Article 04: Matters of Vitamin M
An intellectual property, a passionate pitch, commitment to a social cause, a trending theme, a repackaged timeless classic, sorted distribution channels, outstanding sales; the list can be long. These are the ingredients of a successful business. But there are three things that make an entrepreneur’s business irresistible to invest: Knowledge of books, financial prudence, and a growth plan all of which have to do with money, money, and money!
Bear with us for a rather long-ish article, we hope it would be as interesting to you as it was for us.
Have a look at a sequence from one of the pitches:
Entrepreneur: We are seeking, $300K for 8% of our business
(Skeptical) Kevin: That was a great presentation. You’re asking for 300K for 8% which imputes a valuation of $3.75M, you must be having great sales. Let’s get down to the numbers.
Entrepreneur: We have sold $65K so far this year and are on track to do $100K by end of the year.
(Curious) Kevin: What is your profit after tax and after paying yourself?
Entrepreneur: We will have $10K net profit and we are not paying ourselves.
(Angry) Kevin: For you to give me my money back, you will have to sell $37.5M which I don’t see happening.
Entrepreneur: But the market size is $9B & even if we capture 1%, we can have sales of $90M.
(Livid) Mark: No! No! No! I’m out!
Pitch after pitch, people coming on the show have gotten smarter. Yet, there are some who use market size as the base argument in their pitch to get an investment. They seem to be assuming all pieces of the puzzle will fit right and this assumption conveniently disregards market dynamics, essential capabilities and that’s the reason why investors don’t want to touch such businesses with a ten foot pole. Such pitches are often unsuccessful unless they have some other saving grace like an intellectual property or a remarkable profit margin and proven sales.
Let’s take the example of “Kids Luv”, a sugar free vegan juice product from S11 E15. Ashi Jelinek, the owner of the business had raised $1M and was left with $50k in the bank after 3.5 years. She burned through $950k by spending money on trademarks for her product’s name, her company’s name, getting “international distribution channels in order”. But she didn’t do the one thing she should have done. She didn’t sell anything! She delegated the only thing she shouldn’t have delegated. Mark Cuban questioned her:
“Whose company is it?”
“Who’s responsible for it?”
“Who’s supposed to go door to door and understand if it really works?”
Jelinek’s answers didn’t please Cuban and Corcoran. Two sharks charging at you like that are two sharks too many! O’leary and Greiner also didn’t like her attitude towards her business one bit. Herjavec found it hard too understand that Jelinek didn’t prioritize paying the money back to those she took it from and couldn’t even see that her approach to the business was wrong. She lacked the “critic” role, and she didn’t dare taking a look in the mirror, and here’s what was worse — she seemed to shy away from the mirror when Cuban and Corcoran held it to her face.
Nothing sells like sales, nothing impresses like profits and nothing bums out like debts! In other words, when entrepreneurs deal with the matters of vitamin M (that is money, if it is not clear already 😄), investors rely on those entrepreneurs who understand their books, who are prudent on their expenditures (though the quantum of prudence differs for every business space), and have a vision of expansion — an actionable growth engine.
In S12 E03, “Hug Sleep” a sleeping pod (blanket) that simulates hugging sensation using deep touch pressure therapy pitched on Shark Tank. Matt Mundt and Angie Kupper, the husband-wife team starting with a tiny $2500 investment, Hug Sleep had raked in an impressive $490k in just 16 months making $335k in the last 12 months with a profit of $140k on their total sales. Because of such a low cost for starting their business, they were profitable within 2 weeks of their start. With a landed cost to make of $22 and a selling price of $99.99, Hug Sleep managed excellent margins. Their customer acquisition cost (money needed to spend on advertising calculated against each sale made) was a modest $11.50. They sell on their website as well as on Amazon. Their problem: keeping up with the crazy demand for people trying to have a cuddly sleep, they needed inventory. Starting with Daymond, followed by Kevin and Robert, all Sharks offered them deals because their all aspects in their financials were OUTSTANDING, they had a killer product that solved a problem, and their ask for the investment was $150k for a 10% equity. Lori and Mark teamed up to offer them $300k for 20% equity (10% each). To counter them, Robert, Daymond, and Kevin teamed up and offered the same deal, $300k for 20% making a play for 3 sharks at the same cost.
What a bidding war! Rare scenes on Shark Tank those! Matt and Angie accepted Lori and Mark’s offer. As of today, their website is putting orders on a waiting list — such has been the craze for their product!
Money is the central part of every business. The easiest way to understand why knowing about money matters of your business is to look at it like a Shark. Put yourself in an investor’s shoes and see things. Would you invest in someone’s business if they didn’t know their numbers? It reeks of negligence at best and arrogance at worst if an entrepreneur is not straight with the investors when they ask about the business numbers. The sharks hate those pitchers who stand with happy faces and no clarity on their numbers. By not answering questions on the money thoroughly, one is already considered to be doing a shoddy job of not only presenting but also advertising. This is because the air time on Shark Tank is the best and free advertisement one can do.
Vitamin M influences the health of a business in more ways than one. It wields the power to forge new connections, maintain old ones, and provides the freedom to let go of those that have turned sour. It commands respect of investors, customers, and when handled right, Vitamin M attracts Vitamin M!
By Ambarish Kulkarni and Sapna Patni.
This is our fourth in a series of articles on Shark Tank, where we try to deconstruct the pitches, business fundamentals, and the Sharks.
*Copyrights of all pictures are owned by ABC Studios and creators of Shark Tank. Authors do not claim any ownership of the pictures.
