Season 1 of Shark Tank came, went, was resurrected, and has gone again. Please head over to ABC and tell them to continue the show!
This week was actually fairly average as far as the dollars invested, but it felt like a train wreck for most of the show. Daymond was the only Shark really interested in any of the pitches and he convinced Kevin H to join him on one venture. Together, they invested $290,000 in two companies for an average stake of just over 50%.
The night looked like it was starting off strong with Send A Ball. These two ladies will ship an inflated ball with a message printed on it through the mail by slapping enough postage on the outside. Cool idea and it seems to be popular enough to make them a living. I do give them kudos for being among the few entrepreneurs pitching the Sharks who could actually explain why they needed $86,000.
Unfortunately, their killer phrase was: “We are slammed with orders!” Seriously?! Then why are you selling your equity? Didn’t your CPA tell you there are factoring companies who will gladly finance those orders for you at a fraction of the cost of equity? Heck, even a bank might do it! Barbara said it best that Send A Ball just didn’t need the Sharks and Kevin H pointed out that there really weren’t any barriers to competition so the risk was too high. Do they have a ball that reads “Research cheaper capital”?
Next up was Qubits who initially put the Sharks on their guard by voluntarily offering 51% of his company for $90,000. Mark is from my old stomping grounds in Bend, OR, so I won’t be too hard on him. Although he’s been marketing his construction toy product for over 2 years he’s only made $8,000 in sales, which in itself is a bad sign. Kevin O asks if he’s approached the four major toy companies for licensing. When the answer was no, the Sharks began dropping out one by one. When Daymond was the only one left, he offered Mark the deal he was asking for but contingent on striking a licensing agreement with one of the big four. Now why didn’t anyone else think of that?
Pillars of Slippers was dynamically presented by Nicole Jones with a pink Hummer and choreographed to hip hop music. Definitely one of the most confident entrepreneurs, Nicole is hoping to franchise her home shoe party business and asked $150,000 for 15% of her equity. That’s an initial valuation of $1,000,000. So is this the next Mary Kay or Tupperware? Unfortunately, while $64,000 in party-based shoe sales is nothing to laugh at, the $100,000 she was planning on charging her franchisees just doesn’t add up. Why would someone shell out that kind of money just for the chance to work more than 150 parties a year for a normal salary? And could a less outgoing person really expect to book almost half of every week with parties? What makes any of that worth a million dollars?
Last but not least, what stops someone from doing shoe parties on their own for much less start up cost? All Pillars of Slippers offered a potential franchisee was the car, the name, and their initial inventory. Unfortunately, none of that is proprietary and all of the Sharks dropped out.
The trend of high valuations continued with Llama Brew whose request for $125,000 for just 10% equity puts their company at $1.25 million. Seriously now, call a valuation expert or even your accountant and just ask for a simple estimate of your company’s worth before you make any kind of pitch to investors. This couple may have a potentially good idea, but $4,000 total sales is almost worthless no matter how you slice it. Needless to say, all Sharks were out.
At BiggsKofford we can do full business valuations but generally that’s more than our clients need. We often do simple income value calculations based on a multiple of weighted average historical net cash flow or EBITDA. Comparing that to net asset value is usually enough to give our clients an idea of what an investor might be willing to pay for their business.
The final presentation came from Alan Kaufman of Nubrella, whose completely redesigned umbrella allows for hands-free use in high winds, even when riding a bicycle. At first, the style looked awkward and I wasn’t optimistic but the design works, it’s patented, and hey, most new ideas look strange to someone entrenched in the old ideas. That doesn’t make them bad ideas. Alan started by asking for $200,000 for 25% of Nubrella and ultimately struck a deal with both Daymond & Kevin H for 51%.
One of the things that sent off the warning sirens in my head is that he has invested $900,000 in this company to date. What in the blazes have you spent that much money on?! And why do you only need $200,000 now? I would have been much more rigorous with my due diligence of his operations to date and would have required a clear schedule of how he expected just $200,000 to do what $900,000 could not. My guess is that he’s not good at managing his financials and will likely be a money sink for Daymond & Kevin. Experience tells me that design work and patents don’t cost that much and if his product makes a gross profit, manufacturing doesn’t lose him money. I’m glad the Sharks negotiated a controlling interest because they can replace him with a more competent manager. Of course, that’s all speculation and Alan did land the deal.
