Season 4 week 9 of Sharktank was another fun episode, showing the importance of failing fast, being prepared for your pitch and how selecting an investor is about more than just optimizing valuation.
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Drive Suits
The first company to pitch wasn’t really a company, but really a collection of prototypes for wearable Transformer-type costumes that let a person move like a car or bike. It’s hard to describe in words, so here is a short clip to give you an idea:
The founder, Drew Beaumier has been making these prototypes out of children’s toy parts for the last two years. He has mostly been using them to win costume contests and to get appearance fees at various parties, events and trade shows. Now he wants to raise $150,000 for a 20% stake in his company to start to manufacture and sell the costumes. He anticipates using the money to build autocad drawings, get a patent and start manufacturing.
Three of the sharks dropped out quickly. Robert thought that the idea was indefensible without proprietary technology or a patent. He thought that if the concept was successful, then a toy company with greater resources could quickly knock it off and make if for cheaper. Daymond just thought that the whole thing was too early. Barbara had concerns about safety and liability.
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Cuban offered to invest $150,000 for 40% of the company. He proposed funding the construction of 20 more prototypes in different models, hiring an engineer to think about manufacturing, putting the videos online to get it viral, and then seeing what happened.
Kevin offered to invest $150,000 for 30% of the company, contingent on taking Drive Suits to a toy company and getting a licensing deal done. He thought that a toy company would have the resources to bring something like this to market at scale and would pay a 7-10% royalty. He sold his own company (The Learning Company) to a toy company (Mattel) and said that he knew all the toy company CEOs.
Cuban noted that there was his investment was certain, and that all toy company CEOs would take his call because he is Mark Cuban. He advocated a more steady approach to building the company that may not ramp as quickly, but assured some level of progress.
Drew chose Kevin, saying, “I’m a gambler”.
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Kevin’s deal was a great one for him. He would only be investing if Drive Suits got a manufacturing deal, and if his estimate of a 7-10% royalty is correct, the he would recoup his investment if the product did more than $150,000/7% (royalty)/30%(his share of the company) or just over $7m in sales. If a major toy company like Mattel was willing to license and launch a new toy line, then it would likely be targeting much more than $7m in sales.
Drew was also right to work with Kevin. The only way that DriveSuits was going to get big was through a major manufacturing deal, and Kevin with his relationships is the best way for that to happen. Cuban was suggesting that Kevin do more of what he had been doing in the past, and it isn’t clear that an additional 20 prototypes would generate a breakthrough when the first 4 or 5 had not. Working with Kevin would help him either succeed, or fail fast. And if he failed, he would still own 100% of his company as Kevin would not invest, and he could continue on his current path of making money at events and costume competitions.
PC Classes online
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The next company runs basic computer classes online, targeting baby boomers. The founder, David Cox, used to give computer classes at a Mac store and noted that many of his customers were over 50 years old. He had been running the business for 6 months and had 115 members, paying $199/year. He sought $150,000 for a 15% stake in the business.
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David did a very poor job in his presentation. He came off as unprepared. He was unclear about his business strategy, whether he wanted to bundle his products with hardware sales or offer them as an upsell. He did not have a plan for scalability if he was in fact successful. He did not talk about any product features that actually focused on his baby boomer target market. And his business is taking on a very crowded market that has been around for a long time. When asked why the company is worth a $1M post money valuation, he said, “What it comes down to is passion.” The sharks actually laughed in his face when he said that. All entrepreneurs have passion. That is not enough.
All the sharks passed, some with very harsh words for the entrepreneur and the idea.
Revestor.com
The third company to pitch was another online company. This one aimed to be the “real estate search engine of the future, helping real estate buyers access info that only investors had in the past”. The founder, Bill Lyons, sought $250,000 for a 10% stake in the company.
Bill suggested that his “proprietary algorithms” based on “key indicators” could tell a buyer tell which properties would make money, which would break even, and which would lose money in the future. He was pretty evasive about how this all worked when the sharks questioned him, and eventually gave as examples of key indicators, basic concepts like cash flow, cap rate and return on investment. He struggled to explain who his target market was, talking about both home owners and real estate investors. He talked about charging $99/mth for the product but had not rolled this out yet, so had no evidence of if this model would work.
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Bill said that he had a history of success, having built up a mortgage, real estate and life insurance company to $20M in revenue. Under questioning it came out that the company had gone under in 2007 and he had lost over a million dollars in the company.
As with the last company, all the sharks passed. Again, some had some harsh words for the entrepreneur, with one saying that he looked like a con artist.
It’s great that both David and Bill spotted opportunities and had the passion to start companies to go after those opportunities. But it isn’t enough to just start a business and go for it. Doing some level of business planning is useful, not just to share with others, but to make sure that you have thought through all the aspects of the business. Neither Dave nor Bill had fully thought through their business plans, and this became readily apparent when they pitched the sharks. And no one wants to invest in a poorly thought out business.
Ice Chips
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The last pitch of the week was perhaps the most interesting, for Ice Chips Candy. It demonstrates how valuation is not the only dimension that an entrepreneur focuses on when deciding who to take an investment from. I cover it over at Entrepreneur.com
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