This review makes a great forum for a critique and learning experience valuable to all entrepreneurs. It also complements my book, The Small Business Planner (there are also great free resources including fully formatted planning and marketing templates on the book’s web site). In addition, my regular Blog, and the Entrepreneurship Video Series on my You Tube channel can be very helpful to budding entrepreneurs. Constructive comments are most welcome on any of these reviews.
Series 7 – Episode 14. Original air date: Jan. 27, 2013
Kristin’s Gifts - Asking $100,000 for 20%
Kristina Boudaeva and Elizabeth Ginsberg from Montreal, QC, have developed their own line of stationery, children’s accessories and educational toys. There are over 80 different products including puzzles, games, and greeting cards which Kristina claims are taking the market by storm. Half sell nationally through major retailers and half sell globally on-line. They are constantly updating their catalogue by dropping the dogs and adding (hopefully) stars.
Kevin defined the business as innovative products that are constantly changing with high margins (over 60%) and Kristina confirmed 65% except for large retailers which are 43%.
Sales: $20K per month for the past 3 months.
Projected: $30K this month and over $300K by the end of the year.
Currently in mom and pop shops in Canada and close to getting a deal with some larger stores in the US such as Staples where they are dealing directly with the buyers who they met at trade shows and not agents. This impressed the Dragons. They also sell to some large on-line retailers on deals which were set up by Elizabeth who works as the company’s full-time sales manager. Kevin was impressed but thought the valuation was high (likely to cut a better deal) and Arlene thought they were amazing but opted out because there was lack of definition in the product line which was constantly changing.
David followed suit as none of the products tied in together and he was skeptical that they could continue to come up with new products for ten or fifteen years. Kevin made an offer that was no surprise asking for 40% and a 15% royalty on all sales which drops to 5% in perpetuity when he recoups his cash. Bruce was excited about the business until he heard Arlene and David talk about the lack of a solid brand and he opted out followed by Jim who liked the operation but didn’t see how he could add value. Kevin reminded them that his was the only deal and he was severely chastised by the other Dragons for the high royalty which would steal their cash flow. Arlene told them that it was a bad deal and they had come this far without help and should not accept such a bad deal.
Kristina asked that the equity be lowered to 30% and said the royalty was too high. Kevin agreed to lower the equity amount to 30% but wouldn’t budge on the royalty. Kristina wisely declined the offer.
My entrepreneur ratings:
Idea: good; Competence: high; Knowledge of Market and Competition - good; Competitive Advantage: Questionable – variety of product offering but no branding potential; Preparation / Planning: good – valuation was reasonable given the sales, track record and sales in the pipeline; Chance of Success: good.
Ooka Island - Asking $1.5 million for 20%
Valuation: $7.5 million. (2nd largest pitch and valuation).
Lowell MacPhee and Joelle MacPhee from Charlottetown, PEI pitch their educational children’s software to the Dragons. It teaches children as young as three how to read and spell. 3D graphics on the computer keep the kids entertained while learning. Parents subscribe to Ooka Island for $13 per month. Arlene thought the idea was great and in reference to a previous educational business they sold for 20 million, was anxious to hear how Ooka Island was doing (with such a high valuation).
Customers download the software and maintain a connection with their server throughout the course. The cost to build the program alone to this point was $1.2 million. They have $50K in sales to schools and the home market, and Bruce saw the need in the early years for childhood learning as he has two of his own in that group. Joelle reported that studies have shown that the course improves future grades by up to 12%. Bruce was motivated to look at making an offer because it was right up his alley but said he would need half of the business to justify an investment of $1.5 million. Kevin lived in that space (educational software) for fifteen years and didn’t want to go back. David likes the idea of eradicating illiteracy but also dropped out while Jim pondered how to put an offer together as he has people in the Dallas area that could help.
Bruce firmed up that he would do the deal for 50%. Jim entered the deal with Bruce and Arlene was pleased that there was an offer on the table and dropped out. Joelle pleaded her case for a better deal with the argument that they have invested more than $3 million but the Dragons stood firm and the offer was declined. Possibly good fortune for the Dragons.
My entrepreneur ratings:
Idea: good; Competence: high; Knowledge of Market and Competition - good; Competitive Advantage: unique approach; Preparation / Planning: good – valuation was unrealistically high given the sales and track record; Chance of Success: questionable without help.
The high asking amount made it impossible for the pair to hold a majority share in the business if there was a deal to be made. If they were asking for any amount up to a million for 35 percent then there would have been room for investors to move. The entrepreneurs could have held a majority share and more money would have been available as needed along with the resources to grow the business. They could have made a bundle off their share, but again we see unrealistic valuations.
Paper Nuts - Asking $150,000 for 15%
Valuation: $1 million.
Joanne Secord & Scott MacRae from St. Catharine’s, ON, manufacture packaging fillers which replace plastic and Styrofoam which are currently the most popular. Scott demonstrated one of the problems when he opened a box and a load of Styrofoam balls spilled out on the floor. Joanne stated that only 3.5% of all plastic is recycled (an outrage chided Kevin facetiously). Their solution; recyclable Paper Nuts which interlock in a box and don’t shift or migrate so the contents are totally protected. The couple unveiled the Paper Nuts machine which creates the product at various speeds. It is sold by the bag, or the machine can be rented for the customers to stock pile their own supply. Now – as usual – with such a high valuation, are there sales and a track record to substantiate it because 15% is a very low starting point?
The machine cost is $5,000 and the business model calls for customers with large packaging demands to rent it and buy the paper which they mark up 100%. The solution is less expensive than alternative fillers. A pitfall is the weight as Paper Nuts are 10% heavier than Styrofoam which can have an effect on shipping charges. They currently have 25 large shipping customers on board. Arlene was the first to ask about sales to date.
Sales: $25K - which made Arlene wince.
Kevin asked about the reason for sales to be lack lustre (he must have assumed the company had been operating for some time with the high valuation) and Joanne admitted that the business had just started up. The Dragons obviously overlooked the high valuation and still made offers because of the innovative quality. Bruce went first offering 30%, then Kevin for 27% remarking, “Just to mess up Bruce’s offer.” Bruce played up on his comment by warning the entrepreneurs about bringing negative energy into the company. Arlene jumped in on Bruce’s offer and David folded because he didn’t know much about the industry. Jim said he could help reduce their paper cost and partnered with Bruce and Arlene. The decision was a trio of expertise for 30% or a single investor for 3% less equity. This should be an easy choice in favour or experience and value added. They made the right choice going with trio.
My entrepreneur ratings:
Idea: excellent; Competence: high; Knowledge of Market and Competition - very good; Competitive Advantage: unique and environmentally friendly; Preparation / Planning: good – took a chance with the high valuation; Chance of Success: excellent with 3 Dragons on board.
Joanne and Scott took a real chance offering only 15% and making the valuation 1 million on a start-up with no track record. The Dragons were sold on the innovation and business potential. More often than not, a valuation like this on an unproven idea ends up with the Dragons opting out. This business should do well.
ReGrey Water Pipe - Asking $35,000 for 50%
Jason Nassr from Windsor, ON, wants to create a legacy for his children, based on him being remembered as helping the environment with a new plumbing system aimed at re-using wasted water. He got the idea from watching Holmes on Homes on HGTV to use waste water from sinks and bath tubs to flush toilets. He came to the den with the idea only and did not have a working prototype. There were competitors already and the idea was not far enough along for the Dragons to even consider an offer. I am surprised that the producers let this one through as the only thing we can learn from this pitch is don’t expect to get any help unless you have invested the time, money and energy into the business that proves you are serious. You can’t expect to get rich on an idea you got from someone else.
Growing City - Asking $100,000 for 25%
Lisa von Sturmer from Vancouver, BC, wants to invest in her office composting service. A majority of office and industrial office / employee trash if organic. Her business is leveraging legislation in BC, Ontario and Quebec which will ban organic material from landfill sites by the year 2016. The company drops off one of their composting cans (similar to a galvanized garbage can) and picks up the contents on a scheduled basis then takes it back to the facility for composting. The rate depend on the number of bins the customer uses.
Sales: $100K (2010 – first year.) $212K (2011 including her salary of $55K)
These sales were done on a word of mouth basis as they did not have a sales person on staff.
Kevin questioned why the large office cleaning companies wouldn’t provide that service as they are already contracted by large clients and Lisa pointed out that their second revenue stream was to provide a sub-contract service to the large office cleaning companies. Arlene stressed the need to act quickly on locking up these large contractors while in the early stages of operation before other competitors take the business away. The Dragons were all impressed with Lisa who started the business with a $50K loan and she has done everything to grow the business to this point to date without any help. She also answered that she had never taken any business or entrepreneurship courses.
Arlene offered her the full amount and wanted a quick answer. Lisa asked if there were any other offers which tested Arlene’s patience but Jim reminded her that there were four others. I am sure he was considering the franchising aspects of Lisa’s pitch and Kevin said he was thinking of offering her more. He made an offer of $175K for 50% which is more money but reduces the valuation unfairly to $350K and Lisa laughed at it. Jim offered the asking amount stressing that he would look after the franchising side of the business. Before Bruce or David could speak she accepted Jim’s offer stating later that it was the outcome she was hoping for.
My entrepreneur ratings:
Idea: excellent; Competence: very high; Knowledge of Market and Competition - very good; Competitive Advantage: excellent – legislated; Preparation / Planning: excellent - the valuation was right on the money; Chance of Success: excellent with Jim as a partner.
Lisa did everything right and is truly an example for every would be entrepreneur to follow. She created a business with tremendous growth potential based on legislation for future environmental protection – a situation which guarantees customers. She also had the drive to make it happen and drive sales herself for two years plus. She entered the den, and unlike so many others who make greedy valuations expecting others to do the work for them, she made a great pitch with a valuation that was substantiated by sales and a track record. She also exhibited the excitement that is contagious – everything an investor could ever want. Probably the best pitch we have seen.