What I learnt about business valuation from Dragons’ Den – Part 1

I don’t know if you’ve had a chance to see much of Dragons’ Den (NB: for future reference I’m referring to the nine-season-long BBC version here, not the Canadian or the mercifully short-lived Australian attempt) but basically it’s a show where entrepreneurs and inventors offer pieces of equity in their company (in exchange for a corresponding slice of cash) to a panel of extremely wealthy businesspeople who decide if they deem the business financially worthy of their individual investment.

In the UK version at least they’re not exactly moguls of the Rupert Murdoch variety- (you won’t find British billionaire and Amstrad founder Lord Sir Alan Sugar for that matter)– the richest panel member, Peter Jones has a fortune of some $USD600m. The others are one pay cheque away from having the Rolls Royce repossessed.

Mainly, the wannabe entrepreneurs (who, on the whole have fairly trivial products and extremely flimsy business plans) are given short-shrift by the aptly named panel of “Dragons” who take differing degrees of delight in acerbically sending them packing back to their day job.  Sometimes, though not often, they will invest and even compete with one another for ownership and mentorship of the fledgling company.

The combination of the Dragons’ egos (some of the behind the scenes rows between them is more dramatic than the ones they have on screen), the occasional extreme silliness of the inventions and the feel-good “reality” nature of the individual business successes and the startup business geekery make it worth watching.

So, having just completed watching all 9 seasons what has this budding entrepreneur learnt?  Is any of it any use at all?

A business is worth nothing when:

  • You have no (positive) cash flow.  They’re not investing in ideas, only stuff that’s proven to make cash already.  A common theme is that businesses are only valued at two to three times its cash-flow.  Ha! Remember that when relaxing in your summer house made of gold and ivory, Twitter founders.
  • Your business can be replicated.  Play the “do you have a patent for that?” drinking game while watching the show.  Chances are (aside from getting alcohol poisoning) is that if it’s something that cannot be patented then it isn’t worth a penny.
  • You admit you’ve failed before or have ever lost money in a business venture.  “I’m investing as much in the product as in you…” is another line to add to the drinking game.  This one’s hypocritical and laughable considering the huge number of entrepreneurs who have succeeded after initial failure – Peter Jones himself included.  You could have the cure to cancer and your failed lemonade stand from when you were 10 would render you un-investable.
  • You don’t make up impressive enough future earnings predictions.  If you don’t predict impressive future earnings that equal the GDP of a small African nation you probably won’t be getting an investment.
  • You do make up future earnings predictions that are too impressive.  Make up something too impressive and you’ll have exactly the same problem.
  • You forget your EBITDA from 2006?  Forget that and no investment.  Apparently in the real world you can’t have notes in meetings.

And then there’s the Cardinal rule:

  • Nothing is worth a million pounds.  No matter what it is, it just isn’t.  OK?  Nothing is.  A bundle of a million pound notes even.  Suggest your business is worth a mill and watch your chances of selling equity in a chunk of it disappear.

Have I missed anything?

Next time: What else I learnt from Dragons’ Den


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