For the third year in a row my Facebook memories feed has absolutely blown up! November 19th, 2014 was by far the most active day in history on my social media. It was the day I was on national television closing the largest deal in reality television history.
Leading up to the date, my episode was the featured trailer - some kid from Nanaimo is asking for a $50,000,000 valuation for his company and $2,000,000 cash. I think most people thought that I was yet another one of those pie in the sky entrepreneurs who was going to get eaten alive by the dragons and laughed off the show.
"Morgan, this might not be a very long pitch!" ~Jim Treliving Everyone laughs.
If you watched the episode then you already know, we didn't get burned by the dragons that day. And at the end of the episode no one was laughing. We had just been awarded the largest deal in reality television history (on any show on any network including Shark Tank in the US).
The final deal? $2,000,000 for 5% of the company. Not the $50,000,000 valuation I was asking for (based on a 5x multiple and projected $10,000,000 sales) but still a $40,000,000.00 valuation as a respectable 4x multiple of forward revenues. It was a deal I was willing to take, because it came with not 1, but 2 dragons and finding "great partners" was far more important to me than the valuation when it came to our first financing deal for REW.
It was a very exciting time for me personally and such a great opportunity for my company Real Estate Webmasters Inc. Everyone was excited that this huge deal had gone down (except maybe Arlene Dickinson, she was pissed!)
"He makes websites" ~Arlene Dickinson
I guess I had failed to reach her, or maybe she just wasn't capable of grasping what we really do. Perhaps I should have said: we make our clients look great, provide tools that make their lives easier and more efficient and in the end the result is increased income. We are an ROi engine. That is the essence of a true real estate platform - and the essence of Real Estate Webmasters Inc.
Due Diligence: The Great Reality Check
After the show we entered into due diligence. This is where I learned so many valuable lessons as an entrepreneur and investor.
First let me say: Dragons Den and Shark Tank are the real deal! For anyone who thinks it's just for TV, or that there aren't real dollars on the line, you're wrong. These people are business hardened veterans looking for large profits and any other advantage they can possibly get.
Lesson #1 - Just because someone says they like you or your product and wants to invest doesn't mean they are on your side. In fact, until the deal is done, they are often not on your side, they are the opponent across the negotiating table. They are looking out for their interests and not yours. This was a realization I made early, and quite frankly it was quite disappointing for me, I'm not sure why I expected anything different, just naive I guess. It stuck with me. Clearly had I not been relatively savvy and had I not had great advisors on my end, I could have been taken advantage of.
As an investor and partner now myself this is one of the most important things I have brought with me to the table. I need to be a "partner" even before we do a deal because this is someone you are choosing to trust and are going to build something great with. Don't get me wrong - I still will negotiate for the best deal for my company (we're not a charity) - but being 100% fair, and transparent and clearly stating the what and why is really quite important. That way if you do a deal with someone, they should never feel taken advantage of. Be upfront!
Lesson #2 - We were COMPLETELY unprepared! There is a difference between "sort of knowing your business" and truly knowing your business. If you're going into a transaction like this, it is TRULY worth the time and effort to be tracking the important elements of your business well in advance and to have tools and processes in place that allow you to provide empirical data on demand and in ways you might not expect. We didn't even know what we didn't know! We certainly didn't know what was going to be important to potential investors. (Pro tip, you don't learn it from watching reality TV).
A take away from lesson 2 is to start asking early what kinds of things you will need to know and have ready for potential investors when the time comes. That is one of the purposes of my blog, I want to help future entrepreneurs learn from the trials of my own adventure and be more prepared when the time comes to be sitting across the table from a financial partner or investor. Get yourself a mentor and make sure you heed what they have to say. It will save you a LOT of time and energy, but it will also help you be more realistic in your expectations and your ask.
Lesson #3 - Your projections are likely wrong. Investors do not care about how enthusiastic you are about the next 3 years. Your story about how you're "finally at an inflection point and it's about to take off" does not hold any truth to them. And why would it? They are going to look at your "past performance" and they will want to not only reflect a conservative continuation of your past performance, they are going to build in some contingency (as they should) because as you get bigger, things get harder! They know this, they have been there before.
Lesson #4 - Your valuation is wrong! You are NOT worth what you think you are! Every business owner thinks their business is unique, and awesome. You think your business is special even if the numbers aren't quite there yet. Your idea is so amazing it's going to catch on like wild fire and you will be the unicorn! I went in looking for 5x forward facing revenue because I had heard "SAAS companies get huge multiples!" - heck I thought I was being conservative! (And it is true, they do get huge multiples WHEN at scale) - but not before. Small companies are unproven, and they carry far greater risk of failure. Small companies really are not worth much at all generally, and they do not command large multiples.
Growing much larger (especially with any sort of speed) is 10x harder than you have already worked. If you have not already done it, you should not expect anyone to believe you can - because millions have said this before you and failed. The percentages are so low, and these very smart people work on percentages. I get this now.
Lesson #5 - The partner matters more than the valuation. In hindsight, this one seems kind of obvious but it didn't back then. I was stuck on making sure I was acknowledged for what I had done. That meant I wanted someone to say my company was worth a huge number. But as I've gone through this and several other processes and studied a lot more on M & A I've become keenly aware: Your partner matters far more than your multiple!
For this one let's do some quick math:
Partner A: Willing to invest in your company at your $50M Valuation. They give you $2M for 4% of your company just like you asked. They aren't bad people, but are really just along for the ride. They know their $ will help you "a little" but they are satisfied with the projected returns based on existing models of your performance. If you're revenue is $10M when they invest and you are growing 20% per year then in 5 years your revenues are $25M and i you get the same 5x multiple your company is now worth $125M - Your 96% is worth $120M - Not too shabby!
Partner B: They will give you the same $2M but they want a much bigger % of your company (let's say double, they want 8%) but are going to bring a lot of resources: Assets, techniques, mentorship, access to customers, all kinds of good stuff. Imagine now that with their help instead of 20% per year growth, you are able to go to 50%. Your revenues over the same 5 year period are nearly $76M which at a 5x multiple (same as above) values your company at $380M. Now granted, you ONLY own 92% instead of 96% of this company because you had to give more for the right partner - but the point here is this: Your 92% is now worth $349 M - that is nearly TRIPLE the value of your result with partner A.
THE PARTNER MATTERS!
In our case (REW) - what you will read in the follow up articles is that we turned down our deal. You might be curious as to why?
The answer in some ways is: we had a partner A wanting to be valued like partner B. They could not demonstrate any value (other than cash) that they were bringing to the table but were wanting to be treated as a more valuable partner than they actually were.
Lesson #6 - Trust your gut! There was one other reason we turned down our deal. Throughout the process, we were not treated very well by our handlers. They were arrogant and often times showed up unprepared for meetings, or cancelled in person meetings at the last moment. My thinking was geez, if they are going to be this difficult to deal with before a deal, I can't imagine it will get any better after.
I made the the hardest decision of my career to that point and decided to author a letter to Michael Wekerly (his team had taken the lead on due diligence" and it read:
"Mr Wekerle, First of all I want to thank you for the offer during this most recent season of Dragons Den. Your kind words, clear mind for business numbers and professionalism were most refreshing and appreciated. In doing further research on yourself and Difference Capital it was clear that you were clearly someone we wanted in our corner with respect to your ability to advise in both future funding and exit strategies. You must know, we entered into this process with every intention of executing on the deal that we shook hands on in the Den.
Unfortunately I must report that the handler placed in charge of our accounts due diligence, mr (name removed) has caused us to reconsider. Since the beginning he has been extremely unprofessional and at times personally offensive and we feel that if this person is representative of your organization, we cannot in good conscience allow ourselves to be aligned with your firm. As valued partners we require respect and integrity, neither of which we were shown, truly unfortunate.
I am available for discussion should you be interested in any details, my cell is below.
Morgan Carey, CEO
Real Estate Webmasters Inc"
My gut told me this was going to be wrong: And so I turned down the deal.
This could have been one of the worst mistakes of my life. I might have just turned down an opportunity to add rocket fuel to my business. It would have been the first time I would have been able to take some serious chips off the table personally and set up my family. And on top of that - our show hadn't even aired yet! What if they pulled our show for this? All the publicity and PR value would have been wiped out in an instant!
But my gut told me to cancel the deal, and so I did.
And I can confidently say, I am glad I did. We weren't ready (I wasn't ready). There was so much more to learn before "I" could be a good partner. I needed much better systems, I needed to build a strong leadership bench. We needed tools, and tracking and knowledge. So that is what we did.
3 years later: Was Arlene right all along?
I'll never know what might have changed or how we might have done had we done the deal. There is no hindsight for a thing that didn't happen. You'll just never know! That being said - I can report on what did happen instead and I'm very happy to share that all that faith I have in my team and their extremely hard work was well placed.
At the time of the airing I reported the following:
- Approximately 30,000 Realtors on our platform.
- Targeting $10M Annual Revenue
- $30M in aggregate sales (lifetime)
Fast forward to today:
- REW now hosts over 60,000 Realtors on our platform
- Targetting $25M Annual Revenue for this year
- $100M in aggregate sales!
We have been one of the very fortunate companies to continue to grow and thrive at scale without the assistance of a financial partner. All credit goes to our amazing team, they are the ones that make this happen every day - and I am so very proud of what they have accomplished.
The final lesson I learned from the Dragons (as an investor):
How you treat your prospects can make or break a deal. If you're in due diligence (or any part of the process) - the last thing you want to do is lose an amazing opportunity to be a part of something because of your ego. Entrepreneurs are providing you an opportunity to be a part of probably the biggest labor of their lives. They need to feel valued and respected. It's about far more than just the money for them - it's about their legacy and about acknowledgement. Put yourself in their shoes and try to remember what it was like when you truly had passion for a product and believed (even sometimes unreasonably so) that this really is the next big thing!
I am grateful for my time on Dragons Den, and the lessons that I learned through the process. I feel that it has helped me in my own career as both a business owner and an investor and has taught me a great many lessons about empathy, compassion and what it's like to be on the other side of the table.
For those considering Dragons Den or Shark Tank, I say DO IT! But if you do - try to go in with an open mind, reasonable expectations of the outcome, know your numbers and most of all - don't look at the dollar signs, look for the signs of a great partner!