How Not to Become 'Shark' Bait
Megan Cummins learned the hard way what can happen to promises from VCs. Even when they're made on national TV the investor doesn't always follow through.
Cummins successfully pitched the investors on Shark Tank and got offers from three of them. She turned down two to take one from technology entrepreneur and investor Robert Herjavec. The deal was $55,000 for 20 percent of the company and an additional $50,000 for Cummins to live on for the first year.
However, Cummins says that she never received any money. She claims she tried to reach Herjavec for six months after the show was taped in July 2011. After back-and-forth with his assistants, a contract finally came: It called for half of the company for $55,000. Cummins said no.
According to Needleman, Herjavec responded to questions about the situation by email:
"After the show we begin the due diligence process. As is the case with Megan in the process you find out different things and adjust. Both sides have the opportunity for due diligence and to make a decision."
And that's clearly true. However, in the real world, as opposed to the reality one, due diligence comes before making an offer. Cummins says that the outcome "was for the best" because she owns her company free and clear. But there are some things that she, or any entrepreneur, should know before looking at investors:
- Be clear on the nature of your business. You don't want investors to say that they didn't realize something about your company. Design your presentation to ensure that they won't have any. Cover the fundamentals of the business. There should be no way someone could claim not to know the current status of your company.
- Be ready for investor due diligence. Investors have heard everything from PR spin to lies from companies over the years. They won't necessarily believe what you claim, nor should they. Even if an entrepreneur is honest, there can be differences of interpretation when looking at a company's position. Don't assume that what you heard in a meeting is what you'll see in black and white.
- Do your own due diligence. You should put as much attention into qualifying potential investors as they will put into qualifying you and your company. Talk to other companies the person funded. Use the six degrees of separation process to find people who have done business with the investor. See if you can learn how dependable and trustworthy the investor is.
- Never say yes when you have other offers. The most important lesson is that you don't agree to work with an investor until you see the proposal, and you don't wave goodbye to other investors until you have a signed contract. The point is to find the best deal, not put yourself into a position where you're stuck with only one possibility.
- Have alternatives. Cummins was smart to resist and keep pushing to make the business work. Look for funding sources outside of investors. Maybe it's money from friends and family. You might find that receivables factoring or getting funding from customers could work. In any case, you need the alternative so you can say "no" to a bad deal.
It's fine to deal with sharks, just as long as you don't become shark bait.
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.