Dragons’ offered staggering ‘investment match deal’ to scoop ice cream deal

Normally it is entrepreneur and long standing dragon Peter Jones who berates an entrepreneur in front of him looking for investment with a company which has a turnover of £100,000 whilst seemingly valuing their business at a totally unrealistic value of £5M using some odd 50 times multiple to be a reason why they only want to offer 5 per cent equity in return for the incoming investment.

However tonight Yee Kwan was seeking an investment of £50,000 in exchange of 25 per cent equity in the company. Given the limited trading  activity of the business and the fact that it is a highly competitive and tough market to enter with lots of similar products vying for retailers fridge space the deal on the face of it seemed sensible.

In a large majority of investment pitches on the show the amount of money invested already by the owners and others is usually disclosed, it wasn’t in this case.

This is an essential in all investment due diligence that all investors do as time and sweat equity is one thing, but if you are coming to me as an investor asking me to write you a cheque for £100,000 investment in your company and you have only invested £10,000 but own 30 times the equity I do you are a lot less likely to secure a deal unless you can demonstrate why your numbers make sense.

So tonight after Peter Jones declared he was out after extolling the tough market that the business was looking to trade in given his and fellow dragon Duncan Bannatyne’s investment in Kirsty Henshaw ‘s food business the entrepreneur threw out a lifeline for herself by telling Deborah Meaden and Kelley Hoppen that if either of them gave her the £50,000 she wanted she would match them.

So, this immediately shows good faith and an added security that the entrepreneur herself believes in her own product, however some could also then question the numbers as does the company need £50,000 or £100,000. Are the financial projections based on the smaller or the larger investment?

Putting those questions to one side and lets assume that it has cost a very conservative half of the investment sum so far to get the company to being ‘investment ready’ and you need your incoming new business partner to be able to open doors to secure a boost to the companies exposure and turnover why would that happen if you are expecting them to put in similar effort in terms of time commitment and double your money. Yes you had the idea and of course that is worth a great deal, but ideas don’t provide security.

I regularly look at deals that we are approached over and two things are crucial above the business plan and financials. How much has the founder, and or other investors invested in hard cash terms and how much equity will the key personnel have post our investment.

Both of these questions are crucial as the first provides comfort for us as an incoming investor and it is absolutely essential post investment that the founder and the senior management team still retain enough equity in the business to remain hungry and fired up. Being an entrepreneur and starting and managing a company is not a 9-5 occupation.

If we look at a deal where were are being asked to put in treble plus what has already been invested in a non-tech fast growth business then you are going to have to offer a large amount of equity and work out a ratchet mechanism to pull that equity percentage down over time otherwise the deal is going to be dead before you open your mouth to pitch and investors don;t want to end up owning your business as that is not what investing in a business is all about.

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Richard Alvin

About Richard Alvin

Richard Alvin is founder of private equity company Audere Capital which has a number of investments across the media and fashion sectors. Entrepreneur of the year in 2014 Richard is also Group MD of Capital Business Media and director of award winning PR company Brighter Comms, he is regarded as one of the UK's leading experts in the SME sector and an active angel investor and advisor to new start companies in addition to being an advisor to Save Our Business the U.S. based business advice television show.