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, my regular Blog, along with the Video Series on my You Tube channel can be very helpful to budding and seasoned Entrepreneurs. Of primary interest to those making a pitch on the program is the Feasibility Study as described in the book. If completed in detail, this study will indicate if there is a viable market for the product or service and if the business can be profitable. An added feature to my reviews is a rating on the company’s web site – if available. The web site has become the number one marketing tool for most businesses today and my observations are based on a quick overview whether accepted web design and development standards are met. Remember – you have a very short period of time to hold the attention of a new visitor. Therefore, the web site deserves the appropriate investment and professionalism to be effective. Constructive comments are most welcome on any of these reviews.
Larry Wilson is author of the bestselling book, The Small Business Planner, and is the founder of Dynamic Performance Group, a strategic and marketing planning firm.
Season 5 – Episode 22. Original air date: April 4, 2014
Lori and Barbara both appeared in this episode which was missing regular Daymond.
Pitch One: Kodiak Cakes - Asking $500K for 10%
Valuation: $5 million.
Cameron Smith and Joel Clark represented Kodiak Cakes which are made from 100% whole grain and all natural products. Just add water. Based on an old Utah family recipe, Kodiak Cakes Flapjack and Waffle Mix went from being sold in paper lunch sacks to neighbors out of a red wagon in 1982, to being sold in ski-town gift shops in 1995. The product is now being sold in over 7000 grocery stores nationwide including Target, Safeway, Meijer, and many more. There are different varieties of berry and all the Sharks enjoyed their samples.
Sales: $1 million this year with Target alone and a margin of 45%.
Total projected sales for this year: $5 million.
Retail: $1.65 Cost: $3.02
Target is re-ordering to 1,600 stores and the partners need the money to expand their product lines. The Sharks questioned why they wouldn’t borrow money against their receivables or simply re-invest some of the profits without incurring debt and Joel said they are ready to explode the business. Kevin reminded them that they were buiilding a brand and if they get big enough they will appear on to one of the big player’s radar screens because there is nothing proprietary about the ingredients. He argued that they weren’t worth ten times their pre-tax profit with a high valuation of $5 million and also reminded them that they were trying to take market share away from the market leader, Aunt Jemima, which is priced at about half of their retail price. Robert wanted to know why someone would pay twice as much for their product and Joel could only confirm that they indeed do and Kodiak Cake’s sales are growing.
Lori thought the brand and packaging was reminiscent of the outdoors and Robert affirmed that people don’t know the brand yet where someone can relate to the ‘Kodiak guys‘. Kevin went back to the the need to build the risk of a takeover by one of the two large competitors into an investment which spawned an argument with Mark about competitive products and another when Robert learned that they wanted to use the investment on ‘slotting fees‘ which is a payment to a large retailer to guaranty shelf space. The partners got into an interesting argument with Kevin about return on investment and future company valuation. Joel said they would do $20 million in four years with a valuation of 1.5 times revenue, or $30 million. Kevin said that commodities don’t trade for ten times cash flow and Joel returned to promoting the brand value in future worth.
In the end, value is always determined by the amount of the check that an investor or purchaser is willing to write. In this case, Kevin said that their business is only worth $2 million which substantiates an offer for 25% equity instead of the 10% they asked for. (Remember they must get the $500K investment or leave empty handed.) But he also wanted to add a new risk premium because the business still needed to grow by another 30% to become attractive to offers by the big players and said he would need 50%. He also added that because he knew they wouldn’t accept it, he was out. Robert confirmed that he would like to be involved, but there would have to be a premium in it for him. To factor in the risk he offered the $500K for 35% and Barbara offered half ($250K) for 20% adding that they would need to get another Shark on board to complete her deal. Lori needs to love what she gets into and since pancakes were not on her list of favorites, she opted out.
This left Mark who felt they were faced with some macro challenges prompting him to drop out leaving only Robert’s offer on the table. Then Kevin jumped back into the fray joining with Barbara but their offer jumped to 25% each, or half of the business. Fifteen percent more than Robert offered but with the power of two Sharks as partners. The partners ended up declining both offers with a congratulations from Mark that they did the right thing.
My entrepreneur ratings:
Idea: good; Competence: high; Knowledge of Market and Competition: good; Competitive Advantage: health value and future branding; Preparation / Planning: high; Chance of Success; good – even without a Shark as partner.
The partners came into the tank with a successful business which had a positive growth trend and promising future. They really did not need the money but did bring some interesting dynamics to light, particularly with respect to company valuation. Did they make the right decision? An argument could be made here for yes and no. If the numbers they claim are correct, then they should do fine on their own and it is always best to grow a business that way.
Web Site: kodiakcakes.com
The web site is excellent. Attractive, user friendly and optimized for searches.
Pitch Two: Monkey Mat - Asking $100K for 30%
Christie Barany and Courtney Turich designed the Monkey Mat, a clean portable floor where ever a person (especially with children) travels. The idea was spawned during an airport layover Christie had to suffer through with her children who were forced to play on a dirty floor. Monkey Mat protects the family from any questionably clean floor and is perfect for picnics, travel, beach, concerts, and sporting events, to name a few. The soft material is water repellent, has weighted corners, loops for stakes, is machine washable and includes a compact carrying pouch. The partners put on a fun, animated presentation then handed out samples.
Sales: $60K (First year mainly on-line and also through fifty separate retailers.)
Retail: $39.99 Cost: $13.14 (Made in China.)
The Sharks found all the costs outrageous from retail to manufacturing which they said was high due to the material which is a blend of nylon to maintain softness and toughness to house the four steel discs which cost fifty cents each. Kevin wondered out loud; “Why is anybody going to pay twenty or thirty when they can pay two bucks off a roll in any clothing store?” They tried to explain then Mark jumped in to help them out saying; “Convenience.” His wife would use it in an instant and he loved the product but hated the price. The Sharks agreed it should be closer to $9.99 retail and Christie said they would lose the quality and Robert confirmed that he liked the product as well but their problem was getting the price down in order to make it a mass produced affordable item. He was the first to opt out followed by Kevin. Barbara thought it was too small and repeated the cost problem before dropping out. Lori said with the right strategic partner they could get the price down and wanted to see how easily it went back in the travel bag. When Mark did it quickly and easily she got him to partner with her on an offer for 35% and they jumped at the deal. The other Sharks were still skeptical that they would not get a return on their investment.
My entrepreneur ratings:
Idea: good; Competence: high; Knowledge of Market and Competition: good; Competitive Advantage: unique; Preparation / Planning: questionable with high valuation but they got away with it; Chance of Success: good with Lori and Mark as partners.
The ladies had a good idea and presented it well. There were a few obvious problems with the operation at this stage of growth. These were: the costs (retail and cost to manufacture) which were about three times higher than the market would tolerate to make it successful; it is only a product and not an actual business; and the valuation was far too high for only $60K in sales. They surprisingly did get away with it and received an offer, likely because Lori liked them and their drive. It is interesting to note that the product now sells on their web site for $19.99 and that will have a dramatic positive affect on sales. If they also got the cost to manufacture down, and I’m sure with their Shark partners that they did, then bottom line profitability will also improve.
Web Site: monkeymat.com
The web site is laid out nicely and professional in appearance. It is easy to find your way around and there is quick understanding of the product. The first graphic, as is often the case, utilizes too much valuable real estate bragging about the appearance on television instead of the benefits and ‘what’s in it for the customer’. The web site is not optimized for searches as it is missing appropriate meta tags and the title does not utilize key words. This is not an issue if you are referring most of your traffic to the site through ads or paid links and not dependent upon searches.
Pitch Three: Plated - Asking $500K for 4%
Valuation: $12.5 million..
Nick Toranto and Josh Hix were actually serious about their web based service business called Plated which delivers chef-designed recipes and fresh ingredients directly to a customer’s door so they can relax and enjoy the full cooking experience. They claim to have served tens of thousands of meals around the Northeastern U.S. since launching six months earlier and want to go nation wide. There is a minimum forty dollar minimum order (incl. shipping) for four people. They can maintain higher margins for handling food over stores and restaurants because there is little spoilage.
Sales: $100K (In the past month.) Projection: $2.5 million (the next 6 months).
Long-term projection: $1 million per month.
They started the business with just over $50K and have since obtained $3 million in investments at a post money valuation of $9 million. They both have business and tech backgrounds. Robert was the first to opt out citing that it is a service that he wouldn’t use – so couldn’t invest in. Kevin, who is big on proprietary property protection, said that anyone could go ahead and do the same thing, adding substantially to the risk factor. He figured he could do the whole operation himself for 3 million bucks – and since they wanted him to pay three times that figure to play with them – also dropped out. Nick countered that he would have difficulty finding two hard chargers like them to knock it out of the park.
Lori was having trouble with the concept as it appeared only to be for someone who likes to cook, but was too busy and she dropped out. Mark asked who they thought was their biggest competition and threat and they replied, “Take-out.” Barbara reminded them that take-out is a pretty big threat prompting her to follow the others. Mark said he wouldn’t be a customer, but didn’t need to be to have an interest and wanted to know how it could be a sustainable business. They got his interest when they mentioned their subscriber base of several thousand regular customers. He made an offer of $500K for a $9 million dollar valuation – or about 5.5% and in addition he wants advisory shares. (A match to shares given any other adviser.) They wanted to talk about it and Mark couldn’t understand why because he was giving them the valuation they were after in their planning and also the advisory support requested. They came to their senses and took the deal.
My entrepreneur ratings:
Idea: good; Competence: high; Knowledge of Market and Competition: good; Competitive Advantage: unique; Preparation / Planning: high – they knew the numbers; Chance of Success: good especially with Mark as a partner.
Nick and Josh have developed a great web based business with established sales and growth numbers. They also knew business and technology which makes them great front men – something investors find mandatory so they can trust that the right direction for the company, and their money, will be taken. The valuation was very aggressive but they were lucky that it worked for Mark. It will be interesting to see if this one makes it through due diligence and he actually writes a check as there is considerable risk attached to this kind of venture as conveyed by Kevin.