I'll be honest. Much as I like the intertwining of inspiring stories, witty repartee, and gong show ideas -- I don't watch "Dragons' Den" or its American equivalent "Shark Tank." These shows, in my opinion, are misleading a generation of entrepreneurs into believing that the end game is a financing, not a business.
There is a glorification of the pitch in business today. There are numerous startup events popping up around North America. "Startup Weekends" are 72-hour, business creation marathons where strangers connect and form businesses together. "Startup Days" and "Pitch Days" are investor development initiatives where entrepreneurs present their plans. Every such event revolves around the pitch. Government and entrepreneur associations' websites actively educate entrepreneurs on the skills and strategies required for an effective pitch. Yes, there is a recurring theme here. Pitch, pitch, pitch.
Incubators exasperate this. Many run Demo Days: opportunities for developers to pitch their ideas to investors. Venture capitalists, of course, are the main funders of incubators and make money only if they make investments in incubated companies. Stories like Snapchat, a company with no revenue model, spurning a $3 billion offer, are incredibly rare but glorified by those whose best interests lie in the acquisition of equity in startups. VCs and incubators have bred impatient, short-term focused founders.
The problem, of course, is that fundraising is not a revenue model.
My consulting practice often has my team and me facing situations where entrepreneurs are living with regrets about their impatience. These founders are working 70-80 hours per week, exhausted and unappreciated by their increasingly impatient early investors. Despite being the core drivers of their businesses, they are left with a small percentage of their companies due to multiple financings at low, early stage valuations. Many own less than 10 per cent of their own companies. We come in and realign all stakeholders, while often recapitalizing to take out frustrated shareholders.
If startups focused more on customer acquisition and revenue generation, entrepreneurs would be able to boot strap themselves to success. By prioritizing sales, not only can you create cash flow, you actually increase your chances for non-dilutive financing. Tempting as it may sound to bring in "smart capital," a focus on sales should be your top priority instead. Patience is a virtue. Think five to 10 years into the future, not one to two years.
The equity in your company is like toothpaste in a toothpaste tube. Once you squeeze it out, it's hard to get it back in.
Valarie Fox, executive director of Digital Media Zone (DMZ), an incubator based in Toronto's Ryerson University, has a refreshing perspective: "For the DMZ, the focus is not on the pitch. The focus is on generating customers for our incubated companies." Fox says that their success rate is 65 per cent in their companies becoming going concerns or getting acquired. Leaders like Fox are few and far between.
"Dragon's Den" may be a fun TV show, but it does a disservice to inexperienced entrepreneurs who prioritize pitches to investors rather than to prospective customers. The end game for all of us is a sustainable company. In business, revenue is your friend.
An earlier version of this article appeared in Pivot Magazine
Follow Darrell Kopke on Twitter: www.twitter.com/darrellkopke