When anyone comes up with an invention, the next step is to find someone to give them the financial backing that they can't supply themselves. To do this, they must have a tangible product for the person or company they are approaching to get a proper feel for. The idea needs to be well thought through in its practicality and monetary feasibility. The inventor needs to have done thorough, provable research to show that there is a niche in the market that this particular product would fill, that it would make a profit.
This type of negotiations have gone on since the beginning of time. Now, however, during our times of economical strain, it has become harder to get people with money to back something that may or may not work. That may or may not prove to be profitable. However, it is still possible and the occurrence of the Dragon's Den TV programme has got many would-be budding inventors at their desks scribbling away with their plans.
The whole Dragon's Den format comes from Japan, where it is owned by Sony. Celebrities or high profile company owners that are looking for new investment opportunities sit on a panel and have a designated amount of money in mind that they would like to sink into a new venture.
Trawled in front of them are average Joe's who are allocated a timed slot to pitch their idea to the dragons and convince them that this is the one deal they cannot afford to miss out on. This is not for the faint hearted. The ones with the money in the Dragons Den are confident and adept at business. They know all the right questions to ask and if you're not on top of your game and knowing it inside out they will eat you for breakfast.
Those who truly believe in their product, who have fully researched their market, who know their target customers and have the confidence to put this across simply whilst still giving the dragons something they can see or feel, will give them a much better prospect of gaining the backing that they require.
For those that enter the Dragon's Den trembling with fear, stuttering with nerves and unsure of themselves will come across as unsure of their product. They will be chewed up and spat out in no time by the dragons themselves.
Contestants that have managed to secure finances from the Dragons Den are those that know their product well but do not appear too pushy or cocky. They pitch their idea and hopefully the product will sell itself. Once they have satisfied any doubts the dragons may have and fully sold their product to the best of their ability, then the dragons need to decide whether they want to invest or not.
Negotiations take place. If a dragon would like to invest but is unsure of the products feasibility, they can offer a reduced amount to what the contestant is asking for. While this may be difficult for the person that needs the money, reputation goes a long way and that is what the dragons bring with them, reputation and influence that might just make them successful in their venture.
So what does the dragon get from all this? Well, during negotiations, they can also bargain. The inventor will suggest a reward, usually a stake in the business venture or a cut of the profits, depending on the amount invested. The dragon will then attempt to bring this nearer what he sees as a good deal and eventually an agreement will be reached. One happy inventor, one happy dragon.
Raising capital can be difficult even for those with a decent track record. This is no great surprise because many entrepreneurs are badly prepared when they go before potential backers. They simply haven't worked out their story. An outside investor will want to see and understand the facts and figures on costs, the market place and competition before he or she considers getting involved. Poor preparation isn't confined to one-man-band businesses.
The one essential tool for fund raising is a comprehensive business plan. It needs to include a focussed summary of the business itself, supported by financial projections, an outline of the marketing strategy and a thorough evaluation of the market.
The figures must be more than just a profit forecast. They need to include a cash flow projection and a prediction of how the company's balance sheet will look at the end of the forecast period. The business plan must also be succinct, or it will be discarded long before the investor reaches the end and it must have an executive summary at the beginning, setting out all the key facts.
One element often missing from badly prepared business plans is a clear summary of the major assumptions and on what they have been based. Explaining the underlying thinking makes the plan seem much more professional. Investors may not agree, but at least they will understand the background to the venture.
Another common fault is not including any sort of sensitivity analysis. The only certainty about business forecasts is that they are wrong, the only questions are by how much, in which direction and, crucially, why. Business plans need to recognise this and identify what the impact will be if, for example, the business misses its sales target by five per cent in the first year.
Once drafted, the plan must be shown to experienced business consultants, who can ask all those difficult "but what if" questions. The entrepreneur must be prepared to set aside his ego and listen to what they say, no matter how painful this is. If changes to the plan are necessary, then pride must take second place after good advice. Accepting outside input is essential for success in business. Few lenders or investors will simply hand over money to entrepreneurs and wait patiently for the return on their investment.
The most active investors, like business angels or venture capital companies, will be looking to provide their own skills and experience for the mutual benefit of all concerned. It might seem obvious, but the larger the sums on the table, the more the investor will demand to keep an active eye on it, including sometimes taking a seat on the management board. When everyone is happy with the business plan, it needs to be turned into a professional presentation, which should communicate memorably what the business does. If the core purpose cannot be explained in 30 seconds, the pitch is too complicated and investors will lose interest before the client has a chance to get into the supporting facts and figures.
The questions prospective investors might ask should be anticipated and strong well-researched responses prepared. Once in front of the potential investor, the approach needs to be open and not defensive. There will be detailed questioning and the entrepreneur and his team must be able to demonstrate why their skills and experience will justify the risk the investor is being asked to take. One regular mistake is not raising enough money. If an idea is sound, a professional investor will be happy to put in a little more, to give the business a contingency fund.
Entrepreneurs must also be realistic and get guidance about the potential value of the business. They need to be willing to give up a significant share of the action. Investors will want a meaningful stake in the company. They will also want a good return on their investment and a planned exit route so that they can see how they are going to get it back.
Raising money for new ventures is difficult at the best of times, but good consultancy advice and a professional approach can prevent it becoming mission impossible.
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Catherine Harvey has sinced written about articles on various topics from Culture and Society, Home and Wedding Gowns. Expert entreprenuer Catherine Harvey looks at the way TV programmes such as have helped inventors gain backing for their new products.. Catherine Harvey's top article generates over 1500000 views. to your Favourites.
John Mce has sinced written about articles on various topics from Careers and Job Hunting, Biking and Strategic Planning. John Mce writes for Financial Solutions who offers free independent advice and has helped over 2,000 UK businesses raise extra capital.. John Mce's top article generates over 301000 views. to your Favourites.