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Canwest News Service
Each week, the Financial Post revisits CBC's previous week's episode of Dragons' Den. We capture what the cameras didn't and in the process provide a case study for readers, zeroing in on what pitchers and dragons were thinking and what the challenges for the deal are going forward.
BY MARY TERESA BITTI
The pitch: "It all started about four years ago," says Ross Lipson, who with Howard Migdal co-founded Grub Canada Inc., a one-stop online food court where visitors can find and place orders with local restaurants for takeout. "We both attended Michigan State University and like most students loved ordering food for delivery. I personally ordered every night. We had a stack of menus and the whole process was a hassle. One night I spilled two litres of Coca-Cola on the menus and decided there had to be a better way. So we put together a website, an online menu guide for Michigan State University."
After two years, they sold the company and decided to take the concept to Canada. They took on partners and launched Grub Canada in 2008, starting with university towns in Ontario. Grub Canada is in eight cities –Toronto, London, Guelph, Kingston, Waterloo, Hamilton, St. Catharines and Ottawa– which between them have 14 universities, and 250 restaurants are on board. Grub Canada has already facilitated $1-million in online ordering.
"We saw Canada as an untapped market," Mr. Lipson says. "The website is a way to make sure the day-to-day experience of ordering food is easy, fun and interesting." To make it fun, they run Eat Cheap Weeks, a promotion where restaurants discount a particular menu item. "We are putting a little twist on the food-ordering process; and we are getting great feedback."
The process is simple. Go to grubcanada.com,enter your address and up comes a list of restaurants that serve your area. There is no fee to the end user. Instead, restaurants that participate are charged up to 9% commission for each order placed through Grub Canada. "We are one of the only advertising mediums for restaurants where you only pay for the results," Mr. Lipson says. "You only pay us if we send you orders. It's a guaranteed return for the restaurant. At all times they know how well they are doing with us." The company was already up and running when they appeared on the Den, but the founders were keen to have an audience with the Dragons. "We are 22-year-olds and we know knowledge comes with experience. We wanted to tap their experience in business and we wanted their guidance," Mr. Lipson says.
They also wanted financing to help them market their services. "I've always heard there is no such thing as a free lunch. I'd like to think we can change that," he says. "In the past two months, we have given out over 1,000 free lunches. It's one of the ways we entice people to check out the website. We know when people use it, they enjoy it. It's extremely convenient and they can save money. We want to be the way to order food in Canada."
The deal: Mr. Lipson and Mr. Migdal asked for $200,000 for a 20% stake. Brett Wilson offered $200,000 for a 50% equity stake plus 1% off the commission. The deal did not survive due diligence.
What the dragon has to say:
"I thought they were building their business in the right cities; the demographics were ideal," Mr. Wilson says. "I also thought the model was scalable and could work across the country. But I stepped up because I liked the guys. They were full of chutzpah, creative, imaginative and I thought they were on to something as a business. Two weeks into due diligence, they stated their advisors decided they weren't happy with the structure of the deal. It was too aggressive. I politely declined to renegotiate because I wasn't sure they were serious about going forward. It made me wonder if they had just come on the show to build brand and get their 15 minutes of national exposure. It's half a million dollars of free advertising for them from a national show that has great ratings."
What the expert thinks:
Chris Van Staveren, partner, transaction service, KPMG Enterprise Services, is concerned the steep commission will put some restaurants off, particularly those groups that already have an online ordering interface. "That said they are showing signs their model is working," he says.
"In order for it to be successful, enough people need to know about the site to go there. And you have to have a majority of restaurants willing to agree to your terms. Think of all the independent, small restaurants in every community. You need manpower to get those guys on board. Are you going to convince them for that commission?"
smallbusiness@nationalpost.com
