Lessons from the Den: Dragons' Den, episode three, reviewed

This week the Den provided some very interesting insight into how practised entrepreneurs are able to quickly gauge the potential of a product, envisioning it in a specific market and taking an idea beyond the boundaries that its creator and even other Dragons are able to see. It was a subtle lesson in the true value an experienced investor is able to add to a business.

Let’s take the wheelie bin lid-opening device that Duncan Bannatyne branded ‘just a piece of plastic and piece of string’. Which, essentially, it was: a simple home-made looking device that functioned as a step-on bin-lid opener, completely devoid of any trace of aesthetic charm, that had seen sales of only 2,000 units in 12 years. Little business potential, one might think.

Cue Deborah Meaden, who, despite the sneers of a derisive Duncan, made an offer £25,000 for a 25% in this peculiar business, spearheaded by an ex head of school PE who by his own admission saw ‘no link’ between his former career and his current enterprise and a fumbling side-kick who mustered little more than an emotionless ‘great’ from time to time. Why? She immediately saw huge opportunity for the product in care homes and for elderly users.

Then in jumped Peter Jones. “This isn’t a business, it’s an opportunity to buy a patent,” he explained – the bin-lid couple had secured the right to essentially any lid-opening device for wheelie bins. Which was, for the telecoms super-entrepreneur, where the real value lay. His offer for £50,000 for 50% of the patent – interestingly not the business – was accepted.

Later, Emily Webb entered the den. An impressive young lady still at university, the Dragons warmed to her quickly as she was able to deal with each of their questions in a calm and already-thought-through manner on her rowing-oar grip that prevented blisters and tendonitis.

But what really got the five firey ones leaning forward on their seats was the fact she had already explored the potential of the product in numerous different markets. She had secured patents for the device for use in any sport that used a grip as well as on any bar that needed gripping – meaning that as well as sports, she could roll out the product to crutches, a far bigger market than the 22,000 rowers she’d started off with as potential customers.

Sadly, Emily hadn’t secured contracts with crutch manufacturers yet, and the Dragons felt she had approached them slightly too early – although, again, getting the patents in place (approved in the US and UK and filed in Canada, Germany and Australia) proved a very warmly received selling point for her proposition.

But it’s not only patented devices with potential that get the attention of those with cash-stocked pockets. Above all, investors want return on investment. It’s why they do what they do.

Two brothers from Essex offered them just that. Their car servicing business, which offered lower prices and increased convenience to customers across the UK, had already turned a £40,000 profit in its first 12 months. Not bad for any new business, let alone one launching during this recession. In the last month it had brought in £230,000 turnover. It had zero debt and £40,000 on its balance sheet. The Dragons were suitably impressed. So much so that three of them made individual offers for the full amount asked for. But Deborah walked away with the prize in some competitive undercutting that left the brothers with 5% more equity than Peter and James Caan were offering.

Key lessons form this week? Patents please, but a realistic return will always reel them in.

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