For a real, early-stage angel investor, watching the new Mark Burnett ‘reality’ series Shark Tank generates quite a few conflicting emotions. On the one hand, it provides the viewing audience with a relatively accurate idea of the range of investment opportunities that flood our inboxes daily. These include everything from companies with millions of dollars in revenues, all the way down to ideas for sticky-note holders (although, to be fair, the show doesn’t deal with the more sophisticated, complicated ventures that make up most of our high-end deal flow).
On the other hand, it presents a very warped view of the way most professional angels (at least in my experience) act, think and invest. I’ve found that my reactions to the Sharks’ decisions seem to fall into one of three categories:
In particular, there are two unrealistic things that jump out at me on a regular basis: first, the Sharks often demand a majority share of the venture (if not buying it outright). This is counter to the first principles of angel investing, where you are investing in, and incentivizing, the entrepreneur to create a business…not trying to take it over. If an investor starts out with 70% of the company, in a very short time the entrepreneur’s share will be so small as to be insignificant. At that point, he or she is likely to walk away, leaving the remnants in the hands of the greedy investor. Which does no one any good.
The second unrealistic aspect of the show is that, in the interest of making ‘good’ television, some of the Sharks (particularly Kevin O’Leary) behave in such an egregious way that they would immediately be kicked out of any professional angel group of which I am aware. Not only do they denigrate and yell at the entrepreneurs seeking funding (which is NEVER acceptable), but they also try to push deals that are so one-sided that they verge on being both unethical and non-viable. In contrast, some of the other Sharks (particularly Barbara Corcoran) sometimes invest with their emotions rather than their pocketbooks, which is not completely unrealistic…but also not good business. Somewhat to my surprise, the most ‘realistic’ Shark is turning out to be Daymond John, who projects the appropriate blend of business savvy, fair play and entrepreneurial mentoring that I’ve found typical of the best professional angels.
So, let’s get down to a review of Episode 2, and look at the opportunities from the perspective of an experienced, active, US angel investor with 75+ deals under his belt:
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Craig French
CROOKED JAW
Crooked Jaw is a up and coming action sport/streetwear brand from Long Island, NY. We have worked with many professionals athletes and bands and are looking to be the next big brand in the clothing industry.
http://www.crookedjaw.net
Ask: $200K for 20% ($800K pre-money)
Shark’s Best Offer: Pass
The Angel’s Take: The Sharks were right. Daymond described this quite rationally: these decent, enterprising young men are likable and hard-working, but they’re just like ten thousand other wannabes out there. They have no products worth investing in, nor do they have the business experience that would lead you to take a gamble on backing them. I, too, would like to help them, but this is a non-starter, and I’m afraid they are going to end up losing a lot of their own money in this venture.
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Robert Allison
LIFEBELT
LifeBelt is a safety device that prevents the car engine from starting unless the drivers seat belt is buckled. It can also control other seat belts within the vehicle.
http://www.nobucklenostart.com
Ask: $500K for 10% ($4.5m pre-money)
Shark’s Best Offer: $1m for outright acquisition
Entrepreneur’s Response: Pass
The Angel’s Take:They are all certifiably insane. I still can’t get my jaw off the floor about this one! The inventor claims to “have a patent” on a seatbelt ignition interlock system. What!?! Does not one person in that studio have any recollection of the 1971 NHTSA regulations REQUIRING passive restraint systems in all new vehicles? Which led to many manufacturers building in seatbelt interlock systems? Before consumers nearly rioted and forced their removal? IF he has a patent on ANYTHING, it would be for a particular implementation of an aftermarket interlock…for which the market would be about…zero. The fact that any investor would offer anything for this is beyond my comprehension. The fact that he would turn down a million bucks for it is perfectly comprehensible (given my familiarity with dogged entrepreneurs) but a crying shame, since it is INFINITELY more money that he will ever see from his ‘invention’. What a cluster muck! (Now, ask me how I really feel :-)
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Susan Knapp
CLA PERFECT PAIR
Creators of Extraordinary Gourmet Food Products. Their productshelp the home cook prepare delicious healthful meals quickly and make them look like a 5 star chef to family & friends.
http://www.aperfectpear.com
Ask: $500K for 15% ($2.8m pre-money)
Shark’s Best Offer: $500K for 50% ($500K pre-money)
Entrepreneur’s Response: Accept
The Angel’s Take:The Sharks were in the ballpark.I had this one down for a $500-$1m pre money (ie, about 30-50% equity). The fact that she already has $800K invested is too bad, but that’s the reality of startups. She comes across as an impressive entrepreneur with a solid business and a good grasp on what she’s doing. I would probably have looked at putting in less money at the same valuation, leaving her with a majority interest, but that’s not the way this program works.
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Mary Ellen Simonsen
ATTACH NOTED
AttachNoted is the solution to that irritating problem of loosing those sticky notes while working at your computer. AttachNoted will keep all your sticky notes in place and organized. Also, place your precious pictures or favorite business cards in the 3 slots, that are provided on the front sheet. Now one can securely take all those important sticky notes to their next appointment without having to reposition them.
http://www.attachnoted.com/
Ask: $100K for 20% ($400K pre-money)
Shark’s Best Offer: Pass
The Angel’s Take:The Sharks were right.This is a silly solution in search of a problem that doesn’t exist. It isn’t worth $400K, and, as the Sharks noted, isn’t worth anything at all. But they were harder on her than they needed to be. ‘Nuff said.
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Mark Furigay
CLASSROOM JAMS
Classroom Jams is an educational record label & publishing house. We produce popular music that turns kids on to school curriculum. Our concept albums and teacher’s guides are the cutting edge in high-interest, high-minded teaching tools.
http://www.classroomjams.com
Ask: $250K for 10% ($2.25m pre-money)
Shark’s Best Offer: They take the company for free, commit to putting in $250K, and he gets 5% royalties with the right to use them to buy into an equal share of the business
Entrepreneur’s Response: Accept
The Angel’s Take:The Sharks were scumbags. A royalty structure might indeed be the appropriate way for this deal to work out, but there were so many problems with this ‘negotiation’ that it left me wanting to wash my hands. The entrepreneur came across as a classy guy with a good product and very decent head for business, and to some extent he got rolled by the Sharks. It will be interesting to see if this deal actually closes (most of these TV show investments, like on Dragon’s Den, don’t actually make it all the way). If I were in his shoes and prepared to accept a royalty, I would have taken the Sharks’ offer as validation of the concept, and then gone off and negotiated with real publishers about how to bring the product to market. Ah well, I wish them all luck on this one.
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So, there you have it. Stay tuned next week for my review of Episode Three!