In this blog I will explain how to prepare for the Dragon’s Den by looking at the three big risks any new business faces.
Dragons’ Den is a TV show in the UK where entrepreneurs and inventors pitch their ideas to five multi-millionaires who will choose whether to invest in the business opportunity, and if they do decide to invest, how big a share they want.
The show has proven to be very popular although the ideas and the performances of the entrepreneurs have varied from excellent to woeful.
The new series starts on the BBC this week so I thought that it would be a great idea to give the entrepreneurs a few pointers before they start.
What Are The Three Big Risks Of A New Business?
When new business start-ups contact me, I apply a simple way of looking at their business that focuses on three areas:
- Market demand risk
- Competitor risk
- Capability risk
Let’s take a look at each of these in turn.
Market Demand Risk
First and foremost I ask whether there is a ready and willing market for the product or service.
- Does it solve a common problem or fill a want?
- Is it a real problem? One of the previous Dragons’ Den ideas was a plastic container to keep the top of cucumbers fresh.
- Is it affordable? Does it offer value for money?
- Is that problem already solved by other established products?
- If so, how is this product different? is it a difference that customers will appreciate?
- How will the product reach the ultimate purchaser?
- Is the market demand likely to be a short term fad or a longer term product?
- Is this a one-off, never bought again purchase or will happy customers keep buying?
- How is the market affected by the wider political, economic, social and technological forces?
- How big is the market likely to be? In The UK? Europe? The World?
The Dragon’s in the Den are going to be eager to make sure market risk is low and will look for proof that market demand is there and potentially rising.
Competitive Risk
If there looks to be a good, strong, long term demand for the product or service then can this business survive against the inevitable competition?
- Is the intellectual property in the idea patented? If so, how strong is the protection and what geographic regions are covered?
- Are there first mover advantages? Can this become the generic product? Can relationships effectively block out the competition?
- Does the idea of economies of scale or cost savings that will come from accumulated experience? Are these potential economies significant?
- What barriers to market are there? Do certain potential competitors have a major advantage in working around or through those constraints?
- How much pressure is there going to be from competitors on the market price?
The Dragons in the Den will want to make sure you can win the competitive battles. That you have a competitive advantage over your existing competitors and that there is some way to stop bigger, richer companies entering your market and stealing your customers away.
Capability Risk
If the market looks good and the business can protect its competitive position by one means or another, then does it have the capability to manage the opportunity and deliver on its promises?
- How experienced is the management team? How much of that experience is in this market or with these customers?
- How balanced is the management team? Does it have access to sufficient skills across all the necessary management disciplines?
- What are the supply considerations?
- Does this require a big commitment of cash up front? To finance capital equipment? Stock? Branding & promotion?
- Are there alternative sources of supply for key components?
- Has the product or service been proven to work?
- How confident are the management in the cost projections?
- How much control will they have over future costs?
The Dragons in the Den need confidence in you, their potential partner, and that you know what needs to be done, you have the skills to do it and are committed to finishing what you have started.
Putting It All Together
Working through those three areas gives you confidence to understand their numbers and in particular the forecasts for:
- Sales volumes
- Selling prices
- Unit costs and overheads.
Once you understand these drivers of profit and you get a feel for the working capital and capital expenditure requirements you get a much clearer idea of expected cash flows as the business grows.
The Dragons have got a lot to consider and it is much easier to say NO than to say YES or even maybe.
Notice how quick some of them are to declare… “I’m out”.
The Dragons’ Decision
If they decide to invest then they risk their own cash.
Of course if you’re worth £250 million then an investment (punt?) of £50k is the equivalent of a £50 bet on a horse if you’ve only worth a quarter of a million.
Put in that perspective, the numbers don’t sound so frightening or impressive do they? These Dragons can afford to lose the cash without shedding a tear.
But the Dragons aren’t there to lose money and they will drive a hard bargain with inflated equity proportions.
It’s tough facing the Dragons. Good luck everybody.
Do The Three Big Risks Apply To Established Businesses?
Yes they do, in two ways:
- When a business is looking at refining its market niche, perhaps to get even more focused and to establish clear differentiation from competitors. The niche may be too small to support the business, it may not provide the barriers that will stop competitors also specialising and third, the business may struggle to provide the specialist capabilities needed in this new niche.
. - When the business is looking to expand into new markets, the decision needs to go the three risks assessment. Many businesses over-extend themselves and make bad decisions entering new markets. There is also the problem that straddling two market niches may cause conflicts in the supporting customer values (e.g. a luxury car brand going down-market risks tarnishing its image) and necessary capabilities to compete in both niches.
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