Dragons’ Den – realistic or just entertainment?

The UK came 14th in the 2012 GEDI ranking of the entrepreneurial performance of countries around the world (The Global Entrepreneurship and Development Index by George Mason University, University of Pecs and Imperial College Business School, 2012). Not surprisingly the US was in first place.  Having recently returned from Silicon Valley, California, where I was interviewing venture capital firms in connection with my research into VC fund performance, I was amazed at the sheer quantity of meet-ups, pitching events and hackathons taking place. It seems like everybody wants to be an entrepreneur over there. The UK is actually in the bottom quarter of the GEDI index for the percentages of the population who see entrepreneurship as a “good career choice”.   

So anything that can contribute to the initiatives to encourage entrepreneurship in the UK must be a good thing – surely?

I see this as the main benefit of the TV programme “Dragons’ Den”. But is “Dragons’ Den” providing a realistic interpretation of what it takes to secure entrepreneurial finance? Here’s my personal take:

The programme cites the Dragons as venture capitalists, although they are really business angels in the role they take on the show. Getting in front of five high-profile investors on the submission of a 300 word executive summary is not that realistic, especially when the entrepreneur’s business idea might not even fall within the individual sector preferences of the Dragons. The TV proposals go through a selection process of course, though some are presumably chosen on the basis of their entertainment value as they would not see the light of day when subjected to even perfunctory scrutiny by VCs.

Presenters have just 3 minutes to make their pitch followed by questioning from the Dragons and an immediate decision on whether to make an offer to invest.  If VCs are sufficiently interested after making initial inquiries to meet with a management team there will be the opportunity for a detailed, though succinct, presentation followed by penetrative questioning, further inquiries and referencing checking, further meetings and presentations, ultimately to an investment committee, before an offer to invest is made. And all this takes time, not the 5 to 10 minutes timeframe on the show!

Presenters are required to state the amount of money they are pitching for and the percentage of equity they are willing to give up in their company. Here we get the really invaluable lesson for entrepreneurs. A 10% equity stake (eg) for £100,000 is a pre-money valuation of £900,000. The Dragons will say “what makes you think your company is worth £900,000 when you have only a prototype product, you haven’t made any sales and you don’t even have any idea about your costings or the potentially profitability of your company? – I’m out!).  Being properly prepared and ensuring no obvious flaws in their business propositions are other key learning points from the show for aspiring entrepreneurs.

However the Dragons saying “I’m out” in a sometimes blunt fashion and the embarrassing “put downs” that sometimes occur on the show are not hopefully the normal approach of our UK VCs, though an entrepreneur does need to know where he stands and not simply told to “come back in a year”.  

Dragons offering to share their expertise and contacts to help the companies in which they decide to invest reflects the adding-value nature of venture capital. Business angels would probably get even more involved in the operational workings of investee companies.

Finally, an offer to invest made on the show is subject to the outcome of due diligence before the actual investment is made – as in real life.  

So some shortcomings but, on balance, a useful contributor to encouraging people to at least think about becoming entrepreneurs in the UK. Now as for “The Apprentice” – well that’s another story!

(An edited version of this post appears in the Autumn 2013 issue of the BVCA Journal, see BVCA Journal Guest column)

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