Eric Colti, the guy with the Wine Balloon on this week’s episode of Shark Tank, was not very smart. He let fear make him lose sight of the bottom line and why he was there in the first place. Everyone liked the invention-it was clearly far advanced over every other product purporting to do the same thing.
He had Kevin O’Leary ready to give him exactly what he was asking and taking a reasonable stake. O’Leary was talking about an initial production run of 100,000 units at $22 a pop. With production costs at $6.25, he was looking at $15.75 per unit profit or $1,575,000. Even after O’Leary’s 30% cut, the guy makes $1,102,500- and that’s just on that initial run of 100,000 units (without taking into account a reduction in production costs that would certainly come with volume). As a wine drinker, I would buy something like this and every shark recognized that wine drinkers would embrace this new tool.
Enter Lori Greiner and Marc Cuban who offer the guy $600,000 for the whole company with no future earnings potential. That’s a lot of money, but in reality it is half of what O’Leary offered for an initial production run.
Then the fear set in. Here’s a guy who has, admittedly, been tinkering with inventions for a long time. He finally came up with an invention that works, is a vast improvement over anything out there, and has the sharks circling because they all know they can sell it. He should have brought a calculator with him. I rarely scream at the TV, but this episode was an exception. He was seriously contemplating giving his invention away for half of what he’d make on an introductory production run. I could see the wheels spinning in his head and so could the sharks.
They preyed on his fear. I picture this guy tirelessly testing out ideas in a garage or workshop at home- much like manic inventors who have amounted to nothing in many movies we have all seen A tinkerer like that has probably heard it from his wife, family and friends for years. He’s felt and experienced failure and probably had it amplified by those closest to him. Then comes Cuban and Greiner waving $600,000 CASH in his face and tells him he can go home to his wife and say “Look honey, I finally made something out of one of my inventions.” I could feel the guy clenching, but I had the luxury of doing the math.
Then, he got indecisive and choked; the sharks smelled blood. They used that indecisiveness to chop the offer down to $400,000. He eventually took that offer. Granted, there is no guarantee of selling 100,000 units (or more), but the sheer fact that everyone in the shark tank was making offers and everyone acknowledged that it was a better mousetrap had to have him thinking his invention would sell. The access to distribution channels a partnership with O’Leary would instantly open up would easily move 100,000 units.
What our entrepreneur neglected to think about as the sharks were circling is the bottom line. The “old” magic price point of $19.99 (LESS than $20) for gizmos like this has evolved to $22.00 (ABOUT $20) for many items’ “retail price;” a drop to $19.99 gives it greater value to the consumer and still brings tidy profits even without taking reduced per unit production costs associated with volume into account. There are tens of millions of wine drinkers who would plunk down twenty bucks for this item without thinking twice- it costs less than a bottle of good wine. Our entrepreneur lost sight of that.
What happened next sickened me- he took the reduced offer of $400,000 and sold his invention. Sure, it was a nice payday, but when he fast forwards a year or two and sees millions of units sold, he too will be sickened.
The lesson any entrepreneur can take from this episode is to embrace the vision of your business, know the numbers, and, even in the face of your greatest fear, stick to your guns. I for one will probably pick up two or three of these items- one for myself and one or two as a gift for wine drinkers in my life- too bad that money will be going to Cuban and Greiner instead of the inventor. This guy better hope his wife wasn’t watching-with a calculator!
Rob Merlino is The Hotdogman– read his stuff at www.thehotdogtruck.com
You’re absolutely right, Rob. Watching that negotiation made me queasy. I wish I could have taken that guy aside for two minutes and told him that story from The Social Network:
A Stanford MBA named Roy Raymond wants to buy his wife some lingerie, but he’s too embarrassed to shop for it at a department store. He comes up with an idea for a high end place that doesn’t make you feel like a pervert. He gets a $40,000 bank loan, borrows another $40,000 from his in-laws, opens a store, and calls it Victoria’s Secret. Makes a half million dollars his first year. He starts a catalog, opens three more stores and after five years he sells the company to Leslie Wexner and the Limited for four million dollars. Happy ending, right? Except two years later, the company’s worth 500 million dollars and Roy Raymond jumps off the Golden Gate Bridge. Poor guy just wanted to buy his wife a pair of thigh highs.
That is very interesting, You’re an overly professional blogger. I have joined your rss feed and sit up for looking for extra of your excellent post. Additionally, I have shared your website in my social networks