The investors on ABC’s hit pitch show “Shark Tank” absolutely loved the Singtrix karaoke machine that lets even the worst singers sing in tune. They loved it so much that four of them offered $US1.5 million, a high amount for the show.
But the founders seemed unwilling to enter into a real negotiation, causing the investors to withdraw their deals simultaneously in frustration and for Kevin O’Leary to proclaim, “You are the classic, ‘You’re dead to me.’ You gotta go.”
It was a perfect example of how agreeing to a deal with a “Shark Tank” investor isn’t the right choice for every entrepreneur.
Singtrix cofounders John Devecka and Eric Berkowitz enter the tank looking for $US1.5 million for 5% equity, giving their company a $US30 million valuation.
They explain that it’s worth this much because they know what they’re doing and are poised to make big money.
When Devecka was 26, he built the machine that would become the “MTV Drumscape” arcade game, the first music video game, out of his parent’s garage. It became an international hit and eventually got the attention of video game giant Activision.
Berkowitz was Devecka’s head of marketing and business development, and the two sold all of Devecka’s music game patents to Activision in the early 2000s.
Activision used these patents in the popular “Guitar Hero” franchise that launched in 2005.
Devecka tells the Sharks that the Activision deal worked out great for them, and their latest venture, Singtrix, can revolutionise karaoke with its selection of more than 350 voice modulation and auto-tuning effects. Here’s how it works:
The starter kit retails for $US345 and the entrepreneurs tell the investors they have already sold 4,000 units in the company’s first six months, bringing in total revenue of $US1.2 million at a 40% profit margin.
They have got a deal in the works, they explain, with a major electronics company that will exclusively handle Singtrix’s distribution in the US and Europe, which has made them confident that they will sell at least 30,000 units this holiday season.
Berkowitz says that they’re looking for money that can help them develop new products and have an investor with valuable connections. “It’s not just somebody writing a check. We’ve had lots of people offering us money at the valuation that we’ve put out there. We want to get involved with people who will make us better.”
Investor Mark Cuban says that he knows Singtrix is at a point where $US1.5 million won’t be what’s needed to get the company to where the founders want it to go. He also thinks that if they have an initial bout of success, they will have to spend “a boatload” on marketing, which he figures is one of the main reasons why the two founders are appearing on the show. “I’ll be a customer, but I won’t be an investor,” Cuban says before pulling out of a deal.
Then the four remaining Sharks get creative.
O’Leary offers $US1.5 million for an initial 50% stake. If he gets paid back in full within an 18-month window, his equity would drop to 10% and he’d get a $US2.50 royalty on every unit sold.
Investor Robert Herjavec proposes investing $US1.5 million for a 20% stake, saying his deal is more straightforward and focused on the long-term.
Lori Greiner, who had been chatting with O’Leary while Herjavec spoke, offers $US1.5 million for an initial 30% stake. Once she gets paid back (mentioning no time limit), her equity would drop to 15% and she’d get a $US2.50 royalty on every unit sold. O’Leary decides that he’ll go in on this deal.
Then Daymond John chimes in as O’Leary and Greiner spar with Herjavec for the Singtrix duo’s attention. John opens his offer by saying that he represents the Ultra Music Festival, a popular electronic music brand, for licensing, and Devecka seems interested. John says that he is also connected with Samsung, which he could use to make the brand’s equipment when it scales. He offers these connections along with $US1.5 million for a 25% stake and the guarantee that he will finance all future orders.
Devecka and Berkowitz silently consider all the options, and then Deveka says he’ll settle for an offer of $US1.5 million for a 7% equity stake. The Sharks all protest in frustration.
“We’ve done this already. We made ‘Guitar Hero’!” Devecka insists.
“You made ‘Guitar Hero,’ but you didn’t sell ‘Guitar Hero.’ That’s a big difference,” Cuban says.
In the end, both the Sharks and the founders seem annoyed with each other. When the episode premiered, the Singtrix Twitter account retweeted a couple of users who implied that the founders went on the show for publicity without any intention of making a deal.
Because “Shark Tank” investors come with a network and expertise in a particular field, along with an uncommon hands-on approach, the equity they seek is often much larger than what more typical venture capitalists would seek. The fact that the Singtrix founders counter-offered so low suggests they simply weren’t interested.
It’s notable, however, that Herjavec and John both vouched for the Singtrix product on Twitter during the episode, and neither of them are shy about letting the public know when they don’t like someone. O’Leary expressed again that he thought they were out of their minds, but he still had nothing bad to say about the product or its potential.
And in an interview with Heavy, Devecka and Berkowitz reveal that they were approached by “Shark Tank” producers at a trade show and asked if they wanted to appear in an episode. They initially declined before later agreeing. “The producers were really supportive and encouraging so we changed our minds on the last day of submissions,” Deveka tells Heavy.
Since the episode was filmed, the Singtrix team secured the major distribution deal that its founders told the Sharks about. As of September, VOXX Electronics will be the exclusive distributor of Singtrix in North America and Europe.
At the end of the day, a deal with a “Shark Tank” investor isn’t for everybody. But an appearance on the show provides major exposure, worth millions in free advertising, no matter how much it may frustrate the Sharks.
You can watch the full episode on Hulu Plus.
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