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Think Big. Move Fast.

As you may have already seen, I’ve been breaking down the pitches on this season’s Shark Tank while wearing my work hat as a Managing Director at Lightspeed Venture Partners.

Here are my thoughts on the companies that were featured in the sixth episode of season 4.

Cousins Maine Lobster

The first company to present was an LA based food truck selling fresh Maine lobster rolls, founded by two cousins, Saban Lomac and Jim Tselikis. The company has gotten off to a fast start, $150k in revenue in the first two months, with all the marketing coming from social media. The founders have more demand than they know what to do with, and want to raise $55k for 5% equity in the company to buy a second truck. This implies a pre money valuation of $1.045M. (See my breakdown of week 2 for more on how to calculate pre money valuation.)

There was a lot of discussion about competition. There are at least two other food trucks selling lobster rolls in LA. But it only costs $65k to buy a new food truck, so it is easy for others to enter the market. The founders claimed that their deep relationships in Maine allowed them to get the best possible prices on lobster, and that this is their defensible advantage. The sharks greeted this with skepticism, and rightfully so, especially given the short time the company has been in business and the relatively low sales volume. With low barriers to entry, success for this business will be determined by execution.

Most of the sharks dropped out due to valuation being too high, but Robert and Barbara showed interest.  Robert offered $55k for 25% (implying $165k pre money value, obviously far lower than the initial ask). Barbara countered with $55k for 17% ($268k pre money). Robert came back with $100k for 25% ($300k pre money), and made the point that success in this business comes from scale, and the extra money would allow them to buy two trucks instead of just one. Barbara suggested that this was more money than the company needed.

The entrepreneurs asked what value the investors would add beyond money. Barbara claimed that she is a marketing genius and offered up some good specific ideas, including changing the name to  “Cousins FRESH Maine Lobster”, and focusing the marketing on the two photogenic founders, to make them the brand heroes. Strangely, Robert pulled his offer when asked what value he would add, an apparent act of petulance.

Barbara and the founders went back and forth, and a deal was struck on $55k for 15% of the company ($311k pre money).

I think the founders made a mistake to take Barbara’s offer over Roberts. Barbara did have some very good marketing ideas for the company, but marketing is not their problem. They have more demand than they can fulfill already. Adding two trucks instead of just one would have increased their revenue far faster, and a $100k investment would have enabled them to do that. The pre money valuations on the two deals were close enough to be a wash, but the ability to accelerate the business at twice the speed would have been a real differentiator. The founders focused too much on dilution and on Barbara’s clever ideas on a dimension (marketing) that was not critical to the business. They lost sight of the core problem that they faced, which was inability to fulfill demand.

Freaker USA

The second company to present makes knitted drink cozies that stretch to fit over different sized bottles and cans, and come in many different patterns. The founder, Zach Crain, was highly eccentric, to say the least. He showed up on the show with a top hat, scraggly beard, hot pants and a mostly unbuttoned shirt, making random beeping noises. He sought a $200k investment for 10% of his company.

All the sharks dropped out relatively quickly. Although they blamed various reasons ranging from valuation to lack of passion for the product, only Cuban was transparent about the core issue. Zach did not present himself as a credible business person who would be a good steward for the investors’ capital. No one wanted him to be managing his or her money.

Pro NRG

Pro NRG is a workout supplement, a protein infused energy drink that contains no caffeine, sugar or fat. The founder, Tanya Patruno had enlisted Brandon Jacobs, a two-time Superbowl champ running back with the NY Giants, now playing for the 49ers, as a celebrity endorser. She had secured distribution in 3000 convenience stores and delis in the NY region and wanted to raise $250k for 15% of the equity of the company in order to fulfill purchase orders and take the company national.

Tanya had invested $75k into the company. Pro NRG had made $126k in sales in the three months that it had been available. It retails for $3.99, wholesales for $1.80 and costs $1.10 to make, although that cost is expected to drop with scale.

Four of the sharks dropped out quickly. Kevin thoughts that margins were too low. Cuban thought that the market was too competitive. Barbara didn’t like the messaging and packaging. Robert said that he didn’t understand the market.

Daymond ended up offering to invest the $250k for 30% of the company, contingent on them getting a deal with a protein and supplement company that he had a partnership with. The nature of the deal was not specified, but I would imagine that it would be to reduce manufacturing costs, as the supplement business really should have much higher margins than Pro NRG does.

Eco Nuts

The last company to present makes eco friendly cleaning products packaged with little to no plastic, based on Soap Nut, a berry from the Himalayas that releases a natural soap. The two founders, Mona Weiss and Scott Shields, have done a nice job of growing the business. They started it with a $1k investment and doubled or tripled revenue every year while being profitable all along. In 2010 they did $10k in profits. In 2011 they did $100k in sales and $40k in profits. They are on track to do $250k in 2012 and have already made $100k in profit year to date. The growth and profitability of the company is definitely interesting. The company was seeking a $175k investment for 15% of the company.

When asked, “Why now?” Scott answered that in three years, Eco Nuts had captured 90% of the soapberry market in the US, which is about a $1M market. In that moment, he snatched defeat from the jaws of victory.

There are two things wrong with this statement. The first is that it isn’t true. It implies that the company is doing $900k in revenue and it’s only doing $250k. If the entrepreneurs get these fundamental facts wrong, then they are either incompetent, or deliberately being misleading. Neither is a desirable characteristic.

The second is that it implies a tiny market size, especially relative to the $70bn market for US cleaning products.

Several of the sharks dropped out quickly for these reasons. Cuban criticized the company’s packaging and differentiation. The founders got argumentative and defensive in response, which did not help their cause. On a matter as subjective as this, an entrepreneur can not hope to change an investors mind by arguing. Only data, or third party experts, can help change an investor’s mind.

Robert was the only shark to show real interest, and offered $175k for 50% of the company ($175k pre money valuation). If the company really has done $100k in profit year to date, this is a laughably low valuation. The founders thought so too, but they did not handle the response well. Instead of pointing back to the financial performance, Scott said “no” out of hand, and Mona said, “You’d better be working 16 hours a day on our business like we do.” At that point Robert pulled his offer. The entrepreneurs had an unrealistic expectation for the level of input that they will get from an investor. A good investor should be a thought partner who can help guide key decisions. But they can not make it their full time job to work on the success of your company alone.

Had the entrepreneurs positioned their company better, I think that there is a good chance that they could have come out of the Shark Tank with an investment.

WRAP UP

There are interesting lessons to be learned from three of the pitches that are more broadly applicable to other entrepreneurs. From Cousins Maine Lobster, focus on solving the most critical problem in your business, and not necessarily on dilution or on who has good ideas. From Freaker USA, understand the importance of credibility in the eyes of your investors. And from Eco Nuts, tell the truth and if you don’t have an answer, don’t make something up in the meeting. It always comes back to bite you.

I’d love to hear your thoughts in comments!

 

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