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The Den Report: Hustling The Dragons

Almost all entrepreneurs who want to finance their ideas struggle with the issue of valuation - what their businesses or companies are worth. They're often used to lending criteria -- we'll lend you so much on the basis of the value of your home or some other collateral - instead of the more complex financial methodology of venture capital.

Don't feel bad; financiers can sometimes struggle with the same issue. They're just more experienced at it than most entrepreneurs.

Valuations are a movable feast: Entrepreneurs want to lever as much money as they can from financiers, while financiers generally would like to get as much ownership of a company as possible. They're both working with intangibles such as future worth of the company.

That simplifies it considerably, of course, but that is essentially it. For that reason, you see much haggling on Dragon's Den, which is mirrored daily in the offices of every venture capitalist and angel investor in Canada.

It's also why you see that dragons emphasize business valuations so much. And it's why they become very shirty when they see someone they believe is trying to take them for a ride when evaluating their companies in pitches.

Witness their reaction to Mitch Miller, of North American Card Solutions, who asked the Dragons for $350,000 for 10 per cent of his gift card company idea. This $3.5-million valuation is for software that allows businesses to print their own gift cards, a company that just launched, and had only one sale.

The Dragons destroyed him, calling the valuation "ludicrous", "insulting" "absolutely ridiculous" and the work of a "hustler".

So how does a budding entrepreneur evaluate his or her company or idea?

  • Look at your sales. Most pitches that draw investment have a growth pattern of sales. This points to a basic reality -- you're not in business until you're actually doing some business.
  • Look at its potential. This isn't the usual "the market for this product category is xx billion dollars" pitch so many amateur entrepreneurs spout. This is how much YOUR product can potentially sell.
  • Look at what a buyer would pay for your company. If another company was to come in today and buy your business, how would it decide its worth? If you have only an idea, and not much in the way of sales, it wouldn't be much. Ideas, as they say, are a dime a dozen.
  • Have a strong rollout plan. In the absence of hard numbers, investors will sometimes take a chance on the entrepreneur because he or she has convinced them that they will work hard and actually take this product or service to market in a planned, methodical way. You won't get as much for it as if you had proved its work through actual sales, but you may get enough to get going. This is known as seed investing.
Tony Wanless is Certified Management Consultant (CMC) who concentrates on the SME segment. He is a frequent business plan writer, pitch guide, and business plan judge for competitions. His businesses include Knowpreneur Consultants, a provider of Content Marketing strategy and services to SME's, Reinventionist, an innovation consultancy to professionals who form their own independent businesses. He is currently launching tonywanless.com, which provides communication guidance and real-time digital editing services for leaders in the technology, finance and academic sectors.

Tony is also a columnist and blogger for BC Business Magazine and the Financial Post. A former financial journalist and editor, Mr. Wanless has a long history as a communicator, writer and advisor with Venture Capital and angel investors in Canada. He is a frequent business plan writer and pitch guide for technology start-ups and often acts as a mentor and judge in business plan competitions. Follow Tony on Twitter at @reinventionist