I’m a big fan of the show Shark Tank. I think it can provide valuable lessons to us mere mortals.
I was LOL’ing during a segment of last night’s Shark Tank season premiere as the Sharks taught a valuable lesson to a self-described “husband and wife dynamic duo” who were pitching their $12 direct-to-consumer healthy bread cube for a $16.7 million valuation.
What I found funny is that these folks would be rising stars in the corporate world with their energy, salesmanship and command of jargon (ahem, BS).
What I like about Shark Tank is that what is celebrated in the corporate world, is often ridiculed in startup land.
The company’s sales sound impressive, rising in three years to $2.1 million year to date.
The dynamic duo are also self-described “digital marketing experts” but the Sharks busted them on their acquisition cost of $50 for a loaf of bread, which is probably about 5-10x what it needs to be.
O’Leary asked how they get to the $16 million valuation?
Here’s the paraphrased exchanged:
We’re on track to do $5 million this year, you heard we’ve done $2.1 million year to date. We believe other companies like us can get a 6-10x multiplier on revenue in market.
O’Leary: But, you don’t make money yet. Are you saying you’re going to make money if you hit $5 million?
No, absolutely not.
O’Leary: So, when you become profitable? Ever?
We will become profitable when we reach a certain level of scale.
O’Leary: What is that?
Cuban: No kidding? [In a sarcastic tone] You will become profitable when you reach a certain level of scale?
[In a smarmy, we’re like Jeff Bezos tone] Our goal is drive top line revenue.
Cuban: No [bleep]?
[Looks on the dynamic duo’s faces show they realize that this isn’t about to go so well. What make them stars in the corporate world is making them look like snake oil vendors in the startup world]
Corcoran: I don’t think I’ve ever spent this time in my seat and heard more fancy words in my entire life. I think if I were to put any money into your business, I would not sleep a wink tonight.
The guest Shark: You guys did not come in and demonstrate what your path to profitability is. You missed it. You spoke about all your economics, which aren’t that great by the way, because you are paying too much to acquire the customer, as everybody said, you are not profitable on your first customers. So, I think for me, I’m out.
Cuban: Why don’t you run the company to be profitable now?
That’s actually exactly what we did, Mark.
Cuban: But you lost a million dollars!
To get here we drove CAC [customer acquistion cost] to the floor. We’ve the the #1 lowest CAC in the…
Cuban: [Throwing arms up] That’s such a nonsense grammar. You start small. You got a nice little product. Whatever you do, you go door-to-door and you make money and use that to grow…but now, your back is really against the wall because you’re losing money on every product you sell. So the more customers you acquire, the more money you lose, unless you can make sure that you’re selling them a whole lot more products. Then you get the loaf of bread unsliced, what do I do now? You gonna take a bite out of it?
That crust is very important to preserving the product. People buy that product for the trifecta of three reasons. You can’t find something this healthy, that tastes this good that’s this fresh.
Cuban: Then why don’t you say that?
Corcoran: That’s the best thing you’ve said all day.
Cuban: That was the best sales pitch you’ve made.
That packaging you’re looking at there is our Gen 2 packaging before we really dialed in that positioning statement…
Cuban: [waving hands in frustration] The jargon! You’re driving me nuts.Shh..You’re overselling with all the jargon when you have an authentically good product.
End exchange. They didn’t get the deal.
Here are some business lessons that I take from this.
Customer Acquisition Cost is an important predictor of success. Large companies with deep pockets have the luxury of being able to buy sales and make new product launches appear to be successful. But, if, like Cuban says, you lose money on every product that you sell because you have to spend so much to convince people to buy it, then it isn’t worth anything.
Another lesson is to cut the BS. So many large companies are jobs programs for corporate bureaucrats that embrace a BS culture to spin their lackluster contributions to the company’s performance into resume builders for them. The companies survive on the spoils of previous successes, many happened upon long ago, which is also what helps those companies weather the damage caused by these BS artists.