Saturday, March 2, 2013

Swimming with Sharks

Photo Courtesy: ABC Shark Tank

As an entrepreneur, I have a serious love and admiration for the TV Show Shark Tank on ABC. I respect the business panel AKA The Sharks and I admire the moxy of the people who enter the tank hoping to get a deal. If you watch the show, you know it's no easy task and it's easy to let the situation get out of control. True to the name, they are Sharks and once there is blood in the water, you're pretty much a goner.

Each week, I live-tweet the show and point out some of the tips that I find to be important. They're often underlying messages that any entrepreneur can benefit from. This week was no different:

First up: Nuts 'N More - a fortified nut spread company.
These guys were asking for $250,000 for 20% equity stake in their company. I'm far from a math genius, and I can tell you that the company valuation is pretty darn high. They've been open less than a year and they only started selling 5 months ago, but they're putting the value of the company at over a million dollars.

Lesson 1: If you're going to claim that kind of valuation on your company, you have to have the sales to back it up. Show the trajectory.
The guys backed this by saying they have a large company that is interested in buying product from them. The problem with that is the company hasn't actually ordered because Nuts 'N More isn't in the position to produce at the magnitude that will allow them to fulfill the order. 

Lesson 2: You can't value your company off "maybe" sales. Sure, they have an interested party, but they aren't currently in the position to actually put ink on the deal and by the time they are in that position, that particular deal may no longer be available. Which could cause a huge decline in what they say the value is.

Robert Harjavec pointed it out "You're valuing the company as if you've already made the money." 

Followed by Daymond John who said, "You're working on assumptions" and with that, he was out, followed by Barbara Corcoran who said that the $250,000 was only possible if she got 80% of the business and then she was out. 

Kevin is a true Shark, he's always out for blood and he was out. 

Mark Cuban tried to negotiate with them and even asked Robert to partner with him. Robert told them that they haven't proven a business, they've proven a concept. In the end, the deal was Mark & Robert providing $250K with 35% stake in the company on the contingency that they give them $75K up front and the other $175K as needed for future purchase orders.

Lesson 3: Comes directly from Daymond John, "Don't get caught up in the big numbers. Just want what you NEED."

EVERYTHING is negotiable. As long as you know what success looks like for you and your situation, you can negotiate on the details.

Next up: Romy Taormina, Founder of Psi Bands - an adjustable "stylish" band that is meant to help prevent motion sickness and nausea. She was seeking $250K for 10% equity in the company.

When Robert asked if there was any proof that this actually works, Romy's response was "It's an FDA-cleared medical device." HUGE MISTAKE.

Lesson 4: Answer the specific question that is asked of you, otherwise, you will seem evasive.

Romy said that in the last 12 months, she's sold almost $1MM in products, but she's only had 11% net-profit. That's pretty low, but she disagreed. Of the $1MM, she has a $600K gross margin, clearing $110 (net profit), $100K salary, leaving $400K unaccounted for. She has $600K of debt and she's including past deferred salaries in that number. That's virtually unheard of. Daymond John tweeted "Does the IRS allow you to carry fwd your time as debt?" Barbara Corcoran pointed out that no investor would want to give you money for your business and watch you write yourself a check for salary you earned before they got there. You could see Romy's attitude begin to change at this point. She was getting annoyed.

Lesson 5: Leave your emotions out of it. Everybody knows that as an entrepreneur, your business is your "baby" and nobody likes it when people talk about their baby. BUT, this is business and there are going to be questions, especially when you're asking for money.

Mark doesn't like "snake oil" type products. "There's a lot of things that sell, that don't work." Have R&D to backup what you're selling. Romy didn't have that. So, Mark was out.

Robert didn't like that she used "cancer" as a way to try to push buttons. (Be careful with those hot button topics, they can backfire.) He was out.

Daymond was leaning towards the company, but the numbers didn't make sense. "The company isn't profitable if it has debt and it's not paying down the debt." In the end it boiled down to trust.

Kevin offered her $250K for 40% of the company, but, at that point, Romy was too upset and emotional about the Shark attack and she preferred to walk away.

Third candidate: NEO Innovations and their Black Light Home Tattoo Removal Device seeking $80K for 20%

Hilarity ensued with their presentation.

"I'm black, will I explode if I put that on me," asked Daymond John after they used a black and a white balloon as a way of showing how the device works. It was all downhill from there. Questions about home use of this device, regulation by FDA, safety, and the complication level of the instructions all conspired to cause all of the Sharks to swim away from this product.

Lesson 6: Be mindful of the possible liability of what you are selling. We live in a very litigious society. It's important to protect yourself and your investors as much as possible.

The last candidate was my favorite of the night: Jessica Haynes, Creator of Jeska Shoe Company who asked for $70K in exchange for a 30% stake in her company.

Her product is an interchangeable shoe that allows you to go from a pump to a wedge in no time flat. It immediately reminded me of the Miche Bag, a company that makes interchangeable purses.

Let's be honest, her math didn't make a lot of sense. The manufacturing costs are clearly too high because the product (which hasn't been made yet) would retail for $200 and the heels would range from $20-$30 each. But she had heart. 

Barbara made an excellent point, the person who can pay $200 for a shoe, would just pay that to buy 2 pairs of shoes. 

The Miche bags range between $22-$45 each for the base bag and then interchangeable shells that go on the outside of the bag are between $15-$50 each. These are the kinds of prices that will work better for Jessica.

The problem is, she's out of money. She has invested everything she has in this company and she's just a few more steps away from bringing her product to the masses, so an investment from just one Shark will seal the deal. She doesn't have any sales for the product and she's still in the prototype phase.

Lesson 7: It NEVER hurts to ask for help.

"How will you stand out so that people can find you?" Mark Cuban asked this question and it's something I believe that every entrepreneur should ask themselves this question.

I think the fact that Jessica has $63,000 of her own money currently invested in her dream says a LOT about her as a business person.

Lesson 8: If you can't invest in yourself AND be passionate about it, don't expect someone else to invest in you.

Lesson 9: Jessica said "I don't have all the answers." Don't be afraid to say that. If you don't know, you don't know. If you're willing to learn and ask for help, that's what makes you endearing.

Everyone backed out, except one, Daymond John. Kevin and Barbara tried to convince her to give up on her dream, which made me sad to hear. But, I knew the whole time that he would be the perfect person to team up with her. 

Daymond offered her $70K for 70% of the company, but, he is going to do the work for her, which is what she needs. He has all the connections for distribution, shipping and financing and it's going to help her go far. He said if a billion dollar order came in, he would be able to help her process that order. I have no doubt that's true!

I would have liked to see her negotiate and not just take the deal, but she was so excited to get a "yes" when she's been hearing "no" for so long. I get it. It goes back to what I was saying about being emotional.

Lesson 10: Everyone has a story and an experience and you never know who can relate. Don't be afraid to share your story. Jessica's story is what helped seal the deal with Daymond.

If you are an entrepreneur and you aren't watching Shark Tank, you're doing yourself a disservice. It's like business school every Friday night.