A great product doesn’t mean much if you can’t match the supply to the demand. Sometimes it’s necessary to bring in an executive with the connections and experience to turn your startup into a serious business.
In the latest episode of the hit ABC show “Shark Tank,” investor Kevin O’Leary gets nostalgic over the time he learned this lesson for himself.
Entrepreneur Tom Sanetti tells the Sharks that he’s sold only $US200,000 worth of his eco-friendly, scented Earth-Log fireplace logs over four years because he’s been limited to a small market in Southern California. He just accepted a deal from the grocery chain Albertson’s for 180 stores in California.
Albertson’s wants to take Earth-Log into 3,200 stores, but Sanetti simply doesn’t have the ability to manufacture enough. He’s had to turn down offers from the chain Vons and Costco for the same reason.
Investors Mark Cuban, guest Shark and GoPro founder Nick Woodman, and Daymond John all compliment Sanetti on his product and determination but tell him that he’s got to continue developing his company before they would be ready to invest. “I think you’re trying to go from zero to 1,000 miles an hour right away,” Woodman says.
Then O’Leary explains how he identifies with Sanetti:
You know, when I was in the basement back in the late ’80s starting The Learning Company, after I’d get a $US12 million order for “Reader Rabbit,” it would blow up behind me, the logistics. I couldn’t deliver.
I met a guy named Mike Perik. I gave him half my equity to solve my problem. We sold the company for $US4.2 billion five years later. Best investment I ever made.
O’Leary cofounded SoftKey, the business that would eventually become The Learning Company, out of a Toronto basement with a $US10,000 seed investment from his mother. The company collected cheap software in inexpensive CDs that started to become popular. It wouldn’t control the “Reader Rabbit” franchise until it acquired and took the name of The Learning Company in 1995, meaning that detail in O’Leary’s story is off, but his point — that he and his two cofounders couldn’t keep up with their growth — remains.
O’Leary recruited Perik, an executive from a Canadian investment firm, in 1991 and made him CEO of SoftKey. Perik grew the company in the ’90s through profitable acquisitions, making it attractive enough for Mattel to spend over $US4 billion for it in May 1999. By that November, the deal proved to be a money-losing disaster for Mattel, and O’Leary and Perik left the company with severance packages of around $US5 million.
It’s not a story with a happy ending for everyone involved, but O’Leary ultimately made his fortune from knowing when to partner with someone more experienced.
Back in the tank, he tells Sanetti that he needs to find his own Mike Perik. O’Leary wishes Sanetti the best but tells him he has to bow out because he’s looking for an investment, not a job.
Lori Greiner, however, offers to be Sanetti’s Perik.
As the “Queen of QVC” and a Bed Bath & Beyond partner, she’s uniquely positioned to turn a small household item into a national sensation. She’s done it many times on “Shark Tank,” including with the show’s biggest success to date, the Scrub Daddy sponge that she took from $US100,000 in total sales to $US18 million in a year and a half.
Sanetti came looking for $US160,000 for 20% equity but gladly makes a deal with Greiner for that same amount of money in return for a 35% stake in his company.
Though he gave up 15% more of his company than he wanted to, he essentially took O’Leary’s advice and made that sacrifice to partner with someone who can take his company to the next level.
You can watch the full episode at Hulu Plus.