THE small business PLANNER by Larry Wilson

This review makes a great forum for a critique and learning experience valuable to all entrepreneurs. Learn what to do and what not to do from entrepreneurs making a pitch for money in the Shark Tank.  The review complements my book, The Small Business Planner and there are also great free resources including fully formatted planning and marketing templates on the book’s web site. In addition to this review, my regular Blog, and the Entrepreneurship Video Series on my You Tube channel can be very helpful to budding entrepreneurs. Constructive comments are most welcome on any of these reviews.

Episode 22 – Season 4. Original air date: Mar. 29th, 2013

Pitch One:

Drop Stop - Asking $300K for a 15% stake

Valuation: $2 million.

Marc Newburg and Jeffrey Simon have invented a device that prevents items from failing into the abyss between a car seat and console. The Drop Stop is universal fitting over the seat belt receiver so it moves with any seat adjustment and it contracts or expands  to close any gap catching objects that would otherwise be in the black hole and difficult to retrieve. The boys put on a spirited presentation also emphasizing the safety aspect of driver attention.

Sales: 130,000 sets (260,000 units) to date.  Gross sales: $1.3 million (since 2009)      Sales for the current year:  $300K – $50K profit.

Retail:  $19.99 (pair) with a cost to manufacture of $4. per pair.

Currently being sold through their web site, catalogues and they have had 42 shows on QVC. When questioned by Lori about intellectual property protection Mark advised the Sharks that there was a utility patent in place for, as he described it, “An elongated member that fits over the seat belt receptacle,” which caused Mark to start laughing. Robert couldn’t believe that people drop that much stuff between the seats and he was the first to drop out. Daymond liked the story but said jokingly that the space is important if you want to avoid three to five on Rikers Island (New York City’s jail complex). He said the sales showed a need but not something he would be interested in and he also opted out. Mark admitted that he was a slob and always lost stuff falling down beside the seat and said he would use it but felt that Lori would be a better investor to help them sell the product as they already had a track record with QVC.

Kevin felt that it wasn’t really a business but a product only which would require larger amounts of capital as sales grow. He wouldn’t make an equity based proposal, instead offering the $300K in return for a $2 royalty on each pair sold. Jeffrey complained that it would leave the company with only a dollar on each pair and Kevin said, “That’s ok – you’re growing market share.” (If there are no competitors would they not already have all of the market share for this product?) Lori repeated the phrase agreeing that ‘money can’t buy happiness’ but she obviously liked the product and investment opportunity because she told the entrepreneurs that she could make them millionaires. She offered the $300K for 20% remarking that both they and the product are heroes (not zeros as she often coins products). Kevin sweetened his offer dropping the royalty to $1 after he recoups his capital. Lori had the partners close their eyes and imagine sailing with her around Martha’s Vineyard then receiving a check for millions of dollars which did the trick as they accepted her offer.

My entrepreneur ratings:

Idea: excellent; Competence: high; Knowledge of Market and Competition: good; Competitive Advantage: unique; Preparation / Planning: good; Chance of Success: high.

The partners had done everything right to this point with a proven track record of sales proving customer needs and their success on QVC made a deal with Lori logical. Kudos.

Pitch Two:

Traditional Fisheries - Asking $225K for a 25% stake

Valuation: $900K.

Dave Johnson and Gary Groomes are on a mission to eradicate the Lion Fish, a tropical variety but highly invasive species that was introduced accidentally into the Atlantic Ocean twenty years ago. The spines are venomous so it has no natural enemies and it is already the second most populous fish in the Western Atlantic and Caribbean. They feast on popular fishery species and other fish which keep coral alive. The partners have a solution: “If you can’t beat ‘em – just eat ‘em!” They served up some Lion Fish to the Sharks who all enjoyed the taste likening it to Flounder.

Daymond wondered why no one else was catching the species if they taste so delicious and Dave replied that it was a labour intensive process as they don’t bite on a hook. They also cannot be netted because of the barbs, but must be caught by spearing and the partners use a Mexican cooperative as contractor. Mark asked how the cost per pound compared with other popular species and Gary informed him that it was similar to that of Grouper or Snapper. Mark concluded that the market for the fish would be people who really liked the taste, but more likely those who were ecology conscious. The challenge is introducing a new species to the US market and educating them. Robert wanted to know why the government wasn’t doing something about it if the Lion Fish were destroying the reefs and Gary’s answer was “funding.”

Daymond started the questioning about the business side of the new venture. Sales: $12K to date, which prompted Kevin to comment that it was so small. We know the valuation will be problematic and a huge roadblock amongst others, like the lack of demand that Robert foresaw causing him to be the first out. Kevin related the story about New England lobster taking forty years to go from menace to delicacy and both of the presenters would be dead before the Lion Fish is main stream so he opted out. Daymond felt that it would be a huge educational challenge and $225K would not do it prompting him to drop out. Mark opted out because he didn’t like the fact that they had not tested any markets to see if there was demand leaving Lori who hoped that more people globally would help the cause. Since she couldn’t visualize a lot of people running to eat Lion Fish, the president and vice-president of Traditional Fisheries left without an offer on the table.

My entrepreneur ratings:

Idea: good; Competence: questionable as entrepreneurs; Knowledge of Market and Competition: questionable due to lack of market testing; Competitive Advantage: unique; Preparation / Planning: poor; Chance of Success: low without substantial help.

Dave and Gary are fighting for a great cause and it is always a bonus when you can make money fighting for a great cause – especially one that saves any part of the environment. There are many instances where people are the first in with a service or product to satisfy pending legislation as long as the cost of entry isn’t too steep. In this case, the price tag would be huge to educate the market to create demand then commercialize the process to satisfy the demand. At this early stage of the game, the partners really had not created a viable  business making it impossible to evaluate their efforts. Even if they could start to make money on the new catch of the day, it wouldn’t take long for the large commercial fishers to catch on and snatch most of the market share.

Pitch Three:

Simple Sugars - Asking $100K for a 10% stake

Valuation: $1 million.

By the time she was eleven. Lani Lazzari from Pittsburgh was hit by the entrepreneurial bug and obsessed with it throughout her school years. Having suffered from eczema, she created her own cream that also relieves the symptoms of psoriasis and at such a young age became an entrepreneur. Her natural sugar product exfoliates and deep cleanses the skin in one easy step. She has operated her business to this point on a part-time basis while attending school. However, now that she has graduated, Lani is ready to give the business 100% of her attention and needs the investment for growth. It is currently being sold on her web site and some through wholesale. Due to her condition and visits to the Dermatologist’s office, she became obsessed with coming up with a solution and after many attempts came up with the current formula. Lori tried it and liked the results.

Sales: $55K to date – projected $100K by year end.

Kevin reminded her that she has no mainstream distribution and just a niche player with sales on-line and the business was not worth anywhere near the $1 million valuation she put on it based on the sales so he asked her to defend it. She related a story about taking a year off school in 2010 and grew the sales from $13K to $38K in that year and also told the Sharks about several potential deals worth up to $400K with large on-line retailers. Lori and Robert were concerned about her medical results claims and she advised that there were none – only the benefits of using natural ingredients on the skin. Lori was impressed with her youthful entrepreneurial spirit. Lani wants to hire sales people with a good chunk of the investment.

Daymond did not think that she needed an investment from the Sharks and opted out. Although Lori thought she was amazing but felt that there was too much competition prompting her to drop out. Kevin gave a reality check stating that in the highly competitive cosmetics markets the only product with high margins were illegal and virtually impossible to get share from companies that own that space. His reason for dropping out was the fact that there was nothing proprietary about what she was doing; it was so simple that an eleven year old could produce it; and there was no chance in hell that the business was worth a million dollars.

Robert provided some encouragement stating that if the measure of a business was drive and passion – she would be successful. His challenge was a need to take too much equity if he made the investment she was seeking and the result would not be equitable to either party. This left Mark who admitted that he didn’t know anything about the business but one of his children suffers badly from eczema so he wanted to know how the product would help relieve his symptoms. He asked about the primary target market and the competition. She cited Fresh as their main competitor because of a comparable product but the Simple Sugars advantage was price.

Retail: $15.95 with a cost of $3.61 and dropping with increased sales. The Fresh product retails for $74. Mark made an offer of $100K for 33% and Lani countered with 25% but Mark refused to budge. She wisely accepted his offer.

My entrepreneur ratings:

Idea: good; Competence: high; Knowledge of Market and Competition: good; Competitive Advantage: natural ingredients – low price; Preparation / Planning: fair; Chance of Success: good.

Lani made a great passionate presentation but took a real chance on the valuation asking for a high investment and offering a very low stake with little wiggle room. The sales did not come close to justifying the amount and there is nothing proprietary about the product but, she was very fortunate that the product satisfied an immediate need for a family member of one of the investors. The Sharks all commented that she was terrific. Lani is an inspiration for all young entrepreneurs with her exuberant presentation and passion for her product and business ownership.

This review makes a great forum for a critique and learning experience valuable to all entrepreneurs. Learn what to do and what not to do from entrepreneurs making a pitch for money in the Shark Tank.  The review complements my book, The Small Business Planner and there are also great free resources including fully formatted planning and marketing templates on the book’s web site. In addition to this review, my regular Blog, and the Entrepreneurship Video Series on my You Tube channel can be very helpful to budding entrepreneurs. Constructive comments are most welcome on any of these reviews.

Episode 21 – Season 4. Original air date: Mar. 8, 2013

Pitch One:

Baby Loves Disco - Asking $150K for a 10% stake

Valuation: $1.5 million.

Business partners Heather and Andy started a travelling Saturday afternoon dance party for tots using a mobile studio. They average about 350 participants at each event with activities for young and old alike and the admission price is in the $20 per person range. They started the business seven years ago.

Sales: $2.7 million (since start-up).   

They make money from sponsorship, ticket sales and merchandise sales. The Sharks were interested in the current situation, in particular the past month. Each event makes between $1,500 and $3,000 and their projected sales for next year = $750K.

Mark thought the idea was great when they talked about their early years and attracting moms and kids to events, but when they polluted the model with sponsors and merchandise he lost site of the overall vision of the business which caused him to be the first to opt out. Daymond echoed the same sentiment, that he was lost and followed Marks lead. Andy said something about, “Making it up as they go” to which Kevin said he was just a simple investor trying to scratch out a living and couldn’t understand how he could make money with them so he also dropped out. Lori liked the fun aspects of the business but also did not understand the business model and opted out leaving just Robert who was not buying into the business plan.

My entrepreneur ratings:

Idea: good; Competence: moderate; Knowledge of Market and Competition: good; Competitive Advantage: unique; Preparation / Planning: questionable; Chance of Success: moderate.

Heather and Andy appeared to have a good idea seven years ago when they launched their mobile disco fun mobile business. The operation grew slowly for five years then they changed the business model and it appears to have spurred some growth, but not to the high unrealistic valuation of 1.5 million. They appeared to lack focus when they entered the Tank and couldn’t explain their business model properly. The Shark’s were confused about the revenue model and the presentation did not charge them emotionally to even ask many questions. It was lacking pizzazz – and the all important growth numbers. After seven years in business, a need for equity investment will often be looked upon with suspicion that the business may be in trouble.

Pitch Two:

Lose 12 Inches with Any 12 Workouts - Asking $100K for a 25% equity stake.

Valuation: $400K.   

Ryan Ehmann from Colorado has developed a revolutionary workout regimen spawned by a career ending injury he suffered while performing on the pro rodeo circuit. He obtained his certification to become a personal trainer then developed a system to make workouts more efficient and maximize results. He put his own system to the test, developed rodeo abs and returned to the circuit contrary to doctor’s predictions and won a national championship in Dallas. The Sharks got a real kick out of his charged and animated presentation and antics as he showed pictorial testimonials from clients who used his system to reduce their actual workout time and achieve impressive results. The system is based on optimal heart rate to burn fat and produce – not reduce muscle mass.

The DVD comes with his protected software, a descriptive training video and a wrist band heart rate monitor. The software calculates the appropriate heart rate zone for each individual based on their personal physical details which are input to the software. Robert questioned cowboy Ryan’s appearance with the ripped abs and that he didn’t look real and it was hard to believe that people using the system could look like that. Although his antics would look great on television, Lori questioned the claim; “Lose 12 inches with any 12 Workouts,” stating that there must be independent proof and not just testimonials which can be falsified.

Ryan then popped out another product to demonstrate – his Rodeo Abs incline board. Lori tried it and liked it. According to Ryan, the abs machine has sold over a million in Australia prompting Kevin to exclaim that he is like an artist who needs a producer. He said there is a right investor for the business – but not him. Mark couldn’t figure out who he was and he also dropped out. Robert wanted clarification on the claim and could not believe the claim that everyone loses 12 inches in 12 workouts. He thought Ryan’s energy was infectious but the skepticism obviously was too strong and he opted out prompting Lori to say, to Ryan’s delight, the best cowboy for the job is a cowgirl.

She thought there was something potentially great here but was worried that there were a lot of claims being made and as she was about to opt out, Ryan urged her to believe in the cowboy. She said she needed more proof on the claims and wouldn’t invest today then Ryan offered her more equity. It wasn’t enough and she declined being his cowgirl leaving just Daymond who said he liked it but liked Ryan even more as the brand. Daymond said they were going to ride together and offered the $100K for 25%. Daymond told the other Sharks that the tipping point for him was when cowboy Ryan revealed to Lori that he would bust his butt to make it work.

My entrepreneur ratings:

Idea: good; Competence: high; Knowledge of Market and Competition: good; Competitive Advantage: Cowboy Ryan the pitchman; Preparation / Planning: good; Chance of Success: high.

Ryan’s excitement and passion were infectious as were his cowboy antics in creating enthusiasm – mainly for him as a brand. His valuation was credible based on the sales success and track record with both the DVD system and the abs machine; however, his claims were hard to believe without independent testing. This caused four of five Sharks to opt out. His personality sold Daymond and moving forward I am sure there will be different or well substantiated claims. Either way, cowboy Ryan on a DVD, television infomercial, or trade show is guaranteed to draw attention and sell product.

Pitch Three:

Cell Helmet - Asking $160K for a 20% stake

Valuation: $800K.

Mike Caine and David Artuso from Pittsburgh have created an innovative protection system for cell phones. Unlike traditional cases and covers which make false claims about the level of protection, the Cell Helmet is a typical type of protective case with no added claims but it is unique in that it is bundled with accidental damage insurance coverage. The case is sold for $44.99 and the customer has 30 days to register it for a one year safety net and damage coverage. There is a 24 / 7 hot line and a damaged phone will be repaired or replaced within 3 business days with a handling fee of $50.

Sales: 1,300 units (4 months)   $60K

Average cost to repair a smart phone: $77  – to date 3% have required repair. (Very short time frame for measurement). They said that it is difficult to get a claim to the point of phone replacement and assured the Sharks that they would take in more than then they pay out. This wasn’t good enough for Kevin who said it was a terrible idea and opted out with extreme prejudice. Robert didn’t like phone cases and felt that they weren’t in that accessory business but in the business of serving people who were worried about their phones breaking. He didn’t buy in to the strategy and dropped out adding that he didn’t see it as a growth industry. Lori agreed along with Daymond who felt that there would be too many people who would take advantage of their system and they were out. This left Mark who identified the problem as a lack of barriers to entry for larger companies who could swallow them up if they are successful and the model shows a profitable conversion rate.

My entrepreneur ratings:

Idea: questionable; Knowledge of Market and Competition: good; Competitive Advantage: questionable; Preparation / Planning: questionable; Chance of Success: low.

Mike and David had brainstorm and came up with an idea for a business associated with a rapidly growing market – wireless communications. The problem with the first part of the model – accessories, is that it is dominated by big players and difficult to get market share and a protective phone case is not unique. The second part was also not totally unique as retailers such as Future Shop and others offer Extended Warranty Plans for phone repair or replacement. This part of the business is very risky leading to the partners’ biggest mistake – making a pitch to a venture capitalist prematurely. Four months does not a track record make and not enough time to prove the model or conversion rate. The valuation was also crazy based on the sales and length of time in business. This will be a tough one to pull off over the long haul.

Pitch Four:

CordaRoy’s Comfort for Life  - Asking $200K for a 20% stake

Valuation: $1 million.

Byron Young’s new innovation is a bean bag chair which he claims is the most comfortable and versatile chair in the world. It’s like sitting on a cloud with no pressure points and guaranteed to never go flat. The chair cover unzips revealing a bed with the new bean bag shape. Lori tried out the large chair which converts to a king size bed and reported that it was very comfortable. Let’s hope the business isn’t a start-up and has substantial sales to support such a high valuation. This was echoed right off the bat by Kevin who questioned Byron about the valuation and said he expected to hear that the company profit this year would be at least $200K to justify $1 million. Byron informed the Sharks that there was a utility patent in place and announced the sales.

Sales: $1.4 million (last year).     Cost: $70 (Queen)    Retail: $250  

Byron expects it to be a $5 million dollar business as he has everything in place from manufacturing to vertical distribution. Daymond asked about the net from last year and learned that it was only $100K. The product had been sold on QVC about eight years prior with poor results and Mark commented that they had been around forever. Actually eleven years and he has invested $300K in existing inventory along with a piece of manufacturing equipment worth $100K. He is looking for a strategic partner and will use the money for marketing. Daymond was the first to opt out saying that he couldn’t help.

Mark likes what he is doing but has two issues: one that it is dependent upon Byron to sell; and two is that it is geared toward impulse buying, neither one benefiting from increased spending so he was out. Kevin told him that he was only worth 5 times what he made last year, or $500K. Byron disagreed but Kevin reminded him that it is his money and opted out. Robert said he needed someone like Lori to do the deal but wanted to get involved so he offered half of the $200K for 40% contingent upon Lori picking up the other $100K. Lori said that she didn’t want to partner with anyone and that she was going to give Byron a once in a lifetime offer that was tough and if he blinks it will go away.

Her offer was $200K for 60% of the company. Robert was out and Byron wanted to know what Lori’s plan was given the reduced valuation and her having a controlling interest. Her response was to get it out there fast and furious on QVC, retail stores, and infomercials because that’s what she does. He countered with 40% and Lori went down to 58% saying that she would have to do too much of the work in selling the product. Byron finally accepted her offer with the understanding that a small amount of a big piece of pie is better than a large amount of a small piece of pie.

My entrepreneur ratings:

Idea: very good; Competence: high; Knowledge of Market and Competition: good; Competitive Advantage: unique; Preparation / Planning: good; Chance of Success: good.

Byron created a very unique product that had a proven track record although after eleven years in business the growth appeared very sluggish. He did over value the company considerably based on annual profit and was very wise to accept Lori’s deal even though he is giving away 58% of the equity in the company. As a partner he will still make a salary and as a major shareholder – 42% of the net profit. The Sharks may have been somewhat suspicious of his motives in seeking investment after eleven years in business. If there is anything suspicious it will come out in due diligence.

This review makes a great forum for a critique and learning experience valuable to all entrepreneurs. Learn what to do and what not to do from entrepreneurs making a pitch for money in the Shark Tank.  The review complements my book, The Small Business Planner and there are also great free resources including fully formatted planning and marketing templates on the book’s web site. In addition to this review, my regular Blog, and the Entrepreneurship Video Series on my You Tube channel can be very helpful to budding entrepreneurs. Constructive comments are most welcome on any of these reviews.

Episode 20 – Season 4. Original air date: Mar. 1, 2013

Pitch One:

nuts ‘n more - Asking $250K for a 20% stake

Valuation: $1.25 million.

Partners Neil, Peter and Dennis, have developed a new snack adding nutritional ingredients to peanuts. Fortified with protein, there are four flavours including peanut butter, almond butter and chocolate almond. Their snack is better than others on the market because of the added protein, flax seed and fibre. They have been in operation for less than a year and it didn’t take long for the high valuation to get questioned by Daymond and Kevin. Robert asked about sales.

Neil explained that they have been selling for about 5 months with only $100K in sales but that the country’s largest distributor is interested in the product. He justifies the valuation because the distributor has five warehouses and a pallet in each warehouse equates to $1 million in revenue. (I don’t think it works that way!) Daymond needed clarification about the status of the order and Neil admitted that they haven’t actually ordered because Nuts ‘n More was unable to fulfill.

Retail: $10.99  - $12.99       Wholesale:  $5.75 – $7.25      Cost:   $2.90 – $4.00

Robert needed convincing on the valuation and Peter said, “The Brand!” Kevin and Robert both told them that there is no brand yet. Mark wanted to know about re-orders and the partners advised that the product was available on-line and through thirty-two stores who are continually re-ordering product with a fifty-fifty split on each method of sale. Robert liked the name but was challenged by the unrealistic valuation. He said the pair are acting as if they had made it, but there is no commitment of large orders. Daymond jumped in and said the valuation was crazy and built on assumptions prompting him to back out.

Barbara thought the branding and packaging was terrific but it was a shame they priced the company at $250K for 20%. Kevin called them bozos and Neil jumped in saying that they were there to negotiate as well. Barbara quipped that to give them $250K she would need to take 80% of the business giving it a valuation of $312,500 – not $1.25 mill. She finished by saying that she was so sad but out. They tried to talk Kevin in to making an offer by adjusting the equity and he said that he would need to own 264% and all their cars - then dropped out. Mark wanted to know how much they would have to spend to get their price down to an optimal cost of goods so that the margins and selling price were attractive. Robert thought Mark was on to something and wanted verification that if he invested $50K, “Would it fulfill the large order and get the volume going?” Neil replied that it would.

Mark wanted to propose a deal which included Robert for 35% (we know the investment must be at least the $250K they asked for) with $75K up front and the balance available to fund future purchase orders. Robert wanted to make a generous offer of the $250K for 50% of the business reminding them that they haven’t proven the business – only the concept. They sequestered to the back room while Mark argued with Robert that 50% would cause more problems than it would solve. Upon their return Neil declined Robert’s offer for 50% but said they wanted both in for 30% with the tiered approach. Robert wasn’t in at 30% but stood their ground at 35% and the pitching partners wisely accepted.

My entrepreneur ratings:

Idea: good; Competence: high; Knowledge of Market and Competition: good; Competitive Advantage: unique; Preparation / Planning: good; Chance of Success: high.

The partners were lucky that they got away with such a high initial valuation. They knew their stuff when it came to margins and what they needed to grow the business profitably. Two of the Sharks played the game with them and the way the deal was structured the valuation dropped to $214K, which is close to where it should be given their sales. The balance of the asking amount, $175K could be considered a loan, which makes the deal work for both parties. Although the initial valuation showed some typical greed, Daymond made an interesting comment on the wrap-up that the partners were smart because they only pushed for the amount that they needed to go to the next step, unlike some who want  extra for things like guaranteed salaries. When the Sharks become part of a company, future funding is almost always a sure bet.

Pitch Two:

PSI Bands - Asking $250K for a 10% equity share.

Valuation: $2.5 million.   

Romy Taormina has developed a patented acupressure wrist band for the relief of nausea. They are targeted at pregnant women for the relief of morning sickness and she claims that they also work for motion sickness and the side effects of chemo for cancer treatment. The bands are water-proof and come in a variety of colours. Her screen presentation was very well produced as she asked for the Sharks to invest in a company that was already profitable as she handed out samples. When asked if there was proof that the wrist bands actually work to relieve nausea, Romy claimed that it was an FDA cleared medical device. This answer wasn’t sufficient and the Sharks wanted to know if there was proof and she said that there were clinical studies. The product was launched in 2007 and Robert enquired about sales.

Sales: $1 million  (in the past year).   Profit:  $110K after $100K salary.

They are being sold internationally and through more than six thousand retail locations in the United States. Robert asked why the profit was so low and she retorted that it wasn’t.

Retail: $15.00      Gross margin: 40%

Company debt is $600K which includes deferred salaries. The Sharks found it quite astounding that she would list herself as a creditor for not taking a salary in the first year or two. This is something that a new entrepreneur is expected to accept automatically if necessary until the company grows enough to substantiate remuneration. Barbara praised her for her passion but told her that it would be hard for an investor to watch her write a cheque for wages that she didn’t collect when the business started and she dropped out. Marked continued his questioning about the product results and she didn’t know what percentage of sales did not work for the purchaser. He didn’t think she was concentrating enough on R&D and she kept referring back to her FDA clearance and sales which did not satisfy Mark’s skepticism and he was out.

Robert cringed about the claim of cancer therapy relief and he opted out with great prejudice. Daymond claimed that he has no problem with snake oil sales people and he believes in certain similar products. He believed in her at first when she said the company was profitable until he found out about the debt not being paid down at which time he also dropped out because he didn’t trust her. This left Kevin who liked the fact that she was making money and offered the $250K for 40% equity or six times the cash flow which is what he claims it is worth. She declined saying that the company was going somewhere and her valuation was fair. She wouldn’t negotiate any further and Kevin called her greedy, that no investor would give her that valuation and he also dropped out.

My entrepreneur ratings:

Idea: good; Competence: moderate; Knowledge of Market and Competition: good; Competitive Advantage: unique; Preparation / Planning: moderate; Chance of Success: high.

Romy had created a unique medical device that solved a real time problem for many people creating great opportunities. She had a solid cash flow with impressive sales which makes one wonder why she was looking for investment. If the profit was re-invested into controlled growth then she could even pay herself annual dividends and remove herself as a creditor to keep the balance sheet clean.  There must be more to the $600K debt which scared off Daymond. In addition to the extremely greedy and unsubstantiated valuation, the Sharks were less than impressed by the lack of R&D and factual studies which report the percentage of users who actually claimed relief. This type of information is critical for any type of medical device and led to considerable skepticism. She should still do well on her own if she adheres to good financial management practices.

Pitch Three:

NEO Innovations - Asking $80K for a 20% equity.

Valuation: $400K

Nick Gonzales and Kevin Mack have a solution for removing unwanted tattoos. Their Magic IPL product uses light energy to break up the pigments of the tattoo without breaking up the skin. The hand held device emits a pulse of white light which only acts upon dark pigments and Nick demonstrated how the product has worked on removing a tattoo on his arm. It does take a number of treatments to completely remove body art which previously required plastic surgery with scar possibilities. Daymond asked if he would explode if he tried it because he is black. Nick answered that a person can dial in a different wattage setting which Kevin questioned as this onus on the customer could lead to injury and liability. The product is for home use and the Sharks were re-assured that it is safe to use and will not fry anyone.

They claim that the technology of using a 50 watt light bulb to remove unwanted tattoos has been around for a long time and under questioning from Daymond they admitted that there were other similar home remedy providers but their systems cost thousands of dollars. When Barbara asked if the light was hot to the touch, Kevin (the pitchman) admitted to the Shark’s surprise that there was some discomfort.

Sales: Approx. 30 units per month through amazon.com and ebay.

Retail: $140.00

They have been doing this for a year and a half and according to Nick, when asked about total sales to date, claimed 1,200 units total which is way over the 30 a month that his partner mentioned earlier. Daymond asked if they would do $299K in sales this year which they confirmed. The FDA approval is pending and Barbara couldn’t believe that they could sell them prior to that and she dropped out for reasons of product safety. Mark liked the product idea but because he was a target for frivalous law suits he opted out as did Robert for the same reason. Kevin liked the business and the numbers but questioned the liability and also bowed out. Daymond wanted FDA approval and he followed suit.

My entrepreneur ratings:

Idea: good; Competence: moderate; Knowledge of Market and Competition: good; Competitive Advantage: price point; Preparation / Planning: moderate; Chance of Success: moderate.

As with the previous pitch person, the partners created a great product for a real time problem and the target market is huge. Unfortunately, like the Wrist Band, they didn’t have the proof based on clinical studies. However, unlike Romy’s product pitched previously, their device did not have FDA approval and it is an electrical device. The liability issue here is overwhelming and they had not completed the necessary steps to attract investment which would be protected from litigation making their appearance on the Tank premature. Although the valuation may have been reasonable, there was some confusion in the numbers which created another obstacle.

Pitch Four:

JESKA Shoe Company - Asking $70K for a 30% equity.

Valuation: $233K          (Start-up with no sales.)

Jessica Hayes, from somewhere in the deep south of the United States, has developed a product that transforms one pair of ladies shoes in to different looks using an innovative interchangeable heel system and magnetic accessories. We knew from her introduction vignette that there were no sales as her product was still in the protype phase and Daymond wasted no time in confirming this. Kevin brought up the point that she wasn’t the first to design a shoe with interchangeable heels and Jessica obviously did her homework because she advised him that the first patent was filed in 1899. Robert wondered aloud why he hasn’t seen the innovation in shoe stores prior to this and Kevin educated everyone on the large shoe company philosophy of selling more shoes and not embracing a technology that would lead to fewer sales.

Mark wanted to know how she was going to stand out in a market where the big companies were spending millions of dollars to make themselves highly visible to the worldwide female consumer. She answered that the way to go would be to licence the technology to an existing brand and Kevin kind of shot her down as a little shoe cockroach asking how she planned to compete against the giants and if it would be easy. She admitted that it wouldn’t be easy, but would be possible and when asked about the suggested price, Jessica said the estimated retail price would be $200. She has a patent pending on the magnets and heel concept. Daymond wanted to know more about the price on the shoe system and what she had invested. Jessica informed the Sharks that she was working with an overseas manufacturer who was doing the pre-production work and that she had invested $63,000 of her own money into the product to date.

When questioned about the source of her investment, Jessica related a very heart rendering story about using a college fund set up by her entrepreneur grandfather that she didn’t need for school because she earned scholarships. She then related a heart breaking story about running out of money and going to her parents for a loan which they provided after taking out a second mortgage on their home. Daymond said he could relate to her story as his mother did the same for him.  (Look what his idea turned in to!) Robert said he could never go to his parents because of the pressure it would put on his shoulders and reiterated that he was struggling with the fact that the idea was not available because women actually like changing shoes.

Kevin wanted the answer to the key question when starting a product based business: “How are you going to get distribution?” Jessica admitted that she didn’t have the answers and Kevin showed disappointment that she didn’t have a plan and dropped out followed by Mark who opted out politely saying he didn’t know the business and would be of no help. Barbara confirmed that the first pair of shoes and heels would sell for $200 and an additional pair of heels would cost between $20 and $30. She was troubled that the target consumers would be affluent enough to purchase two pairs at that price and dropped out after suggesting to Jessica that there would be a right business for her (this isn’t it).

Robert philosophized that if attitude and drive were the measures of success then she would be very well off one day. He couldn’t see the business and how she was going to get there but echoed Barbara’s encouragement that she would make it in something. Jessica made a last ditch effort to secure an investment from Daymond claiming that the interchangeable shoes would make millions. Daymond reminded her that she didn’t have a patent or a finished product – all she had was debt and a lot of courage. He was obviously taken in with her story, determination and likeable personality because he made her an offer to everyone’s surprise, only it was demanding a 70% stake in the company. He reminded the other Sharks that he had to do the job for her and would look after production, shipping and financing orders and that he was actually investing in her. Jessica said that a small portion of a big thing is better than a big portion of a small thing and took Daymond’s offer.

My entrepreneur ratings:

Idea: good; Competence: low (from a business perspective); Knowledge of Market and Competition: good; Competitive Advantage: unique; Preparation / Planning: poor; Chance of Success: questionable (even with Daymond’s help).

To me this is a sad case with a happy ending. Sad because there was no proper planning done to see if there was a market before making a sizeable investment in an idea or a dream. It is an all too familiar scenario and to hear that a person has taken money from a re-mortgaged home when inadequate planning had been done is a nightmare scenario repeated too often with people. The broken record keeps repeating – Feasibility Study before investing! It is spelled out clearly in my book. I have seen too many cases where people pursue dreams but only work on the product and have no clue about how they are going to sell it. Jessica was very fortunate that Daymond was taken in by her (and not the business) and in her position she had no choice but to accept giving away 70%. The alternative would have been a large debt to her parents with a long personal pay back out of personal funds. She did say something very profound after accepting his offer, that a small portion of a big thing is better than a big portion of a small thing. Greed is a big reason why people fail to get an investment on the show, both in the amount they are asking for and the equity they are offering. Jessica’s words, if heeded would get many more people the backing of the Sharks.

This review makes a great forum for a critique and learning experience valuable to all entrepreneurs. Learn what to do and what not to do from entrepreneurs making a pitch for money in the Shark Tank.  The review complements my book, The Small Business Planner and there are also great free resources including fully formatted planning and marketing templates on the book’s web site. In addition to this review, my regular Blog, and the Entrepreneurship Video Series on my You Tube channel can be very helpful to budding entrepreneurs. Constructive comments are most welcome on any of these reviews.

Episode 16 – Season 4. Original air date: Feb. 22, 2013

Pitch One:

Addison’s Wonderland - Asking $90K for a 20% stake

Valuation: $450,000.

Brooke Bryant and Brittany Hayes developed a new unique and colorful line of children’s bedroom decor and bedding named after Brittany’s daughter. The line is sold as a set or individually on-line from duvet, blanket to pillow case.

Retail: $1,400 for complete twin bed set.
The Sharks were surprised at the high price tag and Brittany said they were trying to get away from the local work shop to a larger manufacturing facility and bring the cost down.

Sales:   $130K in one year.   Margin: 55%       Avg. order: $900.00

The Sharks argued over the future of the business with the current model selling to a niche upscale clientele rather than making it affordable for the masses. Only Lori supported paring the price down to meet her model while the guys in solidarity agreed that the price should stay high and maintain higher margins with lower unit sales. Lori continued to press the point about making it affordable for the greatest number of people and profit more through volume.

The ladies said that they wanted to get the price down to make the wholesale rate attractive to specialty shops and Kevin reminded them that it would be an entirely different business of distribution with margins of fifty percent offered rather than staying with the current model which appears to be working for them. Daymond agreed telling them that they had a good business and may be trying to grow too big – too fast. Robert was the first out explaining that he didn’t understand their particular market followed by Lori who is looking for products that can be affordable for the greatest number of people.

Daymond didn’t think that the partners needed their assistance as they could profitably run the business out of their home and make a million dollars and he opted out. Kevin didn’t see anything proprietary in the business which prompted him to drop out leaving only Mark who liked the product and felt there was a place in a higher value niche market. He said that he was looking for ROT (Return on his Time) in addition to ROI (Return on Investment). He pondered the idea for a while then dropped out also advising them that they didn’t need any help.

My entrepreneur ratings:

Idea: good; Competence: high; Knowledge of Market and Competition – moderate; Competitive Advantage: unique; Preparation / Planning: moderate; Chance of Success: high.

Brooke and Brittany established a good solid business with a one year successful track record offering a unique product targeting a higher end niche market. They are profitable but wanted to grow quicker thus their appearance on the show looking for equity investor involvement to grow the business on the more cut-throat distribution side of wholesale / retail. They got sound advice from the Sharks who made them realize that their growth plan would be a huge mistake. They should follow the road previously travelled successfully to continue growing the business in a niche market. This will keep the costs down and economize their time involvement. They also get to retain 100% ownership of their company and stay away from the more competitive retail market where another company could create knock-off products easily. They will not make the same mistake that so many new and seasoned entrepreneurs make which is uncontrolled growth: either growing too soon; too large; too quickly; or unnecessarily which usually leads to business failure.

Pitch Two:

Muddy Water Camo - Asking $150K for a 5% stake

Valuation: $3 million.

Steve Maloney, the president of Muddy Water Camo, has invented a new way of manufacturing camouflage that will revolutionize the hunting industry. He showed a sample of traditional camo followed by his new design which makes the hunter blend in more with the natural environment as his partner Stephen Kirkpatrick, a professional outdoor photographer,  stood up from behind a marshy duck blind making duck calls. After five years of development they introduced their new camo designs.

The Sharks were shown a photo of the two standing in a marshy area almost invisible unless pointed out as they blended right in – unlike the existing camo designs which have remained constant since inception. Daymond wanted to know if they were selling the technology to garment companies or actually selling the clothing.  Stephen said that they are selling both at which time Robert asked about sales.

Sales:  $150K to date. (Not into high season yet).

We knew this was going to come up and Robert was the first one to tell them that they did a good job camouflaging their valuation. ($3 million for a new company with no track record!) Robert asked how they came up with the crazy valuation and Steve mentioned the size of the market and getting the finished product to market. They had invested $600K themselves to date along with $2.5 million from other investors (hunters) who purchased a sixteen percent stake in business before anything was sold. Kevin told them that they have the same brain as a duck if they thought he was going to give them a $3 million dollar valuation.

Mark wanted to know what they told the investors about growth potential to get their money and Steve is forecasting $3 million in sales in three years. The camo is being sold in fifty-eight stores currently but none of the big retailers. Robert said the inflated valuation drove him out of the bidding for a piece of the action. Lori agreed that they would sell it because the idea is good but because they were asking for too much she opted out. Daymond said they were out of their minds because the $3 million valuation was quack quack and he also dropped out. Mark said that the biggest problem was the sixteen investors and opted out followed by Kevin who said that to be successful they had to grow quickly and knock the existing standard out. He offered them the $150K for 20% and Steve said they wouldn’t lower their valuation. Kevin ended their hope for a new investor and they left with no deals.

My entrepreneur ratings:

Idea: good; Competence: high; Knowledge of Market and Competition – good; Competitive Advantage: unique; Preparation / Planning: good; Chance of Success: good.

The big question is, why did these guys bother going on Shark Tank at all? Their valuation was ridiculous and they were very lucky to get a bid from Kevin which was very surprising. They should have jumped at it as there is no way to justify the valuation. The idea is good and Kevin offered them the right strategy but without the right partner it will be almost imposible to get in to Dick’s or Bass pro Shops and become the industry standard for camo. If they had offered 15% for the $150K at the start then probably two or three Sharks would have taken the bait.

Pitch Three:

Hip Chicks - Asking $150K for a 35% stake

Valuation: $1 million.

Meagan and Amy from Texas, have created a fun and sexy denim line of clothing for women. They are form fitting and highlight a woman’s shape while exposing the right amount of hip while eliminating thr dreaded whale tail and muffin top. Lori checked out the fabric and Kevin piped in: “Do you have any sales?” When Meagan replied, $12,000, Daymond went, “Ohhh.” (Another over-the-top valuation!) Robert asked why they were there with only $12K in sales through one store and Meagan replied that they had been testing the market with years of research. Robert asked about sales in the next year if they got the investment and how they would get there. Amy answered that they could grow to $850K by selling through boutiques.

Retail: $187.00           Wholesale: $80.00        Cost:   $68.00

When Kevin learned what the cost to manufacture one pair was he said, “You are going to hell – you are making no money!” Amy said that’s why they were there – to get the cost down by placing bigger orders. Daymond said that this was his space and that most jean suppliers were trying to bring their price down to $120. Robert asked Daymond what it would cost to launch a new denim line and get a market share of one percent in the next five years and his answer was $5 million. Robert was quick to drop out after hearing the answer.

Lori told them that they needed more money and it was a high mountain to climb then suggested that they design something unique in a less competitive market. Daymond advised them to try to partner up with one of the larger players and if successful they will have no trouble getting a Shark to invest. Mark gave them a shot of confidence telling them to grind it out and that they didn’t need $5 million. If they could make a woman’s derriere look good then they will eventually get there. Kevin blasted Mark’s advice telling the partners that their probability of success in this market is zero. He told them to be good entrepreneurs and find something where the chance of success was > 0 (greater than zero). Obviously they all opted out after giving their dissertation.

My entrepreneur ratings:

Idea: questionable; Competence: low; Knowledge of Market and Competition – low; Competitive Advantage: unique; Preparation / Planning: poor; Chance of Success: very low.

This is another case where people put a considerable amount of money into a product before doing their homework. It is called a Feasibility Study and the analysis should have been exhaustive in this case before any investment was made. They would have learned what most of the Sharks were trying to tell them and saved a considerable amount of time and money. Remember to be successful as an entrepreneur there not only has to be the passion or the dream but there MUST be a profit as well to complete the equation. You just can’t manufacture a product for $68 and sell it for $80 and stay in business. Completing a detailed P&L will remiind you of this instantly.

Pitch Four:

Proof Eyewear - Asking $150K for a 10% stake

Valuation: $1.5 million.

Brothers Taylor, Brooks and Tanner Dame from Boise, ID, pitched their own line of unique  custom eyewear. The family has been in the lumber business for six decades and Brooks started making eyewear frames several years earlier out of wood and as the idea caught on he brought in his brothers to help out. Because no two trees are exactly alike, no two pairs or Proof Eyewear are alike. Much of the current sales came from trade shows.

Sales:  $433K in 12 months.

Retail: (Sun glasses)  $100.00     Wholesale: $50.00    Cost:   $14.00

Profit: $150K.    Projected: $850 – 900K  (this year)

The boys said that the glasses sell themselves. They haven’t spent much on marketing but have seen photos of celebrities wearing them. Daymond announced that wood was a hot commodity right now. The Sharks were very impressed and liked their logo as well. They were on their way to owning a strong brand in eye wear. As much as Lori loved the guys she had to back out because it was a conflict of interest with a sun glass manufacturer she has already partnered with. They have a $200K deal coming up with Pacific stores which will require extra inventory and Mark brought up a hypothetical dilemma of having to fill an order of 120 pairs for 100 stores and not being able to supply. The brothers replied that their deal with the Sharks would solve that and Mark dropped out.

Daymond admitted that the brand would be cool but they didn’t have the same vision and he was out. Kevin made an offer asking for 25% of the company and a $2.50 royalty for each pair sold that drops to $1.00 in perpetuity when he recoups his money. Robert offered the $150K for 25% and no royalty as it would starve them of valuable cash flow at this early stage of growth. They called their Dad who advised them of the pros and cons and made a counter asking for more investment telling them that the valuation should be higher than the $60oK they are offering given the sales and track record. Brooks asked for a $200K investment for 20% which made the valuation $1 million. Robert held fast and the brothers declined the offer.

My entrepreneur ratings:

Idea: excellent; Competence: high; Knowledge of Market and Competition – high; Competitive Advantage: unique; Preparation / Planning: good; Chance of Success: high.

The brothers did everything right by developing a unique and cool line and growing the business with substantial sales. The valuation was a little high for the current level of sales. The offer from Kevin was unacceptable to them but their counter-offer to Robert was greedy as a $1 million investment was still high. If they made a counter-offer of the original $150K for 20% there would have been a good chance that Robert would have been in as he really wanted to work with the boys and there would not have been a concern about any additional funding requirements to satisfy inventory levels. They should still be able to grow the company slowly in a controlled way and should stay out of trouble if they don’t run into the scenario Mark pointed out.