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.
The pitch: Patricia and Allan Kotack were looking for a solution to a very specific problem. They were not looking to start a business. But that is what they have been doing quietly, almost half-heartedly, with the help of their three children from their home in Milton, Ont. Mrs. Kotack has a neuromuscular disease that causes muscle wasting and weakness.
"My feet were freezing and they were painful," she says. "I couldn't sleep at night. Allan had tried buying me all kinds of thermal socks, battery-operated slippers we ordered from a company in the U.S. and nothing worked. I used to use heating packs filled with grain that you put in the microwave, but it didn't do the job because you couldn't get it around your foot."
Most times, she ended up sitting with her feet on a heating pad or in a bowl of hot water, until she suggested to her husband and daughter Melissa, who was in her last year of high school at the time, that what she needed was a slipper that incorporated a heating pack. After learning that the packs were filled with a natural grain, father and daughter pulled out an old sewing machine and after a few attempts had a pair of slippers that worked.
"I could go to sleep at night. It was a blessing," Mrs. Kotack says. It wasn't long before they realized the need went well beyond their family and that they were uniquely able to fill that need. They hired sewers, and Melissa, who by this time was attending the University of Guelph, submitted CosySoles to the university's juried craft show. She and her sister Amanda worked the booth at the show. "They couldn't believe how much the students loved them," Mr. Kotack says. "We realized we had a good product with mass appeal."
Their polar fleece, bootie style slipper, with a Velcro strap around the ankle to hold it in place, is designed so the Canadian sterilized oat sewn into pockets around the whole upper surface of the foot stays put. Ninety seconds in the microwave and the slippers are ready to go.
In 2001, the Kotacks built a website ( www.cosysoles.com) and started identifying wholesale distributors in North America and the United Kingdom. "Since then we have generated $700,000 in revenues with zero advertising," Mr. Kotack says. This past spring, Mr. Kotack left his IT career to devote himself full time to building CosySoles into a family business where his children, Jordan, Amanda and Melissa all are involved. Jordan already helps with marketing, introducing his parents to social media networking opportunities. "We are ready to take CosySoles to the next level," Mr. Kotack says. "We had the revenue but the profits were not great because the product was made in Canada and our margins were low. Now, we have a means of making the slipper overseas so we can pursue wholesalers. We have the patent, which gives us full protection in the U.K., U.S. and Canada. Nobody else is doing this."
Mr. Kotack has an order from a medical distributor in the United States for 8,000 pairs and a Canadian company that deals with casinos and hotels has placed an initial order for 2,500 pairs. "We know CosySoles has wide appeal," he says. "Hotels, casinos, ski resorts --it's huge."
And there's the medical market. "There are more than 20 million people in the U.S. alone who have some form of peripheral neuropathy and diabetes is rampant and growing," Mrs. Kotack says. "We know the markets are out there. We just have to let people know we exist."
The deal: The Kotacks asked the dragons for $150,000 for a 35% stake in the company, largely to develop a marketing campaign. Perhaps it was the season, but all the dragons encouraged the family to go it alone, unwilling to eat into their equity. The family, however, was keen for a partner.
Brett Wilson stepped up with $30,000 in cash and a $120,000 operating line for a 10% stake. At the time of writing, the deal was close to being finalized. "Once we get Brett's money we are going to build inventory, get the word out, and go after sales," Mr. Kotack says. "We have a pipeline of wholesale customers we are waiting to go after and we are going to hit them in January." What the experts think: "This deal shows the dragons can be angels when they want to be," says David Simpson, teacher in the entrepreneurship program at the Richard Ivey School of Business.
"What Brett is telegraphing with his offer is that sharks offering money is not what this family needs, because the best proof of concept is sales and they have that. Now, they have to make the transition from solving a problem to loving the business of execution. What they need to do at this point is put together an advisory board of people who understand retail mechanics, shelf space allocation, return policies ... two or three entrepreneurs with grey hair and battle scars that can help them grow."
Chris Van Staveren, partner, transaction service at KPMG Enterprise Services, sees this deal as a lesson to entrepreneurs on when to go for it. "If you look at other pitches we've seen on the show, the dragons are mostly saying 'Don't spend another dime.' In this case, the tables have turned. They unanimously said, 'Make this happen.' The deal from Brett demonstrates his confidence that they can do just that."
The challenge, Mr. Van Staveren says, will be in how to best market CosySoles. "If they are targeting a therapeutic market, I don't see spending a lot of money on a traditional advertising campaign as being effective.
"As well, they should be directing their efforts on getting shelf space in places like Shoppers Drug Mart Home Health Care. They have to establish a strategic focus on distribution and get the product into the right stores."