Experienced Business Formation Lawyer
Be Careful Who You Choose to Invest
An episode of Shark Tank demonstrates why startup founders have to be careful with who they choose to invest in their companies. I say “recent,” but I don’t watch the show every week, so for all I know, what I saw was the formula for every episode. On this particular episode, Cincinnati-based startup called Frameri was one of the contestants. Frameri is working on a line of eyeglasses where you can easily pop out the lenses to put them in new frames. If any of my readers wear eyeglasses, you know how much this can save you. The last time I bought a new set of eyeglasses, the cost of the frames and lenses took me past $500 before I could blink.
Pretty much as soon as Frameri’s cofounders explained the product, the “sharks” hit them with abuse and condescension. One of them pointed out that Luxottica (also based in Cincinnati) is a huge player in the market as if that was an indictment of Frameri’s idea. Apparently the sharkhole has never heard of IBM, which used to dominate the computer industry, or the concept of disruption. Luxottica’s market dominance allows them to inflate prices, creating an opening for innovative players like Frameri and Warby Parker. Pretty obvious, if you ask me.
Another sharkhole didn’t even bother trying to formulate a coherent thought. One of them, I can’t remember which because I don’t care enough about them to try, called the Frameri guys “cockroaches.” I kid you not. My cousin was on Shark Tank earlier this year, and one of the sharkholes called her a cockroach, too. Could have been the same guy, so maybe “cockroach” is his go-to word.
A third sharkhole took offense at the $4.5 million valuation that Frameri’s offer called for. This guy has no business dealing with startups, if a $4.5 million valuation troubles him. Sure, Frameri is pre-revenue, but that’s a pretty reasonable valuation in today’s startup market. Uber has a $40 billion valuation, and it’s only 5 or 6 years old.
At one point in the show, one of the sharkholes asked if they were on the show to get an investor, or if they were using the show for publicity. Well, duh. (that’s an arcane legal term).
About 1 minute into Frameri’s segment on Shark Tank, I was rooting for Frameri to reject all of the sharkholes. Most of them dropped out, leaving one left to make an absurd investment offer. To Frameri’s credit, they turned it down. Just because a rich person dangles money in front of you doesn’t mean you should take it. A bad deal is still a bad deal. And a bad investor is even worse. You want an investor who understands your company, your industry, and your environment. None of the sharkholes seemed to have even a basic understanding. You want your investor to be a source of more than just money. The investor should be able to provide support, guidance, mentoring, and connections. Finally, you want an investor that you can have a good working relationship with over a long period of time. Someone who calls you a cockroach isn’t that kind of guy.
So that’s really the bottom line. Forget about the money. Money is the least part of choosing an investor. Look at the person, and ask yourself if you can work closely with this guy over the long run. Do you want this person to sit on your board of directors? How is he going to respond to business ideas that he doesn’t like? Is he going to call you – the company founder, the CEO – a cockroach in front of your staff? If you wouldn’t want to spend a minute more than absolutely necessary with this guy, then move along and find someone else.