Dragon's Den S14 E4

Dragon's Den S14 E4

More about the Dragons: Dragons: Jim Trelving, Arlene Dickinson, Manjit Minhas, Lane Merrifield, Vincenzo Guzzo, Michelle Romanow, Wes Hall.

Dragon's Den

Purpose: to learn about new products, new businesses, how entrepreneurship works, understanding the pitch and how to find investments for your business. What works, what doesn't work in business

Here’s a list of terms/definitions that are frequently used in “Shark Tank and Dragon's Den”:

Equity: when participants present their businesses to the sharks, they start by saying something like “I’m looking for $250,000 for a 25% stake in my business”. The 25% stake is the equity that the shark would get if they agreed to that deal. Equity represents ownership of the company. So in this example, 25% equity means that the shark would own 25% of the business.

• TARGET MARKET: THE GROUP OF PEOPLE THE COMPANY IS TRYING TO GET TO PURCHASE THEIR PRODUCT OR SERVICE.
• VALUATION: THE EQUITY STAKE HELPS TO FIND THE VALUATION OF THE COMPANY. THE VALUATION OF THE COMPANY TELLS YOU HOW MUCH THE COMPANY AS A WHOLE IS WORTH. YOU CAN FIND THIS VALUE BY DIVIDING THE INVESTMENT BY THE EQUITY STAKE. GOING ALONG WITH THE PREVIOUS EXAMPLE, DIVIDE $250,000 BY 25%. THIS WOULD GIVE THE COMPANY A $1 MILLION VALUATION (BECAUSE $250,000 DIVIDED BY 25% EQUALS $1 MILLION). IN OTHER WORDS, THIS MEANS THAT THE COMPANY IS WORTH $1 MILLION.
• GROSS SALES: THIS IS THE TOTAL AMOUNT OF MONEY EARNED FROM A COMPANY BY SELLING THEIR PRODUCT/SERVICE. FOR EXAMPLE, IF A COMPANY SELLS 1000 UNITS OF ITS PRODUCT AT $5 APIECE, THEIR GROSS SALES WOULD BE $5,000.
• NET SALES: THIS IS THE GROSS SALES MINUS RETURNS, ALLOWANCES, AND DISCOUNTS (SEE WHAT THESE DEDUCTIONS MEAN BELOW). NET SALES ARE USUALLY COMPARED TO GROSS SALES TO DETERMINE THE QUALITY OF THE PRODUCTS (I.E. A LARGE DIFFERENCE BETWEEN GROSS AND NET SALES COULD MEAN A QUALITY ISSUE SINCE MANY PEOPLE MAY BE RETURNING THE PRODUCT).
• ALLOWANCES: PRICE REDUCTIONS FOR DEFECTIVE/DAMAGED GOODS (PARTIAL REFUND)
• DISCOUNTS: A PRICE REDUCTION FOR CUSTOMERS IF PAYMENTS ARE MADE BY A SPECIFIC DATE
• REVENUE: ANY INCOME SOURCE FROM A COMPANY’S BUSINESS MODEL.
• PRE-REVENUE: THIS IS A FANCY TERM THAT MEANS THAT A BUSINESS HASN’T STARTED SELLING OR HASN’T MONETIZED THEIR BUSINESS YET. 
• MARGIN: THIS IS A MEASURE OF HOW PROFITABLE A PRODUCT IS (IT’S ALSO REFERRED TO AS “PROFIT MARGIN”). IN OTHER WORDS, IT SHOWS HOW MUCH MONEY FROM EVERY SALE OF A PRODUCT THAT THE BUSINESS KEEPS. THE MARGIN IS EXPRESSED AS A PERCENTAGE. FOR EXAMPLE, IF A PRODUCT SELLS FOR $5 AND COSTS $1 TO MAKE, THE PROFIT MARGIN WOULD BE 80%. THIS IS FOUND BY SUBTRACTING $1 FROM $5, THEN DIVIDING BY $5. THIS MEANS THAT THE BUSINESS MAKES $4 FROM EACH SALE (SO 80% OF THE SALE GOES BACK TO THE COMPANY).
• OVERHEAD: THESE ARE COSTS THAT AREN’T DIRECTLY RELATED TO THE PRODUCTION OF THE PRODUCT (I.E. OVERHEAD DOESN’T INCLUDE LABOR, MATERIALS, ETC. RELATED TO THE PRODUCT). I SPECIFICALLY USED THE WORD “DIRECTLY” BECAUSE SOME OVERHEAD COSTS ARE ALSO REFERRED TO AS INDIRECT COSTS. EXAMPLES OF OVERHEAD COSTS INCLUDE RENT, UTILITIES, INSURANCE, LEGAL FEES, ETC.
• ROYALTY: PAYMENTS MADE TO AN INVESTOR/OWNER OF A PRODUCT OR PROPERTY IN ORDER FOR ANOTHER PARTY TO USE/SELL IT. THE PROPERTY COULD BE IN THE FORM OF A PATENT, COPYRIGHT, OR TRADEMARK. FOR EXAMPLE, THE INVESTOR MAY BE PAID A ROYALTY OF $2 PER PRODUCT SOLD. IF THE PRODUCT SELLS FOR $10, THEN THE INVESTOR WOULD RECEIVE $2 EACH TIME SOMEONE BUYS IT.
• CONTINGENCY: AN AGREEMENT TO DO SOMETHING AS LONG AS ANOTHER THING HAPPENS. FOR EXAMPLE, IT’S COMMON TO HEAR THAT A “DEAL IS CONTINGENT ON ABC HAPPENING”. THIS MEANS THAT THE DEAL WILL NOT HAPPEN UNLESS ABC HAPPENS. IF ABC DOES NOT WORK OUT, THE DEAL WILL FALL THROUGH.
• SCALABILITY: THE ABILITY FOR A COMPANY TO GROW. REFERS TO A BUSINESS’S ABILITY TO HANDLE INCREASING SALES VOLUMES, MAINTAINING PROFITABILITY, MEETING MARKET DEMANDS, ETC.
• PURCHASE ORDER (PO): A DOCUMENT FROM A BUYER AGREEING TO PURCHASE X NUMBER OF PRODUCTS FROM A SUPPLIER.
• PATENT: A FORM OF INTELLECTUAL PROPERTY ON AN INVENTION. THIS MEANS THAT THE OWNER OF THE PATENT CAN EXCLUDE ANYONE ELSE FROM MAKING, USING, SELLING, AND IMPORTING THAT INVENTION. NO ONE CAN COPY THE PATENTED PRODUCT!
• TRADEMARK: ANOTHER FORM OF INTELLECTUAL PROPERTY BUT FOR A RECOGNIZABLE WORD, SYMBOL, SIGN, OR DESIGN THAT IDENTIFIES A PRODUCT OR SERVICE. THESE COULD BE A BRAND NAME LIKE APPLE OR MCDONALDS, A PRODUCT NAME LIKE IPOD OR BIG MAC, A COMPANY LOGO LIKE A BITTEN APPLE OR GOLDEN ARCHES, OR A SLOGAN LIKE “THINK DIFFERENT.” OR “I’M LOVIN’ IT”. WITH A TRADEMARK, NO OTHER COMPANY CAN USE YOUR BRAND NAME, LOGO, PRODUCT NAME, SLOGAN, ETC.
• COPYRIGHT: ANOTHER FORM OF INTELLECTUAL PROPERTY BUT FOR BOOKS, MOVIES, PICTURES, SONGS, WEBSITES, ETC.
• PROPRIETARY: A TERM REFERRING TO OWNERSHIP IN AN IDEA AND THE FACT THAT NO ONE ELSE CAN COPY YOU. IF YOU HAVE A PATENT, TRADEMARK, OR SOME OTHER INTELLECTUAL PROPERTY, YOUR IDEA IS PROPRIETARY BECAUSE NO ONE ELSE CAN COPY YOU.
• PERPETUITY: ANOTHER WORD FOR FOREVER. AN INVESTOR MAY SAY THAT THEY WANT “A $2 ROYALTY IN PERPETUITY”. THIS MEANS THEY’LL GET $2 FROM EACH PRODUCT SOLD FOR AS LONG AS THE PRODUCT IS BEING SOLD.
• WHOLESALE PRICE: THE PRICE CHARGED TO A DISTRIBUTOR (SUCH AS A STORE) FOR BUYING THE PRODUCT IN BULK. THE WHOLESALE PRICE IS EQUAL TO THE COST TO CREATE THE PRODUCT PLUS A PROFIT MARGIN SO THE MANUFACTURER OF THE PRODUCT CAN MAKE MONEY. FOR EXAMPLE, LET’S SAY THAT THE MANUFACTURER MAKES 1,000 UNITS OF PRODUCT FOR $2,000 AND WANTS TO MAKE $500 FOR EACH THOUSAND UNITS SOLD, THEN THEIR WHOLESALE PRICE TO THE DISTRIBUTOR WOULD BE $2,500 PER THOUSAND UNITS.
• RETAIL PRICE: THE PRICE THAT CUSTOMERS PAY AT A STORE. GOING ALONG WITH THE PREVIOUS EXAMPLE, THE DISTRIBUTOR BOUGHT 1,000 UNITS FOR $2,500. THIS MEANS THAT EACH UNIT COSTS $2.50. LET’S SAY THE DISTRIBUTOR WANTS TO PROFIT $1 FOR EACH UNIT SOLD. THIS MEANS THAT THEIR RETAIL PRICE WOULD BE $3.50 AND EACH PERSON THAT BUYS THE PRODUCT WOULD PAY $3.50 FOR EACH UNIT THEY BUY.
• MARKET VALUE: THE HIGHEST AMOUNT THAT SOMEONE IS WILLING TO PAY FOR A PRODUCT (AS WELL AS THE LOWEST AMOUNT THAT A SELLER IS WILLING TO SELL AT). 
• CUSTOMER ACQUISITION COST: THE AMOUNT OF MONEY REQUIRED TO GET SOMEONE TO BUY YOUR PRODUCT OR USE YOUR SERVICE. IN A VERY SIMPLE EXAMPLE, IF YOU RUN AN AD FOR $1,000 AND 100 PEOPLE BUY YOUR PRODUCT, YOUR CUSTOMER ACQUISITION COST WOULD BE $10 PER CUSTOMER.
• FRIENDS AND FAMILY ROUND: WHEN FRIENDS AND FAMILY GIVE MONEY TO THE FOUNDER(S) OF A BUSINESS TO FINANCE THEIR PROJECT. AS THE NAME SUGGESTS, THIS MONEY MAY COME FROM PARENTS, GRANDPARENTS, CLOSE FRIENDS, ETC.
• LINE OF CREDIT: THIS IS BASICALLY FINANCING THAT YOU NEED TO PAY BACK AT A CERTAIN INTEREST LEVEL. FOR EXAMPLE, IF YOU HAVE TO MANUFACTURE $100,000 WORTH OF PRODUCT, THE LINE OF CREDIT MAY BE $100,000 WITH 5% INTEREST. THIS MEANS THAT ONCE YOU CREATE AND SELL THE PRODUCT, YOU HAVE TO PAY THE ORIGINAL $100,000 BACK WITH $5,000 (TO COVER THE 5% INTEREST). A LINE OF CREDIT CAN BE REUSED AS LONG AS THE ORIGINAL SUM AND INTEREST ARE PAID BACK. THE INVESTOR/LENDER DOES NOT NECESSARILY GET EQUITY FOR LENDING THIS MONEY BUT IT MAY BE INCLUDED IN THEIR DEAL. A LINE OF CREDIT ALONE DOES NOT GIVE THEM EQUITY IN THE BUSINESS. AN INVESTOR MAKES MONEY FROM A LINE OF CREDIT THROUGH THE INTEREST ATTACHED TO THE LOAN.
• CONVERTIBLE LOAN: A LOAN THAT IS EXTENDED TO A BUSINESS THAT COULD BE CONVERTED INTO EQUITY. 
• ADVISORY SHARES: SIMILAR TO REGULAR SHARES (OWNERSHIP) OF A BUSINESS, BUT GIVEN TO ADVISORS OF COMPANIES RATHER THAN EMPLOYEES. IT’S EASIER TO GIVE ADVISORY SHARES TO INVESTORS BECAUSE THIS EQUITY CAN BE USED IN PLACE OF CASH AND HELPS MOTIVATE INVESTORS TO CONTRIBUTE.
• ACQUI-HIRE: BUYING A COMPANY IN ORDER TO RECRUIT THEIR EMPLOYEES TO WORK FOR YOU. THIS IS COMMON IN THE TECH INDUSTRY WHERE BIG COMPANIES WILL BUY TINY STARTUPS IN ORDER TO HIRE THEIR FOUNDERS/TEAM.