How To Deal With Business Sharks – A Review of ABC’s Shark Tank

Posted by Kim Luu in Financing | 8 comments

I happened to catch an episode of Shark Tank for the first time this weekend.   This reality television show has some great lessons for entrepreneurs.

If you haven’t seen  this show before, it’s basically American Idol for the small business owner.  Entrepreneurs get to pitch their funding proposal to successful investors (the “sharks”), and then answer questions from the panel.  If they are interested, these sharks will structure an investment offer there on the spot.

Shark Tank is full of juicy bits of “chum” for a budding entrepreneur.   Advice that ranges from tips given by the sharks to the anecdotal stories of the applicants.  The “sharks” were well chosen.  They actually give great pointers to the contestants.

You just need to listen carefully to the questions asked by the sharks as well as the critiques given. The questions offer clues about what ‘real-life’ investors and lenders look for. I particularly like Kevin O’Leary; he tells it straight with no sugar coating.

This one episode alone had enough material to cover a year’s worth of business school.

Let’s talk about how one shark ‘stole’ a great deal from one contestant, Dominique McClain Barteet, owner of One Sole.

Dominique is a sharp, savvy, hard-working business owner.   She was the best applicant on the episode yet she got offered the worst deal of the night.

I understand why Dominique chose to go on Shark Tank.  She’s a good strategist.  If she didn’t have the reasoning down consciously, she worked them out unconsciously already.  Sarah Blakely of Spanx chose a similar method to promote her business and she built an empire from the one opportunity.

The applicant: Dominique McClain Barteet – owner of One Sole, manufacturer of women’s shoes.

The trade: $500,000 for 20% of her company

The Stats: Business valued at $2.5 Million

$20,000,000 gross sales in 4 years
sold in 2,000 stores in 30 countries
2009 sales = $6,000,000
2010 sales = $3,500,000 – Profits of $1,000,000 (not clear whether gross or net)
April 2011 Sales YTD = $4,000,000

The bare stats alone tell quite a story about how smart Dominique is as a business owner.

Here is what the Sharks had to offer:

Shark #1:   Robert Herjavec opened the negotiation with $100,000 for 10% of the company.   He required that she gets the buy-in from the other four sharks for $100,000 each at the same percentage.   This was a feint to test Dominique’s reactions so all the sharks can evaluate her breaking point.

Shark #2:   Kevin Harrington popped in with a counter offer at $250,000 each in partnership with Robert Herjavec.   This would come out to $500,000 for 50% of the company and shared equity with Robert and Kevin.

Shark #3:   Daymond John offered $500,000 for 35% of the company.

Shark #4:   Barbara Corcoran declined due to concern about the time commitment required to partner with Dominique.

Shark #5:   Kevin O’Leary offered $500,000 for 51% of the company with the proviso that he hires an investment bank to sell the company.

The result: Dominique accepted Daymond John’s offer.   At the closing, she shared that she was grateful for the offer and would have given away up to 50% of her company.

ANALYSIS:

These investors truly are sharks:  shrewd, ruthless business people.   They wouldn’t have achieved what they did without those traits.

Daymond was quite kind to Dominique.   I didn’t expect that.  He could have gotten a lot more than 35% and he knew it.   With the proper positioning of the company, Daymond will make a huge profit from his investment.   His expertise in retail seemed to be the best match for Dominique’s business.

Keep in mind that prior to filming; the Sharks had access to all the financial and business information about an applicant.  This means that they have the upper hand in negotiation more than if you negotiate a deal somewhere else.   The trade-off is the national exposure on television for the business.

The kicker is this:   Dominique probably could have done much better.   In fact, she could have obtained the $500,000 needed without giving away any portion of her business just from using basic business funding resources.   When she recited the stats, I immediately thought of 4 standard options that does not involve equity sales.

If you think out of the box or add equity as an option, there are several other choices that Dominique could have used in exchange for 5% of the company or less.

If Dominique had obtained the money from outside the Shark Tank, she could have negotiated with the sharks from a stronger position and give away less of her company to Daymond.  I’ll discuss how Dominique could have improved her presentation at another time.

What bothered me is that there were so many ways that Dominique’s financial advisor could have prevented her equity loss.  The options ranged from educating her about cash flow, doing business projection, planning ahead, providing financial advice to hooking her up with business mentors to guide her through minefields.

With good advice and strong support, Dominique could have gotten the funding she needed and still be on Shark Tank.   It would have made great television to see her turn the table and negotiate against the Sharks from an unexpected position of strength as an equal instead of as a supplicant.

Some takeaways from this Shark Tank review are:
1)   Do your homework and check out all available resources first.
2)   Find someone knowledgeable to work with you or hire them.
3)   As a business owner, you need to maximize every asset.
4)   Know your worth. I don’t mean be arrogant; but be confident.  Otherwise the sharks can smell blood.

 

Remember, if you choose to swim with sharks, make sure that you don’t become the meal.

You can watch the episode here.  Dominique’s portion starts at the 25 minute mark.

© 2010 MoneyandRisk.com all rights reserved

photo credit: Michael Fontenot;
photo credit: Chemical Monkey