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'How do I make a return on my investment?' - A convincing answer to this question unlocks the door to investment. But there is no one right answer.
There are as many answers as there are investors in how this is expressed. There are some wrong answers though, and there are some non-answers which is what we witness in this segment.
Chris and his father have a controversial product in Sweatz Vest in that it is a product for the fitness industry, and so has an implicit 'health' relationship. Duncan Bannatyne in particular - because he hails from that industry - probes this the most - to show that people are fickle about fitness gear and that the claims that one can make about a product can be punctured by other claims.
Online Dragon Julie will write updates of Den activity throughout the 2010 series.
The product is premised on the idea - somewhat tenuous in my point of view - that profuse sweat leads to sustainable weight loss. [If only it were that easy!] When there is a core premise like this around which a product's value depends, it should be clearly stated and defended early or the whole investment pitch will come crashing around it like a house of cards.
And that of course is what we end up witnessing.
We don't get to any structured review of the financials - either historical or forecasts - in the pitch because the father/son team are not prepared or versed in the concepts and language of how to position their business for investment.
Julie on winning investment
An investment proposition works like this:
'I would like you Ms Investor to invest X for Y% of my business. The business will achieve Z financial performance over Q years. The proposition will become valuable to various potential buyers in P years, and I intend to sell to one of these acquirers in 5 to 7 years. Given comparable deals in the market, I anticipate that the business will sell for a price which equals 5X profit [sometimes revenue is the multiple used], and our forecasts show that we will achieve that in that time period.'
Any entrepreneur should have a working model of this in their mind that they are honing while building their firm.
Equally, there could be strategic benefits which make an investor more comfortable with a longer period before they receive a return on their investment. For example, participation in the company as a shareholder could hold commercial benefits, or bring kudos or profile, or bring access to another group of people for the investor. One shouldn't count on these soft or strategic benefits, but sometimes they work.
Finally, in business, some investments are structured as loans which can either convert or be paid back. Getting these right is an art and a science. If you take on debt or promise to pay an investor back their investment, you had better be extremely conservative on the assumptions driving your cashflow or you could find yourself in a very uncomfortable position.
These are the views of Julie Meyer, not those of the BBC
Each week in the 2010 series Julie Meyer and Doug Richard offered their take on some of the key moments from the TV Den.
Week 1: Kirsty, the Best of Britain
Week 2: Called to account
Week 3: Where pitches go wrong
Week 4: A school for entrepreneurs
Week 5: Why evaluation matters
Week 6: When coup de foudre happens
Week 7: The role of an early investor
Week 8: What finishes a pitch
Week 9: Unlocking an investment
Week 10: Lessons from the Den
Missed any action? Watch, read, rate and have your say on the class of 2010.
Other entrepreneurs from this episode:
Missed any action? Catch up and find out more about the Online Dragons.
Apply to enter the Dragons' Den.
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