AfterShark: The Chef in Black's deal is already falling apart
Dorene Humason wanted to get her salad dressing mix onto supermarket shelves, and she needed $50,000 for just a 10% stake. So far, this food buyer and salesperson with 27 years' experience had managed to get into 1,300 stores, which translated to only $41,000 owing to the fact she had to pull her original label design. "My original packaging was offensive," she explained (Daymond John: "It had [Kevin O'Leary's] face on it?"). Because she went for a package that was "very interesting," she had accidentally put a picture of a Japanese prostitute on her Chinese seasoning.
That wasn't the only mistake Humason made. Although she won the Sharks' money in the end (read how she did it, below), now she thinks their business advice was wrong. Where they wanted her to focus on one aspect of her business, she wants to diversify, and now, several months after she made her pitch in the Tank, the deal is in jeopardy. Watch Jason Cochran's video interview of her, in which she's frank about the differences of opinion that threaten to ruin everything she won on Shark Tank.
(Watch more follow-ups with the entrepreneurs and Sharks on our exclusive AfterShark video series: www.dailyfinance.com/after-shark-tank.)
But back to what happened on the show last night. Humason told the Sharks she wanted to take her moderately successful Chinese-themed product and expand to other mixes for salad dressings and dips, including a "Mexican Caesar."
To get the pitch rolling, she did her bit to make it snack time in the Shark Tank, serving our five notorious carnivores salads made with her proprietary, all-natural "Asian" stuff. The brand on the packet was Jaden Chinese salad dressing and seasoning mix, but the over-arching brand was The Chef in Black.
This was too bewildering for Kevin Harrington, and as is his way, he got out before things got interesting. "Too confusing for me," he shrugged. Herjavec agreed that she needed to develop her first product before moving to world domination.
O'Leary warned a big food manufacturer would "crush you like a cockroach," but Humason swore that six months of sidewalk research in "Asian grocery stores" means that no will will decode her recipe. She also averred that there was almost no competition in the dry seasoning category. Still, four Sharks were out, with Corcoran left.
Barbara Corcoran, as is her way, was ultimately swayed by the determination of the woman in front of her. She said she was scared to death of the food industry because the failure rate is so high.
Still, she was confident in Humason's answers, and she said she'd give her the money, but had to have 40% of the business, and with the stipulation that she focus on a single dry flavor at first. "What frightens me is that you're moving too fast with too many things, and that's usually a formula for disaster in any young business." (As Humason reveals on AfterShark, it was this condition that's causing the most friction.)
As Humason began explaining how she had invested $300,000 in her company, Corcoran balked. "Sounds like a 'no' comin' down the track," she said. In reality, Humason was just working up to proposing a revision of the terms: the same money for 35%.
Humason scrunched her neck hopefully. "Would 35% work?" Not much of a negotiation tactic, but she did add that she's "very compliant" as a business partner. The silence was broken only by O'Leary ("I'm gonna need more salad!"), gleefully devouring a carton of the salad dressing he didn't want to invest in.
Finally, without much explanation, Corcoran agreed to give up that 5%. An uneasy deal was struck, but she lost 25% more of her business than she had originally wanted to.
"The best food operator we've seen on this show," exclaimed Herjavec as Humason left. "The best tasting dressing I've had in this category," proclaimed O'Leary.
And that's how a lady made $50,000 on salad dressing.
What else went down in the Tank last night?
* Michael and Babz (yes) Barnett thought up Romp n' Roll, a Virginia-based brand of activities center where young kids and their parents can learn art, music and gym skills together. They already have 10 locations from Pennsylvania to Puerto Rico, bringing in $4 million in the past five years, but they needed a leg up to become the McDonald's of the mommy-and-me universe. Their slogan: "Nurture the genius. Unleash the goofball."
They wanted $300,000 for just 10%, an indicator of their confidence in the profit potential and they wasted no time in trashing their competition as outdated: "Gymboree: the cassette player," said Babz. "Romp n' Roll: the MP3 player." Once they announced a profit margin of about 30%, though, the Sharks saw a fresh meal. But their appetites abated when Michael said he spends only about 1% of his budget on marketing, relying on word of mouth in the mommy circuit for the rest. With a weak marketing plan like that, did this guy really know what it took to build a franchise?
It made O'Leary wax nostalgic about the days he used to sell learn-to-read software to young mothers. "I'd say to them, 'Look, if you don't buy my software, they're going to live in a gutter when they're older.'"
"That's a great sales pitch," Corcoran quipped. "Beautiful. Beautiful."
Yeah, well, O'Leary snapped back, "I sold a billion dollars of it." And calling this business model half-baked, he quit. So did Daymond John, lodging his usual "it's not for me" excuse, which seems to be what he says when he doesn't already have his business tentacles in the industry in question. Kevin Harrington, too, didn't see how it could grow as fast the Barnetts said it could, so he also bailed.
Corcoran's excuse was more practical. She has a three-and-a-half year old (she what?), and the local Gymboree recently closed, so she was too nervous about the sector to proceed.
The Barnetts then made a huge tactical error. In pressing their pitch, they addressed the whole panel, including the four Sharks who were out. This offended the last remaining Shark, Robert Herjavec, enough to put him off.
Or so he claimed. Maybe that song and dance was just to make the Barnetts nervous. They semi-apologized, crediting their passion for the slight, when suddenly, Herjevec swooped in with an offer: He'd give that $300,000, but only for 51% of the company. He'd control it. He said he had to.
The Barnetts conferred in the hallway and agreed to counter by offering him only 20%. But while they dithered, O'Leary sneaked behind their backs and said he knew all about the business of "giving hope to parents." He'd go 50-50 if they got that 51%. Whoops. That was when the Barnetts marched back into the Tank with their new offer for only 20% -- or exactly what would keep O'Leary from investing.
Babz: "I don't think you fully understand our business," she said.
A little salt with your foot, Babz? O'Leary reminded them he made $3 billion selling a business that made educational products for small children. No, Michael said, he'd only give them 20% for that money.
A little ketchup with your foot, Michael?
"It's not worth $3 million dollars," O'Leary said. "Not in today's world." The Sharks stuck to their offer.
"No. Not even close. Not even maybe," said Michael.
O'Leary gave up with a stinging rebuke: "The world's changed. You can't get that loan from a bank or you would have done it. We both know that."
Calling it a sad "missed opportunity," they banished the Barnetts, who remained steadfast. The Sharks were undervaluing their proven business, they said, and they weren't going to be undersold. Goodbye, Sharks.
* We got an update from Lori Lite of the strange Stress Free Kids book series, which aim to reach kids with nervous and social problems (though not, apparently, teach them about grammar -- where's the hyphen?). She appeared in August and split control of her business with Barbara Corcoran. She delighted in reporting that her books had been picked up by Borders nationwide.
Corcoran met with WalletPop's Jason Cochran to talk about what strings she had to pull to get Stress Free Kids in Borders. Click here for that video.
* Dr. Nancy Tanchel and Marix Stone introduced Hells Bells, a stylish motorcycle helmet that can be embellished with custom three-dimensional designs. Stone, a lanky rebel type with long hair and a soul patch, got rolling with the beginnings of his pitch by implying that if you have to have a helmet to comply with the law, it might as well look cool. Then he choked. The words few out of his brain. He stammered and desperately looked at Tanchel for help.
"Only millions of people watching," tittered Daymond John unhelpfully. "Take your time."
Stone laughed nervously and grappled with his helmet and tried to recover.
"A nervous biker," observed John, more than a little gleefully.
Tanchel finally came to the rescue, taking the lead and saying they were on track to make $300,000 this year ($175 a helmet, profit margin of more than 50%), and they owned the utility patent to put 3-D designs on any sporting helmet, period. What they really needed was the seed money to move into mass production.
Harrington, as usual, had nothing to say until the minute he backed out, citing doubts with its potential. O'Leary didn't like the potential, either, and Corcoran daintily dubbed the hard-core biker gear "not my cup of tea." Herjavec was tempted, but was nervous about such a "big ask" for such little proven revenue.
He ultimately deferred to John, who told the biker duo he planned to license their technology to scads of companies, getting them out from under their production burden and making a mint in licensing fees.
That business structure seemed novel to Stone, who seemed mostly concerned that the resulting helmets still look pretty, and he and Tanchel gladly snapped up John's deal. John started out by gently mocking the very pair he ended up going into business with. The segment ended with O'Leary wearing one of the biker helmets, evoking a chubby, slitty-eyed Colonel Klink.
* Then came Alfonzo Dowe, Sr., a career police officer from New Jersey whose The Twister performed as a portable golf ball cleaner. He was looking for $85,000 for a 40% stake (and "a business partner"). You screw it into a plastic capsule, twist the capsule a few times, and the interior bristles clean the ball. He'd only sold a few thousand (for $19.99 each) and wanted to go further, but his job as a cop kept him from focusing on it.
Harrington began musing whether it would actually help a serious golfer's game, and Dowe leaped in to wave that thought away. It didn't matter if it did, he said, because the larger market isn't golfers but people who love golfers and buy stuff for them. It seemed pretty smart, but maybe Harrington was only looking for an excuse, because then he tried saying it would only be a seasonal item (no, Dowe said, there were birthdays, Fathers Days, corporate outings), before finally clamming up with an emphatic and unexplained "I'm out."
Corcoran: "I hate golf." Out. Herjavec: "Please don't arrest me for speeding when I'm in New Jersey. I don't know if this is a hole in one." Out. O'Leary didn't like that Dowe wanted to make lots of product before having any orders. Out. John doesn't get golf, either. Out.
Dowe swung and missed. But as he left, Herjevec asked if he could at least buy one. Dowe: "Absolutely. And I'll give you a special price: $19.99" And with that brilliant snap, he was out, too.
* Finally, Andy Sperry introduced his concept: Netflix for printer ink. Mail-order printer ink. Or his name for it, Ink Flip. To refill printer cartridges and ensure his customers always had a spare cartridge on hand when they ran out of ink, he wanted $150,000 for 20%. In six months, he's made $10,000.
The Sharks' main issue came down to Herjavec's response: "Your business model is predicated on getting customers, but you don't know the cost of getting those customers."
"You're a crapshoot," O'Leary said. "You should have known that number. That's why I'm out."
John agreed. He wasn't educated enough, and his idea wasn't proprietary. Herjavec: "You're going to use my money to test the market? You're crazy."
Corcoran: "I'm thinking of $150,000 and how I had to kill myself to get my hands on it, and I couldn't imagine me giving you that money just to see if this idea might work."
Once Sperry's options ran dry, Herjavec asked him what he'd learned today. The answer could be a lesson to anyone who has a business plan to pitch: "I knew that was my biggest problem coming in," he said. "What I learned is the thing that's in the back of your head that's saying, 'Don't go in without this,' is the thing that you need to work on the most."
And what did we learn? That a Shark is good for doling out money, but if you try to rely on them to do your thinking for you, you deserve to get eaten alive.