Rick Spence on pre-money valuation

In his Financial Post small business column yesterday, Rick Spence wrote about masquerading as a Dragon for a day to help audition new “pitchers” for the next season of CBC Dragons’ Den.

Sitting at a folding table in the cavernous atrium of the CBC’s Broadcasting Centre in Toronto, you’re conscious that the plucky entrepreneurs who try out for the show are exactly the ambitious, creative minds Canada needs to overcome recession and 150 years of overdependence on resource commodities. We need to encourage these people, not turn thumbs down.

Auditions are still underway in select cities, so if you’re considering auditioning I suggest you take Spence’s sage advice on calculating the pre-money valuation of your business idea.

Another problem was pitchers’ overblown sense of their own importance. One entrepreneur came to us with an automobile accessory that has some potential. But she wants $1.2-million from the Dragons, for 40% of the business. Using my razor-sharp math skills, I asked what makes her share of the company worth $1.8-million. She said she had spent four years developing the idea. In her spare time, I asked? Yes, she said. “So what makes your time worth $400,000 a year?” I persisted. She had no answer.

Later, another entrepreneur pitched us seeking much less money. And she was willing to give up 60% of her company to get it. I congratulated her on a reasonable valuation. The rule on Dragons’ Den is that you can’t ask for less money if the Dragons reject your initial deal. So it’s essential pitchers understand that investment capital costs big money — and that hatching the initial idea is only the first step, and usually the easiest, in a business’s long journey to success.

The sooner you learn this, the better off you are. No matter what you’re pitching.