Because it makes for good TV. Nothing is real, it bears no resemblance to how the actual deal is made after the show.
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Did 5 multi-millionaire dragons get this valuation concept wrong?
- Thread starter Realervz
- Start date
OK, so now I'm offering you the rest of the company shares for £10,000.
Do you want to buy it?
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I think also what is being missed here is the dragons say 'what YOU are valuing your company at' not what the company is worth.
Also as I stated, the investment is always in the form of a loan so the money 'invested' doesn't increase the value of the company at all (on a pure numbers basis) as the loan and 'investment cancel each other out.
Also as I stated, the investment is always in the form of a loan so the money 'invested' doesn't increase the value of the company at all (on a pure numbers basis) as the loan and 'investment cancel each other out.
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You told me it was worth £1bn, it's your valuation.
So if I have a company with 1 billion shares, and I've sold 2 shares for £2, then you'll buy the company from me for £10,000.
DM me your details and I'll send across an agreement.
When you buy the company, what will it be worth?
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I do not watch TV very often (I do not even own one) so I am not familiar with the wording they use.
However, in general, when an investor says that a new issue the are considering buying values a company at a certain amount, they mean mean after the investment.
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In that case why is the OP and everyone else talking about an equity investment? Can you explain exactly how it works?
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I know 4 people who had 'investment' and in all cases they were loans, which is why when the dragons say 'when I have had my money back..'
As mentioned already the 'deal' isn't a straight handshake and done, there is a mountain of due diligence and the deal is constructed around this, but in all the cases I know of personally it was loans for equity.
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Seriously? It works how the investor wants it to work, or how it is negotiated
There is often an element of equity and an element of loan, but it be upto 100% of either
It's also quite usual for investors to drip their money in against agreed benchmarks and not unusual for them to draw fees equalling their investment
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Here you are a bit of lunch time reading 
https://www.director.co.uk/9672-dragons-den-do-the-deals-ever-work/
https://www.director.co.uk/9672-dragons-den-do-the-deals-ever-work/
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Well, then it's very simple. If someone puts in £100,000 and ends up with 50% of your company, then you are valuing the company at £200,000.
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The problem here (I think - back of an envelope jobbie) is that @Realervz is using a fixed formula in his calculations ie. % equity taken by dragons = sum invested/company value x100
If you add the dragon investment to the notional company value, then calculate the value of the equity it will always appear to favour the dragons.
On the other hand, if you change the company value (up or down to reflect reality) and the percentage equity to investment ratio you can come up with any result you want.
If you add the dragon investment to the notional company value, then calculate the value of the equity it will always appear to favour the dragons.
On the other hand, if you change the company value (up or down to reflect reality) and the percentage equity to investment ratio you can come up with any result you want.
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It is clear I am asking about Dragon's Den in particular, not investment in general?
So @OldWelshGuy is wrong when he says:
And so is Wikipedia which says:
"The dragons probe the idea further once the contestant has made the presentation. This will either reveal a sound business proposition resulting in an investment offer from one or more of the dragons in return for equity or a withdrawal from the transaction by either the contestant or all of the dragons"
https://en.wikipedia.org/wiki/Dragons'_Den
Which to me sounds like its equity or nothing - no mention of loans at all.
So @OldWelshGuy is telling me its always debt finance, Wikipedia telling me its always equity, and @Mark T Jones telling me it could be either or a mix!
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It's not unknown for Wiki to be wrong
I can't speak with certainly, but there are stories that some Dragon investments have been part loan
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According to the Wikipedia article:
"The differences between the agreement televised and the deals proposed after filming have caused controversy regarding how entrepreneurs are treated on the show. In 2012, the show faced calls to be cancelled following allegations that many entrepreneurs were being misled to believe their pledge of investment was based on returns from equity when in fact the deals were little different to that of personal loans.[95]"
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T
The Byre
People going on stupid TV reality shows get burned. So what's new?
There are people on this earth who just want to make fools of themselves on television.
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Not so fast The Byre! I went to a talk by a CFO who went on Dragons Den. They used the loan (it was essentially a loan) as leverage to get proper investment. The show was part of their investment pitch and it worked extremely well.
They knew exactly what they were getting into and having the dragons wanting to invest was really helpful when it came to raising money.
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tom44
I think the business will be selling them shares diluting the other shareholders, but the valuation of the whole business will depend on the investment terms. For example, their investment might come with a liquidation preference meaning in the event of the company liquidation they get their entire investment back first before any of the other shareholders get anything in which case they might have invested 100K for 10% of the business but supposing the business has no other debt/assets and only 100k in the bank the remaining 90% is worth nothing…
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I thing over time this thread has evolved into something perhaps vaguely interesting.
Things don't really have values. Instead the value is what someone is willing to pay. Unless there is a someone just about to pay it is really just a guess. Some guesses are better informed than others.
I think that's it.
Things don't really have values. Instead the value is what someone is willing to pay. Unless there is a someone just about to pay it is really just a guess. Some guesses are better informed than others.
I think that's it.
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- Original Poster
- #65
After going through the entire thread again, I saw many different responses. Some are just here purely for post count you know who you are and a lot try to explain to me how valuation works and only one or maybe two really did take time to read through my post to understand my logic and argument.
To those who tried to explain to me how valuation works, thank you for the effort but I really do understand how it works and it is not the specific question of mine.
I know that valuation is not just about numbers. It can include other intangible stuff like intellectual property, potential of the business, how many interested client they already have etc.
What my question really is, is why do the dragon always say that the entrepreneur is valuing their current business worth at (X + the amount he is asking for) when his valuation is just X?
I am just talking about their valuation logic here, it is all figures. It's not about "valuation is not totally about numbers" or "it is subjective to each individual opinion" kind of stuff.
The valuation part happens almost at the start of every pitch when the entrepreneur enter the den and state the amount they are asking for and the equity they are willing to give away.
And this is a very good example of what I am trying to say:
watch?v=NI7RuF7yY0Y&ab_channel=Dragons%27Den
(I can't post a link so you got to copy that and paste in the youtube URL)
For the above video, although the guy looks somewhat weird and clumsy, but his valuation logic is what I am talking about the entire time. It is supposed to be correct logically but the dragon argued that he is wrong.
In the video, the dragons all disagree with his valuation explanation and tries to explain the "correct" concept to him.
This is what she (the dragon) said word for word: "I am paying 600 thousands pound for half of your business, in saying half of your business is worth 600 thousands pound, all of your business is worth 1.2 million pound"
BUT she forgotten that this 600 thousands pound is not paid to his pocket, it has to be reinvested into the business.
If she is right by saying he is valuing his business at 1.2m pound and she is paying 600 pound for 50% of the business, this is buying of equity and technically after the deal is done the 600 thousands pound should belongs to the guy. Now that they each own 50% of the company and they need 600 thousands pound to move this business forward, why it is the guy who need to pay the full 600 thousands pound to the business? Shouldn't the 600 thousands pound investment capital be split 50 50 since they each own 50% of the company?
I am struggling to get this logic right.
To those who tried to explain to me how valuation works, thank you for the effort but I really do understand how it works and it is not the specific question of mine.
I know that valuation is not just about numbers. It can include other intangible stuff like intellectual property, potential of the business, how many interested client they already have etc.
What my question really is, is why do the dragon always say that the entrepreneur is valuing their current business worth at (X + the amount he is asking for) when his valuation is just X?
I am just talking about their valuation logic here, it is all figures. It's not about "valuation is not totally about numbers" or "it is subjective to each individual opinion" kind of stuff.
The valuation part happens almost at the start of every pitch when the entrepreneur enter the den and state the amount they are asking for and the equity they are willing to give away.
And this is a very good example of what I am trying to say:
watch?v=NI7RuF7yY0Y&ab_channel=Dragons%27Den
(I can't post a link so you got to copy that and paste in the youtube URL)
For the above video, although the guy looks somewhat weird and clumsy, but his valuation logic is what I am talking about the entire time. It is supposed to be correct logically but the dragon argued that he is wrong.
In the video, the dragons all disagree with his valuation explanation and tries to explain the "correct" concept to him.
This is what she (the dragon) said word for word: "I am paying 600 thousands pound for half of your business, in saying half of your business is worth 600 thousands pound, all of your business is worth 1.2 million pound"
BUT she forgotten that this 600 thousands pound is not paid to his pocket, it has to be reinvested into the business.
If she is right by saying he is valuing his business at 1.2m pound and she is paying 600 pound for 50% of the business, this is buying of equity and technically after the deal is done the 600 thousands pound should belongs to the guy. Now that they each own 50% of the company and they need 600 thousands pound to move this business forward, why it is the guy who need to pay the full 600 thousands pound to the business? Shouldn't the 600 thousands pound investment capital be split 50 50 since they each own 50% of the company?
I am struggling to get this logic right.
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tom44
The company is selling them new shares:
Suppose you have a company with one share which you own i.e. 100% of the business. Then the company creates a new share (which they can if all current shareholders agree) and sell it to them for 600K. Then you own 50% of the business and they own 50%.
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The valuation comes from the pitcher saying "I'll give you 50% of my business if you give me £100,000. So pretty obviously if both agree, then the whole business is worth £200,000.
You're getting tangled up in fake arithmetic and artificial concepts. The real point is that the pitcher's business is usually worth nothing until they get the Dragon's deal then it becomes worth more than the money being spoken about.
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- Original Poster
- #69
Don't go into details on what is the actual value of the pitcher business.
My point is when the pitcher says "I'll give you 50% of my business if you give me £100,000."
To say that the pitcher is valuing his business at £200,000 is wrong to begin with, for the very fact that this £100,000 is not going to his pocket but to the business.
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What is said, discussed and agreed on Dragons Den is purely so the TV audience can understand and follow. It has nothing to do with what happens in reality when the final deal is done, whether it's a loan, equity or shares.
The TV audience is not savvy enough to understand what's involved in buying or investing in a business, so keeping it simple for the TV audience, is what the producers aim for.
This thread sums it up. Business brains discussing the difference between valuations, equity, loans, shares, IP valuation, etc etc.
What does the TV audience know about any of these elements?
Keep it simple and people will tune in and follow.
As an aside, the humiliation some Dragons give to the pitchers is unwarranted, but (perhaps) makes for interesting viewing as far as the producers are concerned.
Have I gone off at a tangent? Probably.
The TV audience is not savvy enough to understand what's involved in buying or investing in a business, so keeping it simple for the TV audience, is what the producers aim for.
This thread sums it up. Business brains discussing the difference between valuations, equity, loans, shares, IP valuation, etc etc.
What does the TV audience know about any of these elements?
Keep it simple and people will tune in and follow.
As an aside, the humiliation some Dragons give to the pitchers is unwarranted, but (perhaps) makes for interesting viewing as far as the producers are concerned.
Have I gone off at a tangent? Probably.
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What happens to the cash after the transaction is irrelevant to the pre-transaction valuation. Giving 50% of the business for £100,000 values the business at £200,000.
After the transaction has been completed, the company will have a different valuation if the cash is left in or taken out. But of course, that's a fictional situation, the anticipated cash investment is factored into the pitchers offer.
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- Original Poster
- #74
You clearly didn't read my post properly.
Using your example, there were initially 10 shares worth £100k each.
So business is worth £1m,
If you pitch for £100k for 10%, this will be the 11th £100k of the company, IF THE DEAL IS AGREED, AND AFTER THE NEW CASH INJECTION, the business will be worth £1.1m.
In this case, you will be giving the dragon more equity that they should get as they now own 10% of a company that is worth £110k now, so by right they should have to invest £110k (10% x £1.1m) for them to own 10% of the business but they only invest £100k for that.
But if you were to ask them to pay for £110k for 10% of the business at the start, they will say that you are valuing your company at £110k, BEFORE their cash is in.
To sum up:
Company is worth £1m BEFORE the investment
Company is worth £1.1m AFTER the investment
But they always say that the pitcher valuate the company at the value AFTER the investment before the deal is even agreed.
Well, if it is like what you have said that the anticipated cash investment is factored into the pitchers offer, then their valuation logic will make sense.
That's a somewhat logical answer I can accept but it seems to me like they were talking about the valuation without the anticipated cash factored in.
If the anticipated cash investment is indeed factored in, this could be the problem solver of this thread.
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He isnt selling part of his business, he is giving a percentage of his shares so the investor can recieve their proportion of future profits in the way of dividends. "I want 100k for 10% the 100k will be taken out of the company and deposited into my peronal bank account-cheers"
You are assuming that £100k investment adds £100k to the value of the company, it doesnt. It just improves the companies cash position and the actual value it adds will vary, especially once that £100k has been spent.
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@Realervz - it’s a TV show, dumbed down for the target audience.
What they say on the show has no relevance to the actual value of the business. So while you may be correct semantically in reality the numbers are for the watchers of the show.
Remember, most of the target audience couldn’t find their own bum without a map, detailed financial breakdowns would go straight over their heads.
What they say on the show has no relevance to the actual value of the business. So while you may be correct semantically in reality the numbers are for the watchers of the show.
Remember, most of the target audience couldn’t find their own bum without a map, detailed financial breakdowns would go straight over their heads.
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Is it not just a way to explain how much the sums involved are in relation to how far the company has grown since start-up
The owner wants say £50,000 to make their plans on growth succeed
He can sell from £50,000 for 10% or the same amount for 20% or even 51%, the point is there is no real value in the company or maybe little but the money is for growth
£50k for 10% then show the contestant, that with little sales they being greedy, but at 51% reasonable. the value of the company is in the original assents patent and goodwill plus the investment if it gets approved
How much is the expertise of the investor worth, compared to what the owner brings to the table
The owner wants say £50,000 to make their plans on growth succeed
He can sell from £50,000 for 10% or the same amount for 20% or even 51%, the point is there is no real value in the company or maybe little but the money is for growth
£50k for 10% then show the contestant, that with little sales they being greedy, but at 51% reasonable. the value of the company is in the original assents patent and goodwill plus the investment if it gets approved
How much is the expertise of the investor worth, compared to what the owner brings to the table
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It can be confusing at times, but its one of those things that you need to look at from first principles.
the Youtube link you posted isn't a great example- really he's valuing his business at 600k once he's put 600k in, and 1.2m when someone else puts 600k in. If you've each put £600 in a pot together, you'd rightfully expect to own half the pot.
I think your confusion stems from a misunderstanding of what happens on an equity investment.
remember there are three legal entities on an investment-0 the 2 investors and the limited company.
Typically in dragons den, let's say a company has 100 shares owned by one shareholder what is happening is that the company issues 100 extra shares to the new shareholder, in return that company is given money by the shareholder.
At what is called "seed" round (which is what Dragons Den is), the current shareholders will all have their shareholding "diluted" by the new shareholder. Ie you still own 100 shares, but not instead of the company issuing 100 shares in total, instead, it owns 200 shares in total. So the % of the company you own has been diluted from 100% to 50%. You still own the same number of shares though.
In Later fund raising rounds the founders are sometimes allowed to sell some of their shares to the investors- as an example, we have a client with a business which is now worth £120m (but the business is not quite profitable!) - client started it from scratch and owns 80% of the equity- the investor will put £30m- of which £20m will be new issue shares, and the client will sell £10m to the investor (so the client pockets £10m). The clients effective shareholding post-investment becomes 60% (these numbers are illustrative)- he's sold 10% of this 80% shareholder (leaving 72%) which is then diluted by 20% by the initial shares issued to the new shareholder.
Share cap tables and investment agreements can get awfully complicated!
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