Dragons' Den: episode five, reviewed

What was more interesting in last night's episode than the formulaic peaks and troughs (geddit?) was the pitch that occupied the middle ground. Neither instantly as diabolical as pig-feed Paul or as obviously investable as the wedge wellie (which, despite being ugly, did win offers from three Dragons), the other main show of the night was Tree of Knowledge, a motivational training and education business headed up by the perfectly affable Alan Burton and Gavin Oattes.

Tree of Knowledge ticked plenty of Dragon boxes. Alan and Gavin were both ex-teachers, and had developed a pod-based kit for eight to 18-year-olds packed with team-building activities and games, all linked to lesson plans and the curriculum. They provided the pod to schools along with two-day training sessions - a combination coming in at the profit-margin-happy price of £1,600. Despite the hefty price tag, their training and pods had been taken up by so many schools across Scotland that they'd 'basically reached market saturation' there. (And, as Duncan pointed out, a lot of those schools were notoriously troublesome and difficult cases to break, which made their success all the more notable.)

So, to the figures: £360,000 turnover in their first year, which boiled down to £180,000 gross profit and £20,000 net. That net profit went up to a forecast of £340,000 for the year ahead, but the prediction was reasonable.

Alan and Gavin had also begun forging paths in new markets, expanding into corporate training days, which had racked up £15,000 revenue in just six months. Next up were plans to grow into the rest of the UK and carry on with training days. Tick again.

Theo Paphitis raised the first major concern here - if they'd reached market saturation in Scotland, surely that would happen again once they'd sold their product and services to the rest of the schools in the UK and the business would peak? Why weren't they evolving new versions or updates to the pods to keep a steady stream of revenue trickling in? The couple countered calmly - that's exactly what they were doing, with new pods already underway and further bespoke themed pods commissioned by heritage organisations.

On top of all that seeming perfection, Alan and Gavin were great pitchers and people: clearly passionate about what they were doing, likeable, un-argumentative, calm under pressure and full of energy. In fact, Peter Jones said in the last few years he'd been doing educational and training work, they were 'probably the most impressive people' he'd seen.

So went wrong? Why didn't they walk out the Den with an offer?

The first issue was the cost: they wanted £100,000 for 10% of their business. Peter Jones actually offered half that, but the other Dragons wouldn't meet him halfway for a really interesting reason - namely, because the pair were almost too good at what they did.

Let's look at James Caan's declaration of being out. He was 'amazed' at the rates they were getting and 'amazed' at how many schools they were in, but said the issue was 'this is a pure people business'. He was worried there was no real investment potential.

The trouble was, the business was limited by Alan and Gavin being so good it would be difficult, if not damaging to the brand, to find other people to fill their boots at training days. Which meant the business couldn't scale in a big way, or particularly quickly.

For Deborah Meaden, the issue was Gavin and Alan were 'clearly the experts in the room'. That left little room for her to do anything with the business - she couldn't add value.

Theo Paphitis 'desperately' wanted to invest, but the £100,000 cost of doing so meant he would have to take significantly more equity than 10%, "which would mean you had less incentive to work." And as the business was all about them, it really needed them to own more of it.

All of which raised a very interesting dilemma: Gavin and Alan were almost too much at the centre of their business. So much hinged on their personal talents that the business' size was limited.

On the up-side, this meant they perhaps didn't need the investment they thought they did, and all the Dragons seemed sure they would succeed anyway. But therein lays a very important lesson for investment hunters: you need to have a product that can scale. Your talents and time alone can not, and that will put off an angel looking for fast growth.

 

 

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