2015-09-17 13:00:00 Raising Capital English Expert Geri Stengel breaks down why getting investor money is not all about the cash. See why strategy and expertise can turn a good deal... https://d2yxjugd6jl4bj.cloudfront.net/wp-content/uploads/2015/09/08233029/2015_8_27-small-am-which_shark_on_shark_tank_should_you_swim_with.jpg Which Shark on “Shark Tank” Should You Swim With?

Which Shark on “Shark Tank” Should You Swim With?

6 min read

Investors come in all shapes and sizes, and bring different types of value to the deals they make. It’s no different on Shark Tank, the ABC reality show that has become something of a cultural touchstone and ignited general interest in entrepreneurship. Even if you don’t plan to make an appearance on the show, you can learn a lot from the entrepreneurs who have dared to enter the Tank.

One of the most important takeaways from the show is that investors—televised or otherwise—offer more than money. Many offer connections to customers and vendors. They also offer strategic advice or even access to other investors.

Before attending any investor meeting, do a little soul searching so you know which investor will be most helpful to you. Do you want someone who can open doors to customers and help shape the direction of the company? Do you want someone just for his or her money? Or perhaps you want investors who are somewhere in between? Whomever you’re looking for, do your homework on the investor in question so you know if they are a good match for you.

Using two deals from Shark Tank as case studies, I connected with a former entrepreneurship teaching buddy of mine, Dawn Fotopulos, with whom I previously facilitated a Kauffman FastTrac GrowthVenture class provided by NYC Business Solutions.

Fotopulos is also a small business consultant and the author of Accounting for the Numberphobic: A Small Business Survival Guide. We looked at the entrepreneurs who were jumping into the Tank, and focused on how their unique needs matched up with what the five Shark Tank investors had to offer. Here’s what we learned.

FunBites’ Shark Is More Than Money—She’s a Strategic Fit

Bobbie Rhoads’ daughter, Dylan, was a picky eater. She liked her food in small pieces. Dylan isn’t the only child who likes bite-sized portions. Research confirms that cutting food into bite-sized pieces makes eating it more enticing to picky eaters. So Rhoads invented a durable curved blade cutter, which she named FunBites, that cuts any kids’ food (e.g. sandwiches, pancakes, veggies, brownies, etc.) into bite-sized fun shapes.

If you’re presenting to Sharks—or any investor, for that matter—knowing your numbers is key, says Fotopulos. FunBites had generated $400,000 in revenue over the past three years, $150,000 of that in the past 12 months. The product costs $1.72 to make, and sells for $6 wholesale, $12.99 retail. The gross margin is a healthy 71% for wholesalers and higher for direct e-commerce sales. FunBites is sold online, and Rhoads had just inked a deal with Target. Disney also had expressed interest in licensing the product.

Revenue isn’t the only important metric for a startup company. Fotopulos points out that recognition in the form of awards and reviews establishes credibility for the product. Rhoads won a Huggies MomInspired Grant.

She has also won awards from Able Play for Autistic Children, Mom’s Best, Mom’s Choice, Parent Tested Parent Approved and more than a dozen other parent/kid awards, as well as rave reviews from more than 1,200 mommy bloggers worldwide. And it didn’t hurt that Rhoads also was a vice president of marketing at a major cosmetic company, the youngest ever appointed by this company, says Fotopulos.

Nonetheless, Rhoads felt she’d gone as far as one person could go alone. She wanted help getting into more big retailers, attracting more licensing deals and more e-commerce sales. Her ask was $75,000 for a 20% stake in the company.

This was a deal with Shark Lori Greiner’s name written all over it. She too is an inventor of consumer products, with more than 100 to her credit. She has connections to Bed Bath & Beyond, Buy Buy Baby and Toys ”R” Us. Greiner jumped right in with an offer of $75,000 for a 25% stake in the company.

Daymond John, the licensing guru on Shark Tank, countered with $100,000 for 30% equity. Greiner cut off Mark Cuban—the master of e-commerce—even before he could make an offer, insisting that Rhoads make a deal with Greiner now or Greiner would walk away.

As Greiner said, FunBites is a retail play. Greiner also has experience with licensing deals. Rhoads made the deal with Greiner. Robert Herjavec, another Shark, told Rhoads she made the right deal. Fotopulos and I agree.

Lumio Goes for a Shark That Nibbles, Not Bites

Max Gunawan is the inventor of Lumio, an elegant lighting solution that unfolds from a book like an accordion. It’s portable, rechargeable, recyclable and great for reading, among other things.

Lumio got traction from the outset, raising $580,000—nearly 10 times its Kickstarter crowdfunding campaign goal of $60,000—to fund its first production run. Sales were $1 million in 2013. At the time the show was recorded, sales were projected to be between $2 and $2.5 million in 2014, in large part because of distribution deals in art museums across the U.S. and with retailers in Tokyo.

A Lumio lamp retails for $190. Its initial cost of good sold was $80. To lower production costs, Gunawan spent four months in China working with a factory to bring costs down to $65 per lamp, improving margins from 58% to 68%.

But this wasn’t good enough for Gunawan. His goal was to reduce cost to $50 by doing bigger production runs so he could achieve a gross margin of 74%. He really impressed the Sharks with his understanding of how important it was to bring down the cost of goods sold, according to Fotopulos.

Gunawan had game, and the five Sharks recognized this. Cuban, Greiner and Johns offered deals that reflected the added value they bring to the table in exchange for a larger stake in the company. Kevin O’Leary asked for the lowest share of the company, but wanted a royalty as part of his deal.

Herjavec is more of a hands-off investor. He doesn’t want to help chart the company’s future; he wants to remain in the background, providing a limited amount of guidance. Since Gunawan didn’t need additional expertise from his investors, and recognized an opportunity that fit his needs, Herjavec won the deal by offering $350,000 for a 10% stake in the company.

No hard feelings, though: Mark Cuban recommended Lumio as one of his five must-have holiday gifts in a 2014 Inc. article.

Applying Shark Tank Lessons to the Hunt for Investors

It’s easy to do homework on a Shark by watching episodes of Shark Tank and doing some online research. While not all angel investors are as high-profile as the Sharks of Shark Tank, entrepreneurs can take advantage of great tools like AngelList and Crunchbase to learn about a multitude of angels and the deals that they’ve done.

Try to check investors’ reputations with others who may know them. The bad news is that not all angels and companies list themselves on these services, but they are a good starting point.

The two entrepreneurs profiled here wanted different things from their investors. My guess is both will be highly successful, which supports the idea that there is no one right answer as to who is the best investor. It’s up to you to define what “best” means for your company.

For more advice on how to acquire investor money, read Geri’s article on the 9 ways to perfect your investor pitch.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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