Experienced Business Formation Lawyer
Be Careful Who You Choose to Invest
An episode of Shark Tank demonstrates why startup founders have to be careful about who they choose to invest in their companies. I don’t watch the show, but I tuned in to this episode because it featured a local startup called Frameri (which has since then gone out of business). Frameri was working on a line of eyeglasses where you can easily pop out the lenses to put them in new frames. If any of my readers wear eyeglasses, you know how much this can save you. The last time I bought a new set of eyeglasses, the cost of the frames and lenses took me past $500 before I could blink.
Pretty much as soon as Frameri’s cofounders explained the product, the “sharks” hit them with abuse and condescension. One of them pointed out that Luxottica (also based in Cincinnati) is a huge player in the market as if that was an indictment of Frameri’s idea. Apparently the judge has never heard of IBM, which used to dominate the computer industry, or the concept of disruption. Luxottica’s market dominance allows them to inflate prices, creating an opening for innovative players like Frameri and Warby Parker. Pretty obvious, if you ask me.
Another judge called the Frameri guys “cockroaches.” I kid you not. My cousin was on Shark Tank pitching her company, and one of the judges called her a cockroach, too. Could have been the same guy, so maybe “cockroach” is his go-to word. In any case, any investor that is personally abusive like that should immediately be disqualified.
At one point in the show, one of the judges asked if they were on the show to get an investor, or if they were using the show for publicity. Well, doesn’t everyone who goes on a reality show or competition show do it for the publicity?
About 1 minute into Frameri’s segment on Shark Tank, I was rooting for Frameri to reject all of the investors. Most of them dropped out, leaving one left to make an absurd investment offer. To Frameri’s credit, they turned it down. Just because a rich person dangles money in front of you doesn’t mean you should take it. A bad deal is still a bad deal. And a bad investor is even worse. You want an investor who understands your company, your industry, and your environment. You want your investor to be a source of more than just money. The investor should be able to provide support, guidance, mentoring, and connections. Finally, you want an investor that you can have a good working relationship with over a long period of time. Someone who calls you a cockroach isn’t that kind of guy.
So that’s really the bottom line. Forget about the money. Money is the least part of choosing an investor. Look at the person, and ask yourself if you can work closely with this investor over the long run. Do you want this person to sit on your board of directors? How is she going to respond to business ideas that she doesn’t like? Is he going to call you – the company founder, the CEO – a cockroach in front of your staff? If you wouldn’t want to spend a minute more than absolutely necessary with this person, then move along and find someone else.