More Business Lessons from Shark Tank

Onto the quote-unquote week one episode of the Shark Tank, which is the second episode since the show emerged for a second season.  This episode, like all of the episodes, contained a lot of small business lessons that are valuable to have on a life’s journey of entrepreneurship.

Lesson #1: Negotiation Snafu: Giving Away Leverage

First up was Nikki Pope of Toygaroo.  Toygaroo is a great concept of a membership in a rental toys plan.  Toys were made to be forgotten about in a matter of a few days or weeks, so this a great way to *Only* have the toys that you need when you need them.  This is a genius concept, and of course, the Sharks were interested.  While Pope was nervous in her pitch, it was obvious she did her homework as she was well aware of Kevin O’Leary’s background with key toy companies.  Since she had done her homework, she had O’Leary interested in bidding higher than his original bid, especially when she fired back questioning O’Leary’s relationship with the major toy companies.

But, she opened her mouth one too many times and let him off the hook when she asked if O’Leary would be willing to go higher to match an offer placed by Herjavec.  Ouch, she shouldn’t have asked if he is willing, he all ready was!  It made her look afraid to lose a deal with him, and with that she lost negotiating leverage.  Key lesson here, do your homework and speak with purpose, but learn to stay quiet after you have accomplished your speaking goal, or risk losing your negotiating leverage.

Lucky for her, O’Leary proposed a fair deal and brought in Mark Cuban to make the ideal partners.  Pope needed Cuban for his internet subscriptions program expertise and O’Leary’s toy company connections, and the shark’s came through despite her business and equity gaffes.  A second lesson learned here, is if you have a really novel idea, it will attract rainmakers, so just make sure you keep a piece of the company when it starts raining, as she managed to do with her deal with Cuban and O’Leary.  A third lesson here is to not just willy-nilly give away equity to fringe partners like a web designer, writers etc.  Pope has given 40% away to vendors that easily could have been paid as contractors.  She most likely made this equity arrangement because she was trying to minimize cash outlay, but giving away equity should be reserved to partners who inject serious cash, or serious expertise to take the business to the NEXT level.  Now, for an idea that could go HUGE, and I mean HUGE, giving away 40% equity to Non Cash and Non Equity Injecting partners is crazy.

Lesson #2: Know Your Numbers

Next up was Matty Sallin pitching his bacon cooking alarm clock.  The Sharks loved the novelty of the concept, but could not get their heads around actually using it themselves more than once if at all.  Also, Sallin was unprepared with sales projections, which is understandable, since he has not sold any.  However, the sharks did not like that he did not even have a projection of future sales.

The value in having projections is having a target to shoot for.  Lesson learned here is to put a pencil to paper and create some concrete metrics to work with.  This was pointed out by Cuban, when he asked Sallin how many units a first run would be, to which Sallin replied 10,000.  At $13 per unit to manufacture, that would be $130,000 just for the first run, but Sallin only asked for $40,000!  Another lesson learned, is do your homework, on how much money you will actually need, so you know how to get from investors!  By the way, Sallin runs an interesting blog about the technology of interfacing.   Kudos to Cuban not just laughing at Sallin, but giving Sallin a quick business math lesson.  You don’t have be a math wizard to run a business, but you should learn to pay attention to figures and keep good track of revenue and expenses.

Lesson #3: Know Your Target Customer Market

Following the Bacon Alarm Clock was the Vurtego Pogo Stick, the brainchild of Brian Spencer.  Spencer has sold about 7,000 units, and his products have a ‘cool’ factor to them.  You have to watch the product in action to see just how cool they are.   The sharks quickly identified that Spencer has a product that is on the high end of the market that appeals to trend setting consumers.  They also felt that the product would lose it ‘coolness’ if it was marketed to the mainstream market.

Since Spencer was already successfully selling the product to a good niche market, the Sharks gave Spencer great advice, which was to stay in the market that he has established his company and dominate it.  With market domination, he can add premium models and raise prices to increase margins.  Lesson learned with this segment: Understand the market that you servicing or selling to, and make sure not to stray from it in a way that will dilute the brand or quality and degrade the overall brand and business.

Lesson #4: How to Create and Maintain Negotiating Leverage

The final segment of the show involved the highest stakes negotiation of the episode.  Joe Moore presented the First Defense Nasal Screens, which are screens that cover the nostrils to prevent allergens and other unwanted things entering the nasal passages.  Moore and the product seemed a little awkward and weird looking, but he was taken seriously as soon as the fact that he had significant orders on the books from the Middle East was revealed.  The product makes sense for those that live in dusty climates, or desert climates or any other locale where nose irritating particles abound.  Moore’s body language made him seem unsure and lacking some confidence, but he really handled himself really well when the Sharks began presenting offers and pressing him for answers.

Barbara Corcoran was the first shark to leave, because she thought the product would be hard to explain and sell.  After that O’Leary quickly presented the first offer, and pressed Moore for a quick answer in a aggressive tone “You have an offer from me, what do you want to do!?!?”  Moore paused briefly and then replied that he’d like to hear offers from the other Sharks.  This was the first instance in which the sharks tried to impose their terms onto Moore, but each time, he paused and gathered himself and replied back without caving into their pressure to either name a price or accept their first offer.  At this point Cuban said he is also interested, and O’Leary asked him to join as a partner in his offer.  Then Daymond John jumped in with a higher offer, and then O’Leary quickly retorted with a $1,000,000 offer for the entire company.  When Moore hemmed and hawed quickly after the million dollar offer, O’Leary was surprised and said ‘you just turned down a million dollars.”  Moore said ‘Yes, I did.”  This reply of Moore’s earned him O’Leary’s respect.  Cuban then asked if Moore would name a price for the entire business, and Moore wisely deflected the question instead of throwing out a number.

The key to the deflection was that it wasn’t just an annoying non answer, it was that Moore preferred to remain a part of the company.  Undeterred, Robert Herjavec jumped into this as well and came up a $2,000,000 for the entire business and a 10% royalty to Moore.  At this point, Moore has four very interested sharks bidding against himself, so he wisely said no, and asked for a recap of the three offers.  He had the leverage and kept it.  He even turned down $4,000,000 plus royalties from Herjavec.   At this point, Moore lost some leverage and the three remaining sharks took advantage.  O’Leary asked Moore to step away, so he, Cuban and Daymond could discuss amongst themselves.  O’Leary asked Daymond to join them, and he agreed to, this meant that there was only one offer left.  When Moore came back, O’Leary told him that there were changes, and that there was only one offer left.  Cuban, John and O’Leary changed their offer to a perpetual royalty and kept the equity purchase about the same.

This is huge, combined as one offering team, they basically got better terms for themselves, and Moore lost some margin for himself for perpetuity.  Moore agreed to a good deal, but agreeing to step away for a moment to let the sharks collude cost him.  Moore should have stuck to his guns and, at least when he countered for more cash, stuck with his counteroffer.  When you have Three Sharks that interested, they will counter you back.  Two lessons learned here, number one, learn to pause before immediately replying to a negotiation question, which gives you time to think about your answer and also puts the other party back on their heels a bit, which retards their efforts to get better terms.  Number two, don’t let competing bidders collude against you, if they try, remember to divide and conquer.

For More information on how Just Elementary, Inc, Business Brokers can help you negotiation, valuation and small business transactional needs contact our Client Care Manager Sonia Chhabra (888) 926-9193 or email cs@justelementary.com