dragons’ Den concept was originated in Japan (Money Tiger, 2001-2004).
We would say though that what they have clearly helped demonstrate, is the need to be fully prepared and sensibly advised before going in to see anyone, let alone try and attract the interest of the Dragons. If fundseeking viewers can take anything useful away, it is to learn from the mistakes of others: the questions asked and the tell-tale body language often adopted, albeit, subconsciously by those in response.
So does getting equity investment for your business have to be a scary venture? Well it can be quite challenging, you have to be persistent and there is no guarantee of success. But intimidating? Not really. If the idea you have developed is sound and you have the right guidance on how to present it, it needn’t be as daunting as you might think. The key is to put yourself in the shoes of the investors – what would make you part with your cash if you had it to invest? That will give you a good start.
Here are a few of the Golden Rules:
- Opening Pitch. The commercial attraction of the proposition and in this regard, the existence and, indeed, quality of your business plan is crucial. This document will initially “sell” the opportunity to potential investors.
- Investors invest in Management as much as the projects – be prepared to admit your limitations in business and have a plan to deal with them (recruit, train, or look for investors who can provide)
- Fair Price. Existing shareholders – ie you and your management team – must be realistic and flexible in your valuation of the business. All too often entrepreneurs offer too little equity for funding, denying investors any chance of making a healthy return. Fear of loss of control is main reason why so many fail to get funding – but most businesses are controlled by management with the support of investors, not the other way round.
- Chemistry. Whilst they rarely wish to run the business themselves, an investor will, however, want to have a role (not a job) in the businesses and will want to use this to “follow their money”. So you need to be sure you are comfortable with an investor on personal level. After all, you will be working closely together. Trust and full disclosure is essential.
The key to all this is to think it through and write it down before you approach any potential investors. Even then you may need to rely on an element of luck to find the right investor with the money and the desire to invest in you and your business. Realistically you’ll also need a white knight to help prepare you for the fight and probably to find a suitable Dragon to take on.
Originally written for fundingforgrowth.co.uk.