Thursday, November 15, 2012
Business Owner, Know Thy Business Before Going on Shark Tank
By Donna Robb
It never ceases to amaze me that Business owners and Inventors who appear on Shark Tank, never seem to have watched and learned anything from previous shows. Shark Tank is currently in its fourth season and is a reality show on the ABC network that introduces entrepreneurs and inventors, hereafter referred to as Bait, to Angel Investors, or what is known in this case as Sharks. Week after week as I watch this guilty pleasure, I see folks who have a great idea, product, or business crash and burn because they didn’t take the time to prepare and do a little research. Honestly, would you apply for a show such as Jeopardy without having watched it enough to at least know that you have to phrase your response as a question to the clues provided? Most intelligent people would answer no. As with anything you hope to succeed at, DO YOUR RESEARCH!
Many of those that crash and burn, I would like to see succeed, and they probably could have had they watched the show a time or two, took some notes, and thought out a few things so they were ready to answer the Sharks questions any regular viewer knows are coming.
Most important thing – Have a realistic value of your company. When the new Bait comes in, they introduces themselves, their company, product and/or idea and tells the Sharks what they are looking for to make a deal. Most appear to have no understanding that by using simple math, (Yes, Virginia, there is a use for math and algebra when you grow up), they can see what they are valuing their company at. Most of the value they come up with is so astounding, you would think they were valuing Apple, instead of their small start up.
One man recently asked the Sharks for $90,000 for a 5% of equity in his invention. To be fair it was a great invention and could easily be the Next Big Thing. To calculate value simply divide 1.00 by the percent of the stake, multiply that result by the amount requested and you can quickly see that this fellow valued his invention at $1,800,000. 1.00/0.05 = 20 X $90,000 = $1,800,000.
Did the young man have any idea of how much he had personally invested in the invention to date? No. He did have purchase orders to show that there were potential sales of $1 Million to QVC. But was it high enough to validate such a high valuation? No again. This man also offended all of the Sharks by virtually ignoring Lori’s offer of $900,000 for a 30% stake plus future funding if needed, bringing his value to $3 million!
During the negotiations at one point he had an offer from Daymond for $1 million for a 25% stake. Kevin had offered $90,000 for a 5% royalty on sales and the Bait could keep his much valued equity. They keep after him to tell them what he wants, he finally spits it out and asks for $750,000 for a 5% stake. What? He started wanting $90,000 for the same 5% stake. This guy obviously doesn’t know the value of his business as now he thinks it’s worth $15 million. He then asks if he could contact his brother to get some help with the valuation of the company. He gets back from his phone call and counters with an offer of $1.5 million for only 10% equity, still valuing the company at $15 million but asking for way more money than anyone has offered.
At this point all the Sharks, except Lori, were already sick of this pretentious and rude fellow, all bailed out. The Bait continues to try to get Mark on board after he dropped out. Lori, who is a QVC mogul, after being ignored by the Bait, even when she is the only Shark still in, decides to drop her offer back to $90,000 for a 10% stake. He offers her 8% for the $90,000 and finally condescends to doing business with Lori after having made all the other Sharks decide they didn’t want to work with someone like him. He left with his company valued at $1,125,000.
Don’t ignore or insult people you are trying to get support from. This fellow wasn’t the only one who opened his mouth and inserted his foot on this show. Many times people get so heated in the negotiations they become snappy, bitter, rude or just plain odious. This is a negotiation; there is no reason to take it personally. Go in there knowing you will have to do a dance of give and take. Some have their hearts set on working with one particular Shark so much that they ignore other offers from others. You want to entertain all offers and be rude to none. Weigh if the benefits will outweigh your personal preference of Shark. Sometime your Shark just isn’t interested, or they can be turned off by the way you treat their colleagues. Don’t let that lose your deal that will help grow your business. Most of the people with bad manners and poor social skills, unless like the guy above they have such a tremendous product or idea, walk out with nothing. No deal whatsoever. If you are going to be a jerk, just don’t go on there. Let someone else who wants to make an effort have their chance instead, because you will have wasted yours.
Realize this is a negotiation with yourself and five very savvy investors at once, be willing to negotiate on equity, royalties, and company valuation or just don’t go. The person who does the worst on the show are kind of like the guy above. He wants everything, but doesn’t want to give up any equity to get it. While I know equity is important and potentially valuable, if you can’t fund your business to grow and get some business help from experts, it could very well flop. It’s just like a sales manager who won’t give a discount to a customer to make a sale because that would cut into his margin too much. So on a $100,000 deal, he makes 24% of nothing instead of 17% of $83,000. I know which I would rather have.
Have a strategy, know it backwards and forwards. Know what each Shark brings to the table as far as expertise and who can take you the farthest. I recently saw a couple ladies give up more equity to do a deal with Barbara and Mark instead of Kevin. Barbara and Mark were the Sharks with the network they needed and the personalities they wanted to work with. Granted Kevin probably has contacts pretty much everywhere. But as to who I would rather work with, sorry Mr. Wonderful, Barbara and Mark would win in that show down every time. I thought they made an excellent deal.
Know your sales and make sure you have purchase orders. If you went to a convention / trade show and people loved your product or idea, ask for purchase orders, close the deal. If you’re not a salesperson, take one with you. But close those deals. Prospective sales based on interest at trade shows don’t hold a lot of weight with the Sharks, purchase orders do. Also know how much you have sold since the start of your company, the start of the year, and what your reasonable projections are. Trust me, they will ask!
Be personable, passionate, courteous and friendly – but don’t be an oddball. If you want to be taken seriously, present yourself as a serious business person who is passionate about what you are doing. Humor is good, being right out crazy isn’t. One guy came on, did a somersault, made strange beeps and other strange noises at the Sharks and appeared to me to be possibly under the influence of some drug. Needless to say, they were briefly amused, but it ended quickly and he left without a deal.
Know the market and how your company or product fits in. If they ask you about the market, you’d better know it. Have information ready to show how your latest and greatest thing fills that need and know who your competition is. One lady whose idea had been stolen and was in litigation with two companies for infringement, lost the deal because she hadn’t enforced her proprietary rights soon enough to prevent her competition from making a lot of money with her idea. Make sure your offering isn’t too much of a niche item. They want as wide a customer base as possible. Big niche is fine, little (or perceived little) niche is death in the Shark Tank. Let someone else fill the smaller niche markets who doesn’t need the Sharks.
Know your margins before and after their investment. Know how much it costs to produce now, how much is wholesale, and how much is retail. Also know how much it will be after you implement the automation or expansion you are using their investment for. Is your pricing in line with the market for similar items, could it be higher or lower? Are you giving too much of the margin to the retailers of your product? Pricing is a crucial part of marketing your product or service. Again do your homework.
Show them how invested you are, how passionate, how much you’ve done on your own. If you are not going to work hard to see your offering succeed, they’re not going to take a chance on you. They want to know how much money, time and effort you have personally invested in it. Have you quit your day job and are working full time at this? Are you making a living at it? Why or why not? How many places have you found on your own to sell your product or service? How many units have you sold on your own? They don’t like to hear you have no or only a miniscule amount of sales. They want to know you have a business plan and you have come to them at the logical step to grow your already established business. Most successful people come on there having invested a hundred thousand to a million or more of their own money. They have taken the business as far as they can themselves. They need the Sharks to help with capital to fund production facilities to keep up with purchase orders in hand. Or they have production in place but need the Sharks contacts to get into more retail locations. They may need both, or help with advertising, web creation, or just business know how. Also if you are the brand, such as the sole designer, you’d better know how you can replicate what you can do to meet demand.
Be honest, if you aren't they will bite you, but not in the way you want. If you have another investor, be honest and upfront about it. If you started the same type or similar business before but had to restart, explain why. Don't try to hide it if they ask about it. They are human too and know folks have pasts and issues. But if you try to hide it, it won't be pretty.
Know what you need their money and time for and what you are going to do with it. If you need money know how much you need to take the next step. If you need more, explain that ‘I need X amount right now to open a production facility, but in 9 months I will probably need X amount more to hire more employees when this goes international to keep up with projected demand. I also need your contacts in the fashion/retailing/sports world to grow this company, so I need some of your time in that area.’ So ask for all that you need with an appropriate amount of equity or royalties to fund it. Be sure you know what amount of royalties will work for you so Kevin doesn’t throw you for a loop you’re not ready for.
Know the Sharks. Know their background. Research them online. Know them from watching the show. You will see that they have particular areas of interest. This is what I have gathered just by being a fan of the series.
Robert Herjavec – Probably the nicest Shark of all. He rarely invests and knows precisely what he is looking for. If it’s not in his bailiwick, he quickly withdraws. He is a son of an immigrant and is the Shark who you want to go to if your company makes jobs and keeps them in the United States. Other than that, he loves animals, and is a gadget freak. But still, if he can’t be passionate about it, he’ll go out. He’s probably the hardest to win, if you ignore him when he makes an offer, he will quickly withdraw. If he makes an offer, talk to him. Consider it. Ask him if he might make this or that change, but don’t ask others for their offers or he will pull his. Get him to invest time in the discussion and treat him as a valuable person in his own right and I think you’d have a chance at working with someone of high integrity who will really help your business. Warning once he is out, he usually stays out.
Lori Greiner – The QVC queen and prolific inventor. She likes ideas she knows that will sell. She seems to invest more in products and inventions that can be carried on QVC, infomercials and chains of retailers that she has connections with. If it’s a good idea, she’ll stick with it. She is probably the least easily offended Shark, but I think she would be a great motivator for the right Bait. After all Sharks were out on a recent episode, the lady who was the Bait started to cry. Even though her business plan and acumen were awful, Lori came back in and invested in her because she could see her passion. So she has heart.
Barbara Corcoran – She’s a no-nonsense real estate mogul. She only invests in things she can be passionate about. Barbara generally likes to invest in restaurants, real estate items, food specialties, and things she can see that can use her help to grow. If it’s a food product and not-tasty, she will not invest in it! That’s pretty much true across the board with the Sharks, if it’s a drink or food item and it doesn’t taste good, good luck getting a sponsor. If it tastes good for say an energy drink, but doesn’t taste good to someone who is not used to energy drinks, only those who know what regular ones taste like will stay in. Barbara is very much a lady, treat her as one. She tends to like things she can see using in her family. She’s not into trendy, but more homey type businesses. Also sometimes she will offer advice, whether in or out of the bidding, listen to her. She knows her fellow Sharks way better than you do. I don't think I've ever seen her steer someone wrong. She will wrangle a bit for a good deal, but I still don't remember ever thinking badly about what she said to the Bait. Very intelligent, caring and sharp, but don't take her for granted.
Kevin O’Leary a.k.a. Mr. Wonderful – The Sharkiest Shark of all! He is very good at making money. He will help you make a lot of money. He invests all over the board. If he goes out, and there is a good opening to have a bigger bite, he will come back in. You will probably have to have products produced off shore somewhere, rather than in the U.S. Be sure you have the patents to your ideas. If you want him to bite don’t be too married to the idea of your product as many times he is more interested in licensing the unique and proprietary process or intellectual property to many different manufactures rather than tie himself to one product. Many times he is happy to take a royalty instead of a stake. If you are shy of sharing equity, this is your guy. While I don’t wish to cast aspersions on his character, he is the one I would be “leery of” (pun intended) , as his main thing is making money for himself. That comes first. While I think he could be a very good partner, he would be one I would choose to go into business with last out of all the Sharks.
Daymond John – Started the clothing line FUBU. Definitely the one you want if it’s clothing or fashion related. He also invests in club scene and trendy things. He’s also big on getting celebrity endorsements for your product. He is not the nicest of Sharks, I’d probably put him just above Kevin O’Leary in the warm fuzziness category. But he knows his stuff. If he partners with you, I think he will put much effort into helping you succeed. With him, you’d better be working hard or the romance will be quickly over. So slackers, stay away. I probably wouldn’t hesitate too much going into business with him if it was his type of business. Somewhat easily offended and has no patience for folks that are just plain out there. If you are not serious about your business, he won’t be interested. If he can’t put up with you, likewise.
Mark Cuban – Owner of the Dallas Mavericks. He is easily offended but pretty reasonable overall and quite a charismatic person. He likes things he can sell in stadiums. He likes things that are club scene, trendy, or cool ideas. I would rate him pretty high on the personal integrity spectrum. If he makes you an offer, like Robert, you’d best focus just on him or he will pull it and go out quickly at that. Occasionally he will go back in, but it has to be a killer idea. Like Daymond, if you are hard to work with or not serious, forget about it.
I hope if you are inspiring entrepreneur or inventor with dreams of appearing on Shark Tank, this will help you. Remember this information is good to know for any type of business who are looking for investors.
Best wishes to you,