There are times you come across a homegrown business idea with the right ingredients to succeed or a stellar product that’s destined for big things.
When Perth-based David Lambasa walked into the tank last Sunday to spruik Clever Score — his modular scoreboard business – there was a lot of promise. The product was cleverly designed and easy to use – two very good ingredients to have in any offering.
David was seeking $200,000 in return for a 25 per cent stake to help Clever Score expand internationally. He had been running the business for 10 years with no margin erosion – factors that looked good on the surface. But as we digged deeper there were some clear red flags which later turned into no-go zones. David was repeatedly asked how much sales Clever Score registered each year but somehow kept avoiding the question. Getting him to share some basic numbers on how his decade-long business had been performing was like trying to get blood from stone.
As a potential investor, I found that extremely frustrating. It felt like he had something to hide. It felt like I couldn’t trust him. And this is a major problem in any relationship. We gave him a chance to redeem himself and he finally revealed that he makes roughly $200,000 a year in sales. He insisted though that his profit margins were good. As we probed further we were told that his costs fell between $70,000 and $80,000 per annum, leaving a balance of $120,000 if the top end figure is used.
We’re later told that he takes home less than $75,000 in salary. How the remaining tens of thousands of dollars are spent remained a mystery. I found it to be the most confusing thing ever pitched to me. I had no idea what I was investing in, no idea what was on offer, and I had no details of what the required $200,000 would be spent on. In the end, I decided I couldn’t work with him and was out.
Here are some tips on how David could have done better:
1) Explain what the investment would cover. Whether it’s $200,000 or $2000, investors want to know how their money will be spent. Don’t forget that most investors have had their fair share of long nights, challenges and struggles to achieve success so why should they just sit back and freely dole out cash?
2) What problem are you trying to fix and how do you fix it. David wanted to expand internationally as he felt he had done enough to corner the local market. However, he no idea how to go about it and wanted ideas from us Sharks on how to maneuver international markets.
3) What are the forecasts or success metrics? Details were again scant and David had no data or numbers to explain the return on investment in return for $200,000. When buying property, would you part with your money without getting an understanding on the suburb, its median prices, growth potential and demographic information? So why are investors expected to give anything away without first understanding what’s in it for them? My advice to anyone pitching their business is to have precise answers when asked how their money will be spent. No pussy footing, no beating around the bush – just get to the point and back it up with facts.
Steve Baxter is an entrepreneur and investor, founder of technology startup hub River City Labs, founding director of StartupAUS and a Shark on Shark Tank Australia.
Missed episode one of Shark Tank? Watch them here.