The season got off to a rousing start as four entrepreneurs presented to the five sharks. In the season opener, Kevin Harrington was replace by guest shark Mark Cuban, a media mogul and the owner of the Dallas Mavericks; the other four sharks remained the same: Robert Herjavec (Internet technology), Daymond John (fashion), Barbara Corcoran (real estate), Kevin O’Leary (software).

Of the four presenters, two made deals and two walked away empty handed.  And the episode saw one of them get an offer of $4,000,000 for their business, the largest offer in the history of the Shark Tank!

Read on…

First Guest: Nikky Pope, Toygaroo (LA)

ToyGaroo rents toys. Nikky Pope, the presenter, although not yet a parent herself, has 11 brothers and sisters, and 13 nephews and nieces under the age of 8. She saw that these kids grew tired of their toys before the toys wore out, so she created a service to rent toys to parents. She positions herself as “the Netflix for toys”.

Her value proposition is that parents can always have a fresh supply of new toys at a cost less than or equal to what they would normally spend, and kids will have Christmas every month when the next box of toys arrives. She now has 300 toys in her catalog.

She did a test launch at $42 per month for a box of toys that retail for $200. Her cost is from %0 to $90, so (cash-flow) breakeven was at two and a half months or so. Her experience is that the toys are returned undamaged; the parents are obligated to purchase toys (at a discount) if they are damaged. She plans to launch her business with plans that start at $35 per month and go up.

Her opening offer was $100,000 in exchange for 10% of the company, giving a pre-money valuation of $900,000.

Kevin asked “for every million dollars of sales, how much inventory is required?”, and she answered $64,000. Our calculations show that each family will spend $500 per year with her for an investment of $80 in toys (assuming the toys are rotated among families). Another way of looking at it is that 12 families will spend $6,000 and share nearly $1,000 worth of toys at cost. That means that she was probably off: we think she will require $160,000 in inventory for $1 million in revenue (in the first couple of years), plus the cash required for marketing, staff, and other operational expenses.  After just a few months of operations, she should be able to borrow money to fund her growth using the toys as collateral.

Kevin said that while he didn’t believe the company was worth $1,000,000, he wanted to be an investor.

As it turns out, her husband owns 50% of the company, and she only owns 10%. Some web designers and marketing partners own the balance, but she had the right to make whatever deal she could. She really messed up by giving away some of her ownership to the other partners, while her husband kept his original 50%. Yikes!

Daymond has had bad experiences with dealing with people who didn’t own the controlling interest and he was out.

Kevin countered with $100,000 for 35%. He knows he can help her immensely in the toy space because of his connections. She wanted to do a deal with him from the start, saying that “I had my eye on you!”

Robert interrupted her reply to Kevin, and proposed a JV with Mark, seeing this as an Internet logistics play. They agreed to up to offer to $200,000 for 40%, competing with Kevin for the deal and cutting him out.

Barbara was going to offer a lot less, so she was out.

Kevin reminded her that he was “Mr. Toy”. He sold his company to Mattel and lived in Fisher-Price for a year. He was very astute is saying that a partnership with toy companies is a great idea – and he knows all the board members of the most powerful companies. That is worth a lot!

Robert and Mark countered that they had relationships with Netflix and a great deal of relevant experience – they didn’t think the relationships Kevin had were positive or necessary in the early stages of growth.

Kevin matched the offer, got the deal, then offered to split the deal with Mark. Done!  Robert was cut out at the last minute, and was not happy about it.

Our Analysis:

• Presentation: She was poised and confident, only getting little flustered when Kevin suggested that her company wasn’t worth $1 million.
   
• Business Strengths: She has the First-Mover Advantage. Her early focus group showed a very strong interest, and Netflix has proven the model. She also has a waiting list of over 1,000 people.
   
• Business Weaknesses:. She’ll need liability insurance and strong quality control for sanitizing the toys to avoid lawsuits. She will also need to address the issue of sending a toy intended for older children to a family with young kids.  
  
• The Deal:  She asked for $100,000 for 10% and was excited with Kevin matched Robert and Mark’s offer of $200,000 for 35%  She was thrilled to tears!
   
• Sharks: The sharks acted like them! Robert countered Kevin in partnership with Mark, then Kevin stole the relationship by splitting the deal with Mark. As Daymond said “you screwed your partner without even looking at him – Way to go!”.  It was very shark-like

Next Step Suggestions:

• She will need a lot more than $200,000 to launch nationwide, and will probably need another round or two of financing for additional marketing, inventory, and staff. According to our quick calculations, $10,000,000 in revenue could require up to $2.5 million in cash (some of which can be debt).
   
• Work with Kevin to form a partnership with Mattel and Fisher-Price, to feature their toys and purchase them at even greater discounts.

Lessons:

• Dilution should be equal among the founders. We think Nikky made a bad mistake by not being on an even playing field with her husband.
   
• Know the total cash required to expand the business – we think she was off in her calculations.

Followup:

• You can learn more about. Toygaroo at www.Toygaroo.com. They now have 500 toys available. 

(If you are interested in raising capital for your business, visit us at www.AngelNetwork.com)