Reality Economics

I watched "The Best Bits of Dragon's Den" on the BBC last night -- as the title indicates, this was a "best of," little snippets of the television series. I'm sorry I missed the whole thing. This is one reality TV show I'd enjoy.

Basically, entrepreneurs made a pitch to five well-known investors for money. The "Dragon's Den" in the title refers to the room where the venture capitalists sit, with piles of cash in front of them, listening to presentations from the hopefuls. The deals, and the money, are real.

The rules are that the contestant must come away with all that they asked for, or none at all. For example, the first petitioner was asking for something like 150,000 pounds ($270,000) for an equity stake in a company to make a gadget for rocking a baby to sleep. If he got two bites, say for 50,000 pounds each, and not a third, he'd go away with nothing.

That system gave the investors a lot of leverage. First, the money-people are all in the same room, so they know who they are competing against, and for how much. Second, knowing that it's all or nothing, the bidders were able to play off each other for higher equity stakes.

One entrepreneur, who plans to set up vending machines at London Underground stations to sell umbrellas, was trying to sell 20 percent of his business for 150,000 pounds. One investor offered 75,000 for a 22 percent stake and another matched that. The businessman would get his money, but at the cost of giving up a lot of control. Negotiate? What for? The only other choice is to walk away.

The umbrella guy did manage to claw back 4 percent with the one weapon available to the entrepreneurs: peer pressure. Seeing that the petitioner was seriously considering just walking away, one of the bidders offered a token: He'll give him 75,000 pounds for 20 percent, instead of 22 percent. The other bidder -- I believe it was Duncan Bannatyne, a health club mogul, refused to budge, demanding 22 percent at the same price. Reluctantly, umbrella guy agreed to both and left the room.

The incident caused a rift in the investors. "I don't think I'll work with you ever again," says the first bidder, who (again, I wasn't taking notes) I believe was Peter Jones of Phones International. Mr. Bannatyne had just screwed both the entrepreneur and his fellow investor in the venture, Mr. Jones says. Not cool.

Faced with a loss of reputation on national television, Mr. Bannatyne caved quickly. He called the umbrella guy back in the room and gave up his extra 2 percent.

Trust and reputation, as the umbrella episode illustrated, was more important than the business plan in many deals. The successful petitioners won backing because they came across as someone the investors would feel comfortable working with, not because they gave the slickest presentation. One contestant lost because he cut off a questioner and tried to claim he had contracts with two well-known companies. A closer looked showed that the "contracts" were actually just quotations, promises to provide a service at a certain price. (This petitioner also spoke almost entirely in jargon, and I still don't know what he was trying to do.)

One final aspect that jumped out at me was the biases of the producers. The advertisements for the show portrayed the investors as monsters, making the hapless entrepreneurs squirm under withering personal attacks. But when all that squirming and criticism was put into context, the investors came across as savvy, intelligent people, and even sympathetic. One segment shown repeatedly in trailers was the guy trying to sell a gadget that rocks babies to sleep. He's shown sweating profusely and stammering. And he did, but all on his own, with the investors all the while trying to put him at ease -- offering to ask questions, instead of letting the poor guy suffer through a presentation that was failing.

Still, despite its biases and some questionable rules, the show worked as a microcosm of the business world. Business is built on trust and reputation, with a dash of peer pressure, at least when it's working the way it should.

[Updated to add link to the show and correct the number of investors.]

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