Dragons Highlight Several Flaws In A Tech Startup
Dragon’s Den, if you weren’t already aware, is a popular reality tv show revolving around five venture capitalists investing in promising entrepreneurs. In many ways, the show is identical to Shark Tank, although considerably older. In fact, a couple of sharks began their public life as Canadian dragons!
During a recent episode of the show, the dragons were introduced to tech entrepreneur Martyn Gould, founder and owner of yboo, a mobile phone deal app based in the UK. As happens in every pitch, the dragons had an opportunity to learn about Martyn’s business and delve in deeper into the model and upcoming growth plans.
Before we begin, this article will focus on the points of concern highlighted during the aired show and its purpose is to show you examples of certain mistakes or miscalculations which are commonly made by entrepreneurs. In no way do I mean to judge or ridicule Martyn and his business, nor do I seek to discourage him from proceeding on his entrepreneurial journey.
Martyn presented yboo effectively in a matter of minutes. I, together with the dragons, had never heard about the mobile application, but by the end of the presentation, everyone was up to speed on what it did. For our readers who missed the show, the core feature of yboo is the ability to analyse your mobile phone usage and recommend the most suitable calling plans available combined with the best signal coverage, depending on your area.
The entrepreneur was offering the dragons a 2.5% equity share in his business for £250,000, resulting in a valuation of £10,000,000.
The dragon’s questions
Sara Davies, the newest dragon, led the round of questions by confirming Martyn’s experience and track record. The entrepreneur explained how the business was there to solve a real problem, and that he has worked without pay for over a year, investing his own cash and recruiting a great team. This is commendable, as it shows to investors that the owner has a personal stake in the project, and is not simply looking to risk other people’s money.
Peter Jones, an entrepreneur with a telecoms background, was next to question Martyn. He first focused on the app’s coverage service, in order to figure out how this is determined. The app gathered its data from its users, who, at the time of the recording numbered around 40,000. In the UK there are approximately 60 million mobile phone users, which makes the app’s figures look like a drop in the ocean.
At this point, Peter identifies a major flaw with the application. The app would generally be unable to gather sufficient coverage data for most of its users. Peter goes on to recommend the use of an average network coverage map. Martyn disagrees with him immediately, with the reasoning of keeping the app totally independent. The two continue discussing the idea further, but the result is that Martyn is not open to accepting proposals from an experienced investor, especially one who has a background in the same industry.
This shows entrepreneur bias, which is a cause for so many bad decisions in business. It also gives the investor an idea of what working with the entrepreneur might look like. Potentially, a better idea would have been to use all the data available and then improve upon it, over time, with the data gathered through the application.
Fans of Deborah Meaden will know that she is all about the numbers. Sure enough, her first question focus on the company finances. Deborah quickly narrows down on the marketing spend, which turns out to be £300,000. Here, she admits to her disappointment of not having yet heard of the app, even though it had quite a large marketing spend. Furthermore, she highlights the fact that the return of that marketing spend was rather poor, with an average cost per user of £7.50.
This begs the question, why did the entrepreneur not change his marketing strategy to get a better return? A free app which is designed to help users save money and get better mobile coverage should spread like wildfire, especially if the business is using social media effectively. However, this was not the case, and Martyn’s response was that he needs help from the dragons to grow faster.
Tej Lalvani ignores the past momentarily and focuses on the future. He asks Martyn what he plans to do with his investment, and, unfortunately, his reply irks every single dragon, and rightly so. The plan is to use the money to launch the application internationally, a terrible plan for a variety of reasons.
First, £250,000 would be insufficient to launch in any Western country if it cost the business £300,000 just to market, ineffectively, in the UK. Second, different markets operate in different ways. The application would need considerable time to prepare and adapt to the local purchasing culture. This time would be taken away from the time needed to grow in the UK. Third, this decision shows that the entrepreneur did not think his market through. He probably did not carry out sufficient market research before starting to work on the project.
In fact, many other questions come up. The entrepreneur would like to export the app to Australia as he believes the coverage portion of the app would be in great demand. However, why would it be a success there if it hasn’t yet been proven a success in the UK? In any case, if Australia somehow promises a better return than the UK market, why did he start with the UK market? Why will he split himself so thin, on two or more markets, when he hasn’t even scratched the surface of the domestic market?
Toucker Suleyman gives Martyn a dose of reality. He explains how sometimes entrepreneurs don’t want to admit to a problem or a bad decision and therefore look for distractions elsewhere. Martyn, once again, sticks to his guns and confirms his belief that the application has the potential to scale internationally. Certainly, this may be the case, but all the dragons agree that this is not the time for that.
Indeed, Toucker looks very upset, and ends up calling Martyn “delusional”.
Next, the dragons look towards justifying the company’s steep valuation, especially in light of mediocre market penetration. Martyn admits that the turnover for the last financial year was lower than he would have hoped, at only £60,000. A £10,000,000 valuation for a business which the previous year only turned over £60,000?
At this point, all dragons are in disbelief. Many entrepreneurs are unable to value a business correctly, and valuations are always up for some debate, but in this case, there has clearly been some serious miscalculation.
Peter Jones is simply mystified, and in a rare occurrence on the show, is speechless! Martyn offers to explain his reasoning, but Peter will have none of it. The numbers lady, Deborah, however, is all ears.
Martyn throws in a surprise buyer which, according to him, was ready to pay £5,000,000 for the business. This gives the entrepreneur a certain degree of credibility once again. After all, the true value of any business is what another entity is willing to pay for it. Peter is given the offer document, but to his disappointment, it does not tally with what Martyn had just explained.
In quick succession, all five dragons drop out of this investment opportunity. Peter is the first to drop out. He explains how he is not ready to invest in a person who would base his valuation on incorrect reasoning. Deborah is next to explain her position. She states that for an entrepreneur to misrepresent information on such a scale leads her to believe that either Martyn is naive, or he believes her to be naive. Martyn politely states that in such a case he is the one who is naive.
Tej believes that Martyn is in a difficult position, having invested so much time and effort in a business and not having yet seen a decent return. He calls Martyn an optimist but goes on to state that his business needs a realist.
Toucker delivers another round of reality. He told Martyn that a market stall can easily have a greater turnover than him, at a much lower valuation. He cannot believe that Martyn would go to the den to be saved by a dragon, and request that the dragon overpays for the privilege. This sentiment is often shared by many investors when they get pitched by overly-ambitious or arrogant entrepreneurs.
Finally, Sara is the fifth dragon to drop out, but not before complimenting Martyn’s selling skills.
Learning from this episode
Martyn’s appearance on the dragon’s den is far from being the worst, most disappointing or most arrogant. In fact, all dragons agreed that the app offered convenience to users, but its execution was flawed. Nevertheless, Martyn would have probably gotten an offer had the valuation been down to earth, and he showed a better disposition to listen to and take on board advice from the dragons.
The takeaways from this episode which you can implement in your entrepreneurial journey should be:
- Carry out market research before you start working on a business
- Once you launch a business, keep listening to the market
- Be ready to admit that you were wrong, and be the first in your organisation to change
- Use data as much as possible to develop your business
- When meeting potential investors, partners, stakeholders or clients, always be polite, as Martyn was throughout the episode, even if they might disagree with you
In closing, Martyn’s adventure does not appear to have stopped, and we wish him and his team best of luck to succeed with their mobile application. You can watch the episode online on Youtube.