Getting Dropped in the Tank

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I'm a big fan of the ABC show "Shark Tank". I love the tough negotiating, the Sharks' banter (especially Kevin's), and I think that some of the products are actually very cool. I was catching up on this week's episode yesterday and was captivated by the negotiating going on between the Sharks and entrepreneurs Rick and Melissa Hinnant. The Hinnant's had started a successful lace sock business that had done $800,000 worth of sales in 2012 and $1,250,000 in sales in the past year. The Hinnant's had huge profit margins and made more than $300,000 in profit on the $1,250,000 in sales. They also had not spent a dime on advertising, all of their marketing was through word of mouth and social media.

They came in asking for $175,000 for a 10% equity stake in their sock business. Robert Herjavec (the worst Shark by far) offered them exactly what they asked for and forced the Hinnant's to make a decision right away. He argued that it wasn't fair to him for them to shop around while he offered them exactly the deal they were seeking. It really bothers me when the Sharks use this as a negotiating tactic. To me the offer is just the start and if someone meets your ask that means the market environment has changed and it's smart to keep shopping around to see the best offer the market will bear. In some cases the Sharks retract their offer, and the entrepreneur gets a worse deal. The Hinnant's however held firm and refused to accept Robert's offer and ended up deciding between offers from Mark Cuban and Barbara Corcoran. Surprisingly they shunned Mark's offer and decided to go into business with Barbara.

I thought that the Hinnant's negotiated brilliantly: they had a plan going into the Tank and stuck to it even when faced with a compelling offer. Future entrepreneurs on the show could stand to learn from them. Being on Shark Tank provides tremendous marketing and exposure. Simply appearing on the show is enough to jumpstart sales. In light of the free advertising the entrepreneurs receive it isn't the worst thing to not get a deal, so why not hold out for a better offer from another investor even if you get offered your ask? I know that if I went on the show that's how I'd play it. What do you guys think?

Comments (47)

 
Nov 25, 2013 - 2:40pm

Pinkpoloshorts:

Robert Herjavec (the worst Shark by far)

Robert is the worst shark? Ehh, I think Barbara could have that position. Seems like Barbara only invests in things that personally appeal to her (lace socks for example). I like Mark because he seems like the most logical and Kevin because he will make himself money no matter what.

Regarding the deal, the Hinnant's came in to the tank with a goal in mind, I didn't think it was stupid they chose to ignore Roberts offer. They clearly stated they wanted strategic direction and capital wasn't their main need. It seemed like they really wanted Barbara and they got what they wanted.

 
Nov 25, 2013 - 2:58pm

And here I thought you were going to subject yourself to sensory deprivation like @"Edmundo Braverman"...

Metal. Music. Life. www.headofmetal.com
 
Nov 25, 2013 - 3:09pm

Gotta start watching this show, I can't believe I still don't.

It may be a high pressure tactic, but if you're in the position to do so, why not. If you think someone is potentially going to take the first offer you throw out there, especially if it's exactly what they're looking for and you know it's a good deal, then you should do it. They can always say no.

It may be a tough position to be in, but that's why you have to be smart and be willing to take a risk that you'll get a better offer, if you really think that is a reasonable expectation. It may not be however.

"When you stop striving for perfection, you might as well be dead."
 
Nov 25, 2013 - 3:09pm

Many people go on Shark Tank actively seeking no real investment. The TV time is worth more than the money the sharks will give them. Also when the sharks use the take it or leave it type of offers before others have a chance to chime in are doing the show a disservice. The best TV comes when the pitchers talk themselves into a shittier deal.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 
Nov 25, 2013 - 3:24pm

A friend of mine worked on the show, he said that the show has only exercised that option a couple of times. I think what happened is that they tried to exercise the option and the company sued the show saying they would have to provide compensation for the equity because the show financially benefited from the pitch that was made by the company. Not 100% sure if that's what happened but I think that is what happened.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 
Nov 25, 2013 - 3:50pm

jbone24:

http://jason-cochran.com/blog/8-things-you-didnt-k...

Shark Tank can exercise the option they have with any entrepreneur appearing on Shark Tank, in the form of 2% royalty or 5% equity. Though hardly exercised, that's some expensive "TV time".

Used to be that way until Cuban stepped up and made them remove that clause out of the contract (and it's retroactive) or else he would walk away.....

http://www.inc.com/will-yakowicz/mark-cuban-forces-shark-tank-to-remove-equity-clause.html

 
Nov 25, 2013 - 3:21pm

I love that show as well and agree with many of your points, particularly the free advertising. Honestly I'm shocked by some of the people that even get to present though (remember the guys who wanted to make that motorcycle movie, wtf?)

Agree that O'Leary is the most "sharkish" of them all, offering so many deals that require a royalty. Seriously a deal like that seems horrible to me as you're diverting much needed cash from a growing business. At the same time though, he is often the last shark remaining in the tank.

Have to disagree with Robert being the worst shark by far. Agree that Barbara is kind of lame.

 
Nov 25, 2013 - 8:03pm

Yes, but QVC is perfect for many of these companies. Lori has developed many physical products and secured patents and has relationships with a lot of big retailers, which again is perfect for many of these products. Robert brings little to the table for the non tech companies. Lori is actually willing to work with the entrepreneurs as is Barbara.

Mark, Lori, Damon, Barbara, Kevin, Robert, in that order. Depending on the company, a certain shark may be more useful.

 
Nov 25, 2013 - 3:56pm

I can only see the guys on the show taking the hard line when a business idea isn't really that good. Otherwise, who are they fooling? Being a blowhard only really works when you have the advantage or if someone is stupid: if they're on the show with a good idea, they're probably neither. I can be as obnoxious as the next guy, but when it comes to serious business, I tend to adopt a more civil tone and save the brutishness for when I'm bartending.

I guess it makes for good ratings and Cuban likes the attention.

Good call on the people here pointing out that once someone goes on that show with a good idea, they're going to have a lot more options. I'm curious how many other financiers / VC folks watch the show so they can scoop up a deal that the 'sharks' didn't get their way on. Personally, I watch the show sometimes in order to rip off ideas for a business.

Get busy living
 
Nov 25, 2013 - 4:07pm

I've known two different people that have taken their companies on the show. As has been mentioned above, neither of them really cared much about the investment itself from the sharks but rather wanted the exposure. One made a deal (which ended up falling through) and one didn't. In both cases, their businesses spiked big time.

"I know you think you understand what you thought I said but I'm not sure you realize that what you heard is not what I meant."
 
Nov 25, 2013 - 4:48pm

The strange thing is that what you see on TV is actually very close to what the ultimate deal ends up being. Legalities need to be worked out after but the deals that go through end up very similar to what what agreed upon.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 
Nov 25, 2013 - 4:50pm

This is one of the only shows that my wife and I agree to watch together.

I actually like Robert, but Mark is the best shark. I almost always agree with his take.

Kevin is a little bit of a tool and his offers are often ridiculous, but at least he's making offers. If they accept, then he's going to make some good money.

The is genius on both sides because of the publicity. The business owners will multiply their sales over night. The sharks have an almost risk-free investment because they're paying based on historical sales, when they know the sales will multiply over night.

The fact that they can keep this as compelling television will keep everyone making a lot of $.

twitter: @CorpFin_Guy
 
Nov 25, 2013 - 5:04pm

Pretty sure Mark forced the producers of Shark Tank to stop taking equity in companies that present because a lot of good companies would not have gone on the show otherwise (he threatened to quit if they didn't comply).

Also, you see successful VCs always have founder-friendly term sheets. Most early-stage firms are more than happy to just put up convertible notes that switch to equity based on future fundraising activity or some milestones. This makes sense, as great founders will be faced with many term sheets and they'll be likely to select the best. A homerun investment pays a LOT, and it won't matter whether or not the financial terms are favorable in the beginning.

What I don't like about the show is that these angel investors in the Tank treat companies like value investments and not venture capital investments. O'Leary asks for royalties - are you kidding? That's probably the most moronic structure ever for young companies. Capital needs to be used for growth in small companies. I personally hate Kevin - the guy adds little value and doesn't seem to understand that the tiny, miniscule gains he gets from offering hostile term sheets will cause him to lose out on many great opportunities.

Otherwise, great show. I'm a big Mark Cuban fan.

 
Nov 25, 2013 - 5:12pm

Of the people on the show Mark is really the only one who understands how the fund raising market works, the others think that they alone are what the companies need to make it big. When they couldn't even find there way out of a room with only one exit.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 
Nov 25, 2013 - 7:11pm

Barbara made her money in real estate - how does that qualify her as an entreprenuer consultant for these kinds of businesses? She's probably a smart lady, but I always imagine her as the old fogey who doesn't know how computers work.

"I will you $300,000 for a 40% stake in your internet company...if you explain to me how the internet works"

when you're accustomed to privilege, equality feels like oppression
 
Nov 25, 2013 - 7:57pm

Robert is the worst. Makes horrible deals, only piggy backing once Cuban or Damon likes the company. Most of the entrepreneurs are lucky, sometimes Kevin is the only one willing to give them a deal. Now, they may not take the deal, but at least it was an option. Capital isn't the easiest thing to get a hold of or a big name investor. Many of these companies suck and have low quality management...my deals wouldn't be much more appealing than Kevin's for the companies I've seen on Shark Tank.

I don't give favorable valuations to companies run by a 14 year old and his/her mom.

 
Nov 28, 2013 - 4:04am

Kevin is the biggest douche on the show, Mark is the biggest shark! He's the only billionaire on the show. And people stop dissing on Robert, he's the man. I love this show, I DVR every episode to make sure I watch them all. Those guys have such a sweet gig, ABC forks over who knows how much money and they turn around and invest it. They basically have free angel funding shoved in their pockets just by making the show!

"You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." -Warren Buffett
 
Nov 30, 2013 - 1:31pm

Right, but guess how much ABC pays them to be on the show? Do you really think they do it for free?

"You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." -Warren Buffett
 
Nov 30, 2013 - 10:40pm

These morons don't understand how growth companies work. I watched an episode a long time ago and the bald guy, sorry dont know names, offered this company like $200k for a 50% equity stake. This company was making like $600k in net profit and was doubling revenue growth. The company ended up taking it, what a freaken joke. These guys don't know how to value companies or look at future growth prospects.

Array

 
Dec 1, 2013 - 4:14am

I really think that the socks was a shitty deal. There is nothing special about them and my gf said they are all over the place at retailers like H&M and forever 21, but at a much lower price point (IIRC, theirs were like $38). It's not a company, but a one product gimmick. They are in fashion now, but in a few years when the wind changes, they'll be passe. Besides, (I know it's a classic Kevin line) literally anyone could make those. I wish Damon was on this episode, I'd be interested in his opinion on them given his background.

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