Entrepreneurship: A Bad Deal

Many of you know, I have been in South Africa since early July working with students and entrepreneurs in many of Cape Town’s townships. I just arrived back in the States two weeks ago. While I was away on my month-long excursion, ABC launched a new show called “Shark Tank.” Clearly this is a take off of the BBC version of “Dragon’s Den” – and BBC’s version is a very good show.

I was quite enthusiastic when I sat down to watch an episode of “Shark Tank.” However, after watching three different entrepreneurs pitch to the panel of investors, I was disappointed in their lack of interest in educating the entrepreneurs on what they should do to improve. But the last entrepreneur presentation sent me through the roof.

Admittedly, the entrepreneur’s concept needed work, but it had legs. It was founded by Mark Furigay of Chicago Illinois, a high school English teacher who created Classroom Jams Records. He came in asking for $250,000 for 10% of his company. Yes, this is a ridiculous proposal from a business that had not yet generated sales but let's put that aside for a moment. This entrepreneur had developed an interesting way of turning Shakespeare into “trendy” songs the students could relate to. Apparently, the product had produced tremendous results. Additionally, the entrepreneur himself was passionate, likable, knowledgeable, experienced in the industry, and presented himself well. The investors liked him and his concept.

However, I quickly realized the investors on this show were not there to encourage entrepreneurship. The investors in this show were solely about making money. In this episode, the investors saw an opportunity to take advantage of a green entrepreneur – and frankly, it made me physically ill to watch it. Here are some of the excerpts – not in their entirety:

Investor 1: So you are selling the record label and the rights to all the songs?

Mark: I am not selling the rights to the songs. I’m selling a stake in the record label and publishing house.

Investor 1: Why not the songs?

Mark: The songs are something I would like to keep control of.

Investor 1: You are a nasty man.

RED FLAG NUMBER ONE: If the investor blatantly insults you in this fashion – excuse yourself politely and walk out of the room. Do not go back.

Moving on in the discussions, one of the investors started to take an interest and ask the entrepreneur what his plans were for growing his business. The entrepreneur starts to answer:

Mark: The next three we are planning on, will target three areas: history, science, …

Investor 1:Mark I’d like you to do a favor for me. I’d like you to walk outdoors for a moment and leave us alone.

RED FLAG NUMBER TWO: If, within five minutes of your presentation, the investors ask you to leave the room so they can “talk” – you better believe it is not to benefit you. They are scheming against you. Your guard should be up in full force if you decide to walk back into the room.

This is what was said when the entrepreneur left:

Investor 1: I like this deal. This is why I wanted to call a session. Lets not bid against each other. First of all, there is no way on earth he is walking out of here with the publishing rights in the deal. $250K for 100% of the business and he gets a 5% royalty after we recoup our dough.

Investor 2: I love it, but I’d like to be taller too. I don’t think he’s going to do it.

Investor 1: I’m not giving him any dough unless I have total control and I own all the rights.

Mark re-enters.

Investor 1: Look, I gotta tell you something. You are a very lucky guy today that we met. I’m gonna make you an offer. I’m gonna make you rich I think. But you’re gonna have to really think this through. We form a new company, we own it. We fund it with $250,000. It’s a publishing company for you. Just like a great artist, you’re going to make a royalty. In perpetuity for the rest of your life: 5%.

Mark: Its great to imagine that you would be willing to do that, um, but I’d like to build this company…

Investor 1: Stop right there. Do you want to be rich or not?

Mark: I do want to be rich.

Investor 1: Well, lets get focused on that buddy.

RED FLAG THREE: If you are a true entrepreneur – you are passionate about your business – it is your baby, your lifeblood, your sweat, and your tears. It isn’t just about making money – it’s about creating change and creating value. Investors who aren’t interested in you – have no interest in your business either. If you truly have a desire to create something and not just create wealth for yourself – you should walk away from that investor. Additionally, you should tell all of your friends to do the same. They will eat you for lunch, leave your remains in the parking lot to fry on the hot asphalt, and laugh when another car parks on you. Seriously.

So, we continue:

Mark: I would like to make a counter offer.

Investor 5: We’re all ears.

Mark: I would like to be six players as co-owners of the company.

Investor 1: It’s un-American what you are asking. You don’t want to take any risk. You want us to spend all of our dollars, give you free equity, and get a royalty. Do you see a problem with that?

Mark: I don’t’ see it as free…

Investor 1: And look at how much we are struggling for you to make this work.

Mark: And I appreciate that very much. I don’t see it as free equity.

Investor 2: He’s not gonna do the deal, he’s not stupid.

Investor 1: I didn’t hear that yet.

Investor 2: I mean I went along with the deal because I thought sure if it does the deal, I’m happy to go along with it. But he’s not gonna do the deal.

Investor 5: Mark, you have to start making a decision on this deal, what’s it gonna be?

Mark: That was why I wanted to take notes.

Investor 1: You know the big risk is you are going to walk out the door singing the blues.

Investor 2: You know I’m gonna say the big risk here is I’m gonna say I’m out in less than a minute, we’ve been here for way too long and this is getting way too complicated for me.

Investor 5: Yeah this is getting way too complicated.

Investor 2: And I’m a simple guy. I just want to make money.

RED FLAG FOUR: The investors have all rallied together, created tension among themselves for the sole purpose of pressuring Mark into a bad deal. If you ever notice dissension in the panel while you are presenting – do not make a deal on the spot. Find whatever reason you can to meet with them one-on-one, at another time, ask for a night to sleep on it, etc. Dirty investors play dirty. Don’t let them bring the dirt onto your turf.

I truly hope that the general public does not watch this show and think that this is entrepreneurship, because in my mind this is the farthest thing from entrepreneurship. Entrepreneurial success comes from passion, competence, capacity, resources, networks, and experience. It stems from taking advantage of gaps in the market, it does not come from taking advantage of people. The behavior of these investors is not ideally entrepreneurship - it is opporpreneurship of the most predatory kind.

Unfortunately, this behavior happens quite frequently, ABC has certainly created a true reality show. At least it provides a practical lesson for nascent entrepreneurs - be prepared. Mark needed more coaching and practice on the possible scenarios that he might hear from the investors. He was clearly off balance with the strategy of a royalty business model vs. the deal he walked in with.

Never be afraid to walk away – as soon as you are, you have lost all power in the situation. If the deal does not work with your vision – don’t do it. There are more investors, and there are GOOD investors who want to work WITH you.

I hope that most of you who choose to watch this piece of garbage watch it for all of the red flags to look for when you are dealing with an investor for your business. If any of the investors in your room even remotely remind you of them – put your guard up, and leave it up.

Especially look out for the type that resembles the balding guy who sits in the middle of the panel and bears a striking resemblance to the character in the film “The Princess Bride” named Vizzini (Wallace Shawn) who utters the word “inconceivable” numerous times in the film clearly not understanding what the word “inconceivable” means.

By the way – Mark took the deal. After Mark left the room:

Investor 2: That was a very good deal, a VERY good deal. He definitely should not have taken it, but it was a very good deal.