Economics of A startup Company Looking For Money.

Discussion in 'Economics' started by Hello, Jul 14, 2010.

  1. Hello

    Hello

    Has anyone seen the show Dragons' Den, or Shark Tank?

    Basically a bunch of people with products which could be marketable come up to a bunch of billionaires/multimillionaires and pitch a new business idea, which is based on a new product/invention. Basically the startups ask for a certain number of dollars as an investment for a certain part of their company.

    So for example someone might have a company based on XYZ product which nets 500k per year and they offer a 25% stake for 200k, or something like that and then the dragons (A.K.A. Billionaires negotiate on price/percent owned of company.)

    These guys (the dragons) know their numbers, and they know how to evaluate something which has the potential for investment.

    What blows my minds is that this Kevin O'Leary guy constantly sneaks out deals when he sees a product which has true value which states that he will invest based on a royalty intead of getting a percent of the company.

    So basically what this guy(O'Leary) always offers is something along the lines of 5% of gross sales as a royalty in perpetuity, in exchange for him giving away 250k to the business, which has a million dollars a year in sales, with no marketing, on some product you know would be a homerun hit if it went on the shopping network.

    Now some other Dragon (multi millionaire) will step in and offer the same person 250k for 25% of the business, with no royalty, only a 25% stake in the company.

    All these are obviously inventions with high margins, but what inevitably happens is every single person takes the 5% royalty deal in perpetuity, as opposed to giving away 25% of their business for the same amount. (250k)

    My question is WTF?!?! are these people thinking?? Who would take 5% of gross as a royalty in perpetuity over 25% of their company if they had decent sales prior to the money being invested?
     
  2. Hello

    Hello

    Here is an example of the show, am i missing something in terms of the numbers?

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  3. One of the better movies I've seen in recent years that truly captures much of the startup process is Extraordinary Measures.
    If you want to get an idea of what the entire process from inception to pitching to VCs is like, I suggest taking a look at this film.

    Again, very close to capturing the whole process of a successful startup; start to finish.

    Unfortunately, most of the time, VCs want to see money and customer relationships streaming in before they will even consider you. That is unless (as in the case of the movie), you are already a well established expert in some field that is very much in demand.

    As an aside, this guy's invention seems very similar to the guy that had that motorized skateboard driving around. From simple observations, I don't think it took off very much.
     
  4. Hello

    Hello

    You will like Dragons Den/Shark Tank then.

    For the sake of argument i should clarify so it comes down to a numbers game, lets say you have a startup with a hotproduct which has not been widely introduced to the general public but has a lot of potential.

    So your company does 1 mill sales(without any substantial worldwide marketing), 500k EBITA, and you are offered 250k for 5% of royalties on gross sales in perpetuity, or 250k for 25% of your company, which offer do you choose?

     
  5. Not really an expert in that area, most of my experience has been in VCs offering to take a certain amount of ownership of the company in terms of options equity in exchange for funding. As time drags on and the money runs thin, often secondary infusions are needed which dilute the existing share pool. I prefer the equity options path, as it offers you a chance to really make a fortune rather quickly (since your goal is to go public or be acquired at some point). You'd be amazed at how quickly you can make a fortune off penny options in 4-5 years, if you've made it.

    As I said, I'm by no means an expert in the structures you presented, but giving away some percentage in perpetuity, seems like getting a bad deal for a small pittance up front.
    Imagine getting 250k up front for an IPOD invention that took off; the funders would make out like bandits in that scenario. It would be better to set a time limit, IMO.
     
  6. Hello

    Hello

    You nailed the question, so you know enough, im just stunned by the guys who dont get it. Go check out DRAGONS DEN on youtube, you will find all you need to know, Im going to take your suggestion from before and download the movie "Extreme Measures"

    This kind of stuff interests me, it just fascinates me that so many people with million dollar ideas have absolutely no business sense whatsoever, and they allow themselves to be raked over the coals by business savvy investors.

    I would appreciate more ideas if we could get some.
     
  7. Hello

    Hello

    Here is some more ideas, it is not always guys like the one above, i only used the previous guy as an example, there are plenty of failures along the way, and infact his one wheeled scooter was not even a good idea. I will try to find you a legitimate 1 million dollar a year idea.


    Wish i could find one of the million dollar a year products but they seem to be censoring the show on youtube.


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  8. Hello

    Hello

    Anyone who wants to take the 5% royalty on this deal?
     
  9. Just to reiterate, the title is "Extraordinary Measures," with Harrison Ford.
    http://www.amazon.com/Extraordinary...ef=sr_1_1?ie=UTF8&s=dvd&qid=1279173232&sr=8-1

    Having been through several startups, it brings back strong memories of the entire process; start to end.
     
  10. Hello

    Hello

    #10     Jul 15, 2010