The Times is reporting that Andrew Gordon who failed to get an investment in his business on Dragon’s Den has managed to sell £1 million worth of his product. As Rachel Elnaugh said that STABLEtable was the “most ridiculous idea” she had ever heard of on the show The Times naturally went to her or a quote and claims she says:

“I’m really glad Andrew’s done well, but if you’re investing, you want to be seeing a return in six months, not three years.”

Which makes a great story but I doubt she would expect to recieve a return in 6 months, this is what she claims she actually said:

“Re: Stable Table, from memory we recorded the piece back in September 2004 and Andrew was asking for something like a c£100k investment in return for a 25% stake in the business (which would have valued his business at that point at c£300k). While it is great that Andrew has persevered with his invention and just received a £1million order, in business terms over a three year period that is still not a huge amount of revenue for an angel investor to see materialising in return for £100k, especially as the figure represents turnover and not underlying profitability (after manufacturing costs and overheads).”

It’s hardly surprising that The Times is quick to ridicule Elnaugh as Gordon has had some great PR over the last six months. Unfortunately none of it seems to have actually considered the difference between turnover and profit. Although Elnaugh’s maths is a little out too!

Now while I wish Gordon all the best as a fellow entrepreneur I believe that this story is likely to encourage others to pursue business ideas even after they’ve been told by other experienced entrepreneurs that they are ridiculous and the reality is that most of them will end up out of pocket.

Doing my own digging earlier this year after the last article The Times published about STABLEtable on Google I found a job posting in freelancers.net from March 2007 which says:

I am the inventor of a new product called Stabletable. Its a unique product that stops household items from wobbling. I have been on Dragons Den’ and also sold 400,000 units over the past 3 years. As I work full-time, I’m looking for a sales agent who can approach large organisations such as retailers, marketing agents etc. to sell volume.

So it’s clear that up to March he had not had enough confidence in his business (or enough profit from it) to be able to give up his job to focus on the business fulltime. While there’s nothing wrong with that, any investor would have insisted that he focus fulltime on the business and would not have allowed their investment to be used to pay him a salary. As he’s not been able to do so it suggests to me that it was not an investable business.

Up to March he had also only sold 400,000 units which retailing at £1 was total sales of £400,000 (or if you take The Times figure a month later £500,000) leading The Times to claim:

A crumb of comfort to all budding inventors: the panel may be worth a combined total of more than £600 million, but none of them thought it was possible to make a wedge from Mr Gordon’s wedge.

Which is just wrong. Gordon asked for an investment of £100,000 and in return was offering 25% of the business (therefore valuing the business at £400,000) now assuming he’d made sales of £500,000 up to The Times’ article and at a generous 70% gross profit then after deducting VAT he would be making £0.595 per unit gross from this you would need to deduct a share of the overheads to determine profit on which you must then pay corporation tax. Therefore the net profit is likely to significantly less. For example if overheads account for 20% and we assume tax at the basic rate of 19% then the net profit per unit becomes £0.3856 and the profit on 500,000 units is £192,000 or an average of £64,260 per year. Which would give a 25% shareholder a maximum dividend of £16,065 per year roughly 16% Return On Investment. Not something to get excited about.

Business Angels don’t base their decision on the dividend return (often there won’t be any for a growing business as the profit is reinvested in growth) but instead on the likely value of their shares when the business is sold or taken to IPO. In which case based on the figures above the business could be valued at three times net annual profit. Assuming that the business is growing and 50% of the turnover was done in the last year then if the figures above where correct the profit for the year would be £96,390 and the business would be worth roughly £289,170 and the investors 25% would be worth £72,293 - which is less than their initial investment.

The profit per unit is likely to be even less for later orders as, if they are being sold through retailers then the retailer will need to see a profit too, so will want to be buying the the product at least 30 to 50% below retail price in order to cover it’s costs and make a profit. This could reduce the net profit per unit to around £0.19 per unit, which does not make for an exciting profit on one million units.

All based on assumptions of course, but I doubt my numbers are significantly out and had a journalist considered them for a moment they might not be so quick to denounce the wisdom of the Dragon’s. Instead it seems business journalists are no longer required to have even a basic comprehension of business.

Personally I was with the Dragon’s on this one, I would not have invested my money in the business and I doubted he would get this far, so my congratulations to Andrew Gordon and StableTable it’s a great success, it just doesn’t prove the Dragon’s wrong not to have invested.

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