Entrepreneurs – Here’s What You Need to Know About Equity Deals
Salutations from the Den of the Dolphins! It seems appropriate to change up the greeting for our Shark Tank episode 4 review because our Sharks decided to give us a fresh offering. First off, our guest shark, Nirav Tolia, has a generic middle American accent, and the evening’s seed funding pitch offerings do not include a food business nor some biodegradable clothing. However, the episode 4 entrepreneurs are going after a foothold in big categories – sporting goods (hi, Nike!), dating apps (what’s up, eHarmony), household soap (fist bump, P&G), and cosmetics (word, Revlon). If any of these businesses can get some effective Sharky assistance, methinks some bigger fish may be looking to gobble them up.
Shark Food – Seed Funding Opportunities
- TheMagic5 – custom swim goggles
- Tabby – dating app
- SoaPen – soap
- 54 Thrones – cosmetics
Four Hopeful Start-Ups Enter… How Many Happy Entrepreneurs Exit?
Pitch #1 – TheMagic5
Company Category: Sporting Goods
Bait: $500,000 for 2.5% equity ($20,000,000.00 valuation)
Bites:
- $500,000 for 7.5% equity ($6,666,666.67 valuation) – take it or leave it from Mark Cuban
- $500,000 for 3% equity ($16, 666,666.67 valuation) plus a $3/unit royalty on the first 500,000 units sold from Kevin and Nirav
- $1,000,000 for 6.5% equity ($15,384,615.40 valuation) from Robert Herjavec (accepted)
Shark Rating: Feeding Frenzy – 3 bites
Dolphin’s Den – As a competitive swimmer, I have never understood the need for swimming goggles or arms and legs, for that matter. However, for those fin-challenged mammals, The Magic 5 is a great concept (swimming goggles customized to the user’s face) with a seemingly insane opening valuation (~7x aggregate historical sales). Still, if their utility patent is strong, the business will certainly get the attention of all the big sporting goods manufacturers as their market share grows. Mark had an excellent pick-up when he recognized (or was told in pre-production, says the cynical dolphin in me) that based on Magic 5’s stratospheric valuation, they probably priced their business high to protect their early investors. Those early investors came in at a valuation at 1/3 the value currently being squeezed out of the sharks.
There was never a discussion on how the business will use the $500,000. Still, with solid sales, media funding (debt financing of media or accounts receivable) would have been another way to protect their investor’s equity without scaring away potential investors. In this instance, not only did they not scare the Sharks, but they made them ravenous. Additionally, they milked the sharks for double the cash they initially requested and at a marginally smaller discount. Altogether it was still twice the value their original investors paid. I’ll see you in the water Magic 5!
Pitch #2 – Tabby
Company Category: Dating App
Bait: $300,000.00 for 20% equity ($1,500,000.00 valuation)
Bites: $300,000 for 30% equity ($1,000,000.00 valuation) from Kevin (accepted)
Shark Rating: 2 bites
Dolphin’s Den – App business pitches all seem like they are coming from the South Park Underpants Gnomes – “Step one, Steal Underpants. Step 3, Profit”. Since its inception, Tabby (the dating app for cat lovers) has had 31,000 users and a total of $43,000 in sales – not really at Step 3 just yet. Kevin has an existing relationship with one of the largest cat owner databases in the U.S. and can provide an immediate infusion of new subscribers (if they all are seeking a relationship). This might get them to Step 2 (how you actually make a profit). Here at the den, we usually steer clear of apps, but if there was a dating app called “Flippy,”…
Pitch #3 – SoaPen
Company Category: Soap
Bait: $100,000.00 for 10% equity ($1,000,000.00 valuation)
Bites: no bites – as all dolphins know, sharks are inherently dirty, so of course, they will stay away from a soap business – wait… Nirav comes thru after they crushed our SoaPen founder’s dreams? Offer is $100,000.00 for 10% equity plus a $1/unit royalty for the first 200,000 units
Shark Rating: 2 bites (Nirav could have been very Sharky given the dramatic pause, but he stayed within their basic structure and maintained their valuation).
Dolphin’s Den – SoaPen is another great idea, though I am pretty sure we supplied very similar fun soap products to our baby dolphins during bath time. If SoaPen doesn’t have IP protection, the law of the ocean says the big fish will simply knock the item off the second it looks like it can take market share. Before that ugly natural selection occurs, let’s grant these 2 young Indian entrepreneurs an alternative reality where they fund additional print media in similar publications that had them blow out 5000 units in 3 weeks with just a simple press release mention.
Everyone wants to grow overnight, but sometimes you become a much better company by growing slowly and pruning the stuff that doesn’t work on the journey. Whether fast or slow growth is your thing, keep washing your hands to keep the doctor (Fauci) away.
Pitch #4 – 54 Thrones
Company Category: Cosmetics
Bait: $250,000.00 for 10% equity ($2,500,000.00 valuation)
Bites: $250,000.00 for 17.5% equity ($1,428,571.43 valuation)
Shark Rating: 2 bites
Dolphin’s Den – Who let Nirav into the tank? This guy is way off their brand and might be a better fit for the Den. In a SharkTank first, to get 54 Thrones a deal, Nirav was willing to partner with Kevin equally on the cash investment but take less than him on the equity – Nirav looking that good is not a good look for the SharkTank. 54 Thrones goes back to the formula by positioning itself as a socially conscious company partnering with various Africa-based co-ops to provide raw materials for their cosmetic line. They have a great tag line, “trade not aid,” and have generated huge sales on tiny ad spends. The partnership with Nirav and Kevin should continue that trend, so let’s hope they can satisfy demand with the supply chain pipeline clogged.
What Can Entrepreneurs Learn From These Deals?
So, four deals out of four opportunities, that’s a record in the Tank this season. If you remember the stats from Episode 1 –out of 50,000 applicants, 300 lucky businesses pitch the Sharks in a season, and a portion of them get a deal. The good news for the contestants is they get very valuable exposure; the downside can be the amount of equity they give up in exchange for seed funding.
Media funding is Charis Media Funding’s specialty… the campaign funding you need with no equity loss.
Call our funding experts if you have a product with promising sales, but you need a cash infusion to make it fly. We’ve been funding for over two decades. That’s over 300 products and $250 million, with zero equity loss.
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