This is the first week that I’ll be splitting coverage of Shark Tank episodes between this blog and Entrepreneur.com. I’m posting my analysis of the most interesting story of Shark Tank season 4 episode 7 over there, and reviewing the rest of the pitches here.
You never get just one offer to invest in your company. You either get zero, or many. The pitch either resonates, or it does not. This week’s show demonstrated both sides of the equation. The Scrub Daddy pitch got multiple offers, and I analyze them over on Entrepreneur.com. Two of the other pitches got no offers, and for similar reasons.
The Bear and The Rat is a company making human grade, organic, all natural, fat-free, sugar-free frozen-yoghurt treats for dogs. The company sought to raise $125,000 for 25% of the comapny, implying a $375,000 pre money valuation. It had done about $30,000 in sales in a little over a year, and had emerged from a natural trade show with interest but no orders.
Unsurprisingly, all the sharks passed, based on market size and valuation expectations.
Shemie is a company making a “modern slip”, a women’s undergarment worn for modesty and to make clothes hang more smoothly. The company was started six weeks ago, had no sales and no retail distribution yet. The founder, Shelton Wilder (in the middle below), sought to raise $60,000 for 20% of the company to build inventory.
Shelton came under intense questioning about how she justified her valuation given no proof of demand. It eventually came out that she had previously been a co-founder of a company that had made a very similar product and had sold $150,000 worth of slips over 18 months. But during that time she had been an alcoholic, and in seeking to break away from that life, she had walked away from the company, causing her to declare personal bankruptcy. Now sober, she wants to take another run at the same idea.
Once again, all the sharks passed.
While Shelton’s personal history must have played a part in the decision to pass, the broader issue for both companies is that they were raising money too early. They did not have any meaningful proof of product-market fit. Revenue or distribution can both be evidence that, in the Bear and the Rat’s case, the dogs literally are eating the dogfood. Neither company had enough momentum to make the case to an independent investor. They should have raised money from friends and family, and grown sales further before seeking to raise outside capital.
The other company to present this week was SBU, the Self Balancing Unicycle. This is a self balancing electric unicycle, capable of speeds up to 15 miles per hour and with a range of 10 miles. The SBU retails for $1,800 and costs $250 to make in an offshore factory. The first 100 units had been sold, sight-unseen, off of the website. SBU sought $300,000 for 10% of the company, implying a $2,700,000 pre money valuation.
After drawing comparisons to the unsuccessful Segway, and discussion of the risks of quality control when manufacturing offshore, three of the sharks dropped out.
Kevin expressed concern over pricing and sounded like he was heading the same way. To this point, the founders responded that they had sold 100 units pre launch, and if they sold 1000 units in their first year, they would make $1,000,000 in profit. This caught Kevin’s attention.
Robert expressed concern about about market size and sounded like he was on the verge of dropping out as well. The founders claimed that they had the most advanced e-bike controller on the market built into the product, that other e-bike manufacturers were expressing interest in licensing it, and that they already had one license that had paid them $25,000 over the last three months in royalties. This impressed Robert and he offered $300,00 for 33% of the company, implying a $600,000 valuation, a steep discount to the ask. Kevin noted that he had just paid $5,000 for an electronic bike without this technology and offered to join Robert. The entrepreneurs dithered for a moment at the valuation. One of the other sharks pointed out that they had been on the verge of losing all bidders just a moment before, at which point the entrepreneurs took the offer.
The key issue for this company is market size, and by extension, what is the market? If the market is indeed self balancing electric unicycles, then Robert’s initial intuition is probably correct. This is a very niche market. But if the self balancing technology is indeed applicable to other e-bikes, then it is the e-bike balance controller market that they are addressing, and this could potentially be big enough to drive a large company. In either event, at the going-in valuation that Robert and Kevin are investing at, they will likely be OK. A sales projection of 1,000 units is not unreasonable and if this generated $1,000,000 in profit in year one, then the $600,000 ingoing valuation will look cheap. They will be able to recoup their investment from dividends, if not from a big sale of the company one day.
Head over to Entrepreneur.com to read my analysis of the first company, Scrub Daddy, and the bidding war that erupted over the right to invest.
And as always, I love to hear your opinions!
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