A special airing of a new Shark Tank episode Tuesday brought us several interesting sides of Kevin “Mr. Wonderful” O’Leary. First, he was the familiar curmudgeonly and caustic crusher of entrepreneurial dreams who couldn’t resist kicking a product even when he was well out of making any deal. Then, during the last pitch, O’Leary made a heroic effort to find a deal for an entrepreneur who’d made a nearly fatal mistake in bringing his product to market.
Did the heart of the resident Grinch grow three sizes that day? No. As in all his deals, O’Leary smelled a chance to make big money on his investment, to the point that his seemingly generous offer looked more like a cruel hoax.
First, let’s look at the pitches in order.
1. ABS Protein Pancakes
Josh McClellan and Ashley Drummonds are fitness trainers from Tampa who have cooked up a low-calorie, high-protein pancake mix that brings pancakes back to the training table. The two were seeking $120,000 for 40 percent of the company.
They passed out the pancakes, which come in several flavors, and the sharks' reaction was mixed. Mark Cuban and Robert Herjavec liked them; O’Leary eventually pronounced them “crap.”
Then came the numbers. The couple said they'd sold 6,000 units in less than a year, for more than $100,000 in sales. The problem was that each bag of mix costs $12 to $14 to produce through a co-packer, and retails for $42.95. Daymond John nearly choked on his pancakes, exclaiming, “Clutch my pearls!”
McClellan and Drummonds responded, saying that, with volume, they could get the cost down to $7 or $8 per unit; but even that price would leave ABS at many, many times the cost of regular pancake mix. Still, Herjavec wanted to jump in. Announcing himself to be “in a sharky mood,” he offered $120,000 for half of the company, noting that he'd had success with other fitness-food products.
That prompted John to note that split control could cause problems. “If you have a fight with him at 50-50, it can potentially bottleneck the company forever,” John warned. Herjavec backed off his deal to 49 percent, only to see John jump in with a last-minute offer of 42 percent equity, which won the deal.
“Congratulations,” dead-panned O’Leary. “You just invested in pancake poo-poo on a stick.”
2. Extreme Sandbox
Next up was Extreme Sandbox, a 10-acre adult playground in suburban Minnesota where adults can run excavators, bulldozers and even car-crushers. Founder Randy Stenger was seeking $150,000 for 15 percent equity.
The bucket-list adventure costs about $300 to $400 per event, and Stenger said he was on track to do about $1 million in sales this year. He said he'd started by leasing everything, and estimated the cost of opening a new location at $120,000.
Some sharks saw a problem in how the company would scale, but Stenger answered that all the front-end activities, such as booking play dates, billing and so on, could be centralized, with 10 sites or more spread out around the country.
O’Leary, who really, really liked the idea of crushing cars for fun and profit, offered $150,000 for 20 percent equity. Then Cuban spoke up. “I’m going to do something I never thought I would do,” he said, and went in to share O’Leary’s deal, gagging on the words, “Mr. Wonderful.”
3. Total Tie Keep
Dwight Littlejohn was up next, seeking $50,000 for 25 percent of Total Tie Keep, a necktie accessory that corrects, straightens and controls ties by loosely attaching them to the shirt using the shirt's buttons. Littlejohn said he'd come up with this ingenious product because, in his work as a federal agent with an unnamed agency in Washington, he deals with dignitaries and must project a professional presence.
The product costs less than $3 to make for a set of four, which sells for $25. Or might sell. The problem was that Littlejohn had to confess he had nearly no sales at all, even working at his company full time. He'd placed 200 units into a Men’s Wearhouse, but he said the product was buried on the web site and needed demonstration and an explanation to sell.
The sharks loved the product but balked at the fact that there simply was no business there. They encouraged Littlejohn to bring his company along further, first. Said John: “I can’t have my money become tuition because you haven’t figured anything out.”
The final pitch of the night came from Peter Thorpe, a firefighter who'd invented a device that responds to the sound of a smoke alarm, to automatically turn off an electric range or oven where cooking food has been forgotten; this scenario is of the most common sources of home fires. Thorpe was seeking $300,000 for 7 percent equity.
The product, which has been on the market for 18 months, costs $45 to manufacture and retails for $195. Thorpe said he had sold mostly to senior housing owners and multi-unit apartment owners, and would hit $2 million in sales this year, with a net profit of $750,000.
There was just one problem: Faced with a cash crunch that left him nearly unable to pay his family’s bills, Thorpe had already sold 60 percent of the company to a partner for $50,000, leaving him with just 30 percent equity. This caused most of the sharks to back off, because they didn't want to partner with an entrepreneur who might not be motivated owing to his not owning a majority stake of his full-time business. Said Lori Greiner: “I don’t want to take more of your company. I don’t feel right about it.”
It looked like Thorpe would go away empty-handed, until O’Leary presented a seemingly generous offer: He would buy out the partner and return 51 percent equity to Thorpe. Herjavec jumped in to offer $400,000 within the same scenario, and Cuban rushed to get the partner on the phone.
That move revealed a second problem: math.
Yes, the partner, Jeff Burningham, stood to make $300,000 or $400,000 on his initial investment of $50,000, but Burningham already was on track to net 60 percent of the $750,000 net profit coming this year -- equalling $450,000. Even assuming a low three-year multiple for his stake, he’d be forsaking close to $1.5 million in profits in the next three years for as little as $300,000 now. “Maybe he needs liquidity,” O'Leary suggested.
There was no way this offer was going to work unless Burningham was so desperate for cash that he’d give up more than $1 million in the medium term for a couple of hundred grand now. But he wouldn't and turned down both offers down.
Thorpe’s pitch then looked doomed until he made a final, nearly desperate plea to Greiner, saying he could get the cost down to $20 and sell FireAlert through her QVC channel for $99. Greiner bit.
She offered $300,000 as a loan, at 5 percent with a 15 percent royalty on sales, until she would be repaid, when she would retain 12 percent equity. O’Leary offered to take a 10 percent royalty until he was paid $900,000 -- meanwhile, he'd keep 5 percent equity.
Thorpe countered to Greiner, offering a 10 percent equity. She offered $300,000 for a 10 percent royalty to $400,000, with the 10 percent equity, and Thorpe took that deal. In the end, the firefighter walked away, just barely pulling his business out of the flames.