Something keeps happening on the Shark Tank and I’m curious to see if you’ve noticed. I’ve got a short quiz to see if you’ve been listening carefully to the show. (Don’t worry, it won’t affect your business’ credit score!).
- No businesses mentioned purchase orders
- One business had purchase orders
- Two businesses had purchase orders
- They all had purchase orders
In season 6, many businesses are mentioning having unfulfilled purchase orders (2 out of 4 businesses in the last episode alone!). They are businesses in growth mode that have stagnated because they don’t have the capital to fulfill the orders and take it to the next level. Why should you care? It brings up an important lesson for business owners. I’ll use the TITIN and SINGTRIX to explain.
Before I get into the finance lesson here, I just have one word: OUCH! I give Patrick Whaley of TITIN huge kudos for handling such brutal criticism on national television so gracefully. Boy did he rub the Sharks the wrong way. I digress.
With a projected $10 million in sales for next year, TITIN is clearly a successful business that’s growing. A bad experience with a venture capital firm left Patrick cautious to bring on another equity investor. His business was assigned an executive who made poor decisions and burned through all the capital in 6 months. If your business secures an equity investor, you don’t just get money in exchange for a certain percentage. They also become a long-term team member who’s actively involved in daily business decisions. This helps you to understand why there might be reluctance to take on another equity investor.
On the show, Patrick explains “We have 1.4 million in purchase orders that I can’t fulfill." He didn’t necessarily need an equity investor especially given his negative experience with the venture capital firm. He could have fulfilled the orders using purchase order financing. That would have given him the cash to fulfill the orders without giving up 20% of profits (forever) and avoid having an equity investor injecting his opinion on every decision. I’m sure Daymond John will make an excellent partner, but it’s important to understand this business had another option. Patrick needed money, but not necessarily the management component. It might have been better for him to walk away and use purchase order financing. He would have kept full ownership of the company and been able to fulfill his purchase orders.
Similar to TITIN, SINGTRIX is a business on the brink of a sales explosion. It boasts a wide profit margin and already has an exclusive distribution deal lined up with anticipated sales of 30,000 units. The Sharks were clearly excited about the product and its potential. (Who doesn’t secretly dream of being a rock star!?) Owners John Devecka and Eric Berkowitz specifically stated they weren’t just looking for a blank check, “we want to get involved with people that are going to make us better." They want a PARTNER. They need to build up their inventory and then market it to make sure it moves off the shelves. This is a prime example when an equity investor makes more sense than purchase order financing. Daymond John’s offer included $1.5 million for 25% equity PLUS financing the purchase orders. He’s offering a combination of equity investment along with purchase order financing.
SINGTRIX didn’t walk away with a deal because the Sharks didn’t agree with their $30 million valuation. By not budging on the valuation, they missed their opportunity to partner with a Shark. They walked away, even though they could have salvaged a deal by lowering their valuation. I believe SINGTRIX will ultimately find the right funding partner because they know what they’re looking for in an equity partner.
The lesson learned from this episode of Shark Tank: understand the different funding options available. Whether an equity partner, purchase order financing or a combination of the two, know which deal makes sense for your business and know when to walk away.
Dan Casey, founder and CEO of purchaseorderfinancing.com, believes every business has a story to tell. He’s been listening and helping small businesses grow exponentially since 2002 using a creative combination of finance tools. He’s been featured in publications including Entrepreneur Magazine, Entrepreneur Online, Small Business Trends Online, The Washington Post, Crain’s Chicago Business & American Express Open Forum.
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