Whether you’re just starting out or looking to go global, raising capital from hard-nosed investors is a tough gig. That’s especially true in Canada, where the venture-capital industry is rapidly shrinking and the demand for capital now exponentially exceeds the supply. Startup companies are taking the brunt of these shifts.
As the industry advisor and online host for CBC-TV’s Dragons’ Den, I’ve been blessed to be involved with the show from the very beginning. Over its three seasons, I’ve witnessed thousands of auditions for the show, seen hundreds of real pitches on the set and cheered the dozens of deals that have resulted. Dragons’ Den participants have been of all ages and come from coast to coast to coast to pitch every imaginable kind of business, from tidal energy projects and online job boards to men’s underwear and salad dressings. But when you view the inhabitants of the Den through a financing lens, you’ll begin to see that the entrepreneurial kingdom is home to just a small number of species. Only a few can ever be king of the jungle; the rest will be roadkill on the highway to investment capital. The following taxonomy is presented in the hope you’ll figure out which animal you are, and which beasts you’ll want to mimic to help secure the funding you need.
Blowfish are infamous for making such comments as, “We are going to beat the market leader” or “This is the next Google!” I’ve heard statements like these several times during tapings, and even more over the past 10 years in my capacity as a venture capitalist. Just before these entrepreneurs go on stage, you can see them getting psyched up and practically inflating. But that confidence can often be seen as arrogance and, worse, can lead an entrepreneur to embellish.
Perhaps knowing that investors favour firms that already have clients (thus demonstrating that the market actually wants their product), several founders in the Den claimed to have customers, only to reveal later that they didn’t have a single purchase order—just leads on potential customers.
When Dragon Brett Wilson, co-founder and chairman of Calgary-based FirstEnergy Capital Corp., caught one entrepreneur in the act of inflation, he warned the blowfish that when investors detect embellishments, they get nervous and begin to wonder what else the blowfish might be misstating. To ensure you’re not caught overstating your case, stick to objective facts.
Fleas are small businesses that have no hope of obtaining worthwhile market share, because there is already an elephant in their space (e.g., Google for Web search, Microsoft for office software).
It’s what Dragon Kevin O’Leary, founder of The Learning Company and now a partner with Boston-based North Coast Capital, alternatively calls “the cockroach problem.” As he explained it to one pitcher in the Den: “Little guys who survive show the big guys what to steal. Then they crush the little guys like cockroaches.” O’Leary would advise anyone entering a giant’s domain to ensure you have a demonstrable and sustainable competitive advantage (e.g., a high-value proprietary technology), so that your business can be acquired, rather than squashed, by the giant.
What’s the hallmark of a gazelle? Growth. You know when you have one in the Den, because the Dragons begin to break ranks and bid against each other, driving up the price of the deal. “As an investor, I want to see hockey stick-like growth,” explained online security entrepreneur and Dragon Robert Herjavec to one of the show’s contestants. “Revenues going from $50,000 in Year 1 to $500,000 in Year 2 to $5,000,000 in Year 3.” Gazelles are agile enough to avoid predatory companies that are bigger than they are, and fast enough to grow revenue faster than they increase their costs, thus becoming profitable as quickly as they become sizable.
“It’s always good when you have a targeted market and, better yet, you know how to reach them,” second-year Dragon Arlene Dickinson, owner of Calgary-based marketing firm Venture Communications, advised one entrepreneur in the Den. It sounds like common sense but it’s sage counsel, considering how many entrepreneurs don’t get the formula right. Like Canada geese flying south for the winter, every business needs to know where it’s going and how it’s going to get there. The rule applies in all aspects of business, but most importantly in sales and marketing: you can’t sell a product if you don’t know who would buy it (target market) or how to reach them (marketing message/media and distribution channels).
Like gazelle, giraffes can run fast and appear to be sleek from the shoulders down. Too bad their head is in the clouds, with an unrealistic understanding of and expectations for their business venture—which makes it hard to sell to investors. Giraffes—or what O’Leary calls “mad scientists”—include all engineers who can develop an amazing product but lack the business acumen to take it to market. But there is hope for any giraffes who recognize the shortcomings of being so intellectually aloft; partner with someone who does have strategic and operational expertise, and you might have a perfect combination of ingenuity and business smarts. In fact, it might be easier for an engineer to find an executive than the other way around. The best example of this phenomenon in Season 3 of the show comes from a teenaged genius who has invented a new energy-efficient mode of transportation. Although he lacked business acumen, all five Dragons funded him, knowing their own experience and expertise in areas from sales to strategy could fill the gap and dramatically increase the venture’s chances of success.
Ostriches have typically been in the business for at least a few years but have yet to make a sale, raise capital or even attract strategic partners. I call these founders ostriches because, like the flightless birds, they avoid danger by hiding their head in the sand—although “danger” in the Den means any suggestion that your business might not be as strong as you think it is. Case in point: when I asked one participant just before his presentation to the Dragons why he thought his business was valued at $10 million even though it had never generated a dollar in revenue, he denied the validity of my question. Too bad the Dragons probed the same issue and, well, you can guess the rest. If you are challenged with questions that you can’t answer, don’t try to hide; instead, go back to the drawing board, do some research and come back with the right answers. If you can’t, then maybe your business isn’t worth funding.
Slow, steady and never more than an appetizer—such are the characteristics of the snail in the eyes of investors. Snails run businesses that are often called “hobby ventures,” because they keep the founders happy but don’t generate the 10-times returns desired by angels and venture capitalists. “Every business that can scale, will,” O’Leary told the members of a family-run business that has stayed small for three decades. “If you’ve been at this for years and it hasn’t [scaled], there must be a good reason.”
When immersed in their element, sharks rule. But once they’re out of the water, they flounder. In the world of entrepreneurship, sharks are great businesses within their niche, but they’re unable to grow past it. The smaller the niche, the more market share you have to garner to generate big investment returns. And even if you do secure the lion’s share of the market, it may never be enough to deliver the multiples that private investors want. Outside of the Den, investors often call this the “cottage industry” problem.
Evolution is supposed to ensure that only the strong survive. So, how does one explain the duck-billed platypus, which no one really understands and appears to contribute nothing to the gene pool?
In business, platypuses are ventures that look kinda neat but don’t solve a problem or, as Herjavec told one entrepreneur pitching an auto part, “No one knows they have the problem that you are trying to solve.”
We saw a lot of platypuses in the Den this year. Perhaps inventing solutions to problems that don’t exist brings fulfillment to people with a common strand of DNA. Too bad it will never bring them funding.