Small Thinking

As an MBA and a student of business, I really love Shark Tank.  I love watching it, seeing the various business pitches and great ideas.  I especially love watching how the Sharks react to the pitches, how they make their offers, and how the entrepreneurs on the show counter their offers or not.

The Sharks are all highly successful businessmen/women.  They know what it takes to make a business work and how to make big money in the real world.  You can instantly tell when they see something awesome, that they can make big money off of.  But they don’t always show it.  Sometimes, a business proposition is SO awesome that they get into a bidding war over it, and they show their true colors.  Other times, they are more restrained and make smaller offers.

Of course, in the rules of Shark Tank, they are constrained.  If they are not willing to offer at least what the entrepreneur is asking, they can’t offer at all.  So I’m sure they often see things they might like to buy into but cannot because of the rules of the show.  But every now and then something really blows their socks off and they offer big money (or what the regular guy would think is big money) for it.

One episode stuck with me for a while, and I think can illustrate what I’m talking about.

This guys comes on.  He’s a wine lover, but he hates the way wine oxidizes and ends up tasting crappy if it’s left to sit after the bottle is opened.  There are products on the market that deal with this issue, but he doesn’t like them.  So he invents his own solution, and it works.  It works really well.  He has a little success selling it and comes on the Shark Tank looking for money.

Instantly, Kevin O’Leary sees the potential.  He’s a wine connoisseur and knows the market.  But he has no intention of getting into a production plan and all that entails.  He offers the guy about what he’s asking for, in exchange for 51% of the company and he intends to license the product (which is patented) to the big players in the field.  Part of his deal is a royalty to the entrepreneur (I want to say 7% but I don’t remember exactly) in perpetuity.

The guy’s eyes light up.

But then one of the other sharks steps in (Lori I think).  Shee also sees the potential there.  She offers the guy $500k to buy him out completely.  The guys begins to waffle.

Mark Cuban then steps in, asking when the last time the guy held a $500k check in his hand he says no.

At this point, Kevin is getting indignant.  He tells the guy he’s being stupid and he’s going to miss out on big money.

Then Cuban enters the fray with Lori and they offer $600k.

The guy waffles even further.  Kevin advises the guy to ask for a royalty if he sells out.  He does.

Cuban says no, and if fact since you’re waiting so long now the offer’s only $400k.

Kevin begs the guy not to take that deal but to come with him and they’ll make huge money together.

The guy waffles.  And waffles some more.  Then he accepts Cuban and Lori’s offer.  In the end credits, he says he wishes they could have made the deal work at $600k but he was happy to get $400k.  Kevin lashes out at Cuban, saying he just stole that guy’s future.  Cuban replies BS, that guy’s kids are going to college because of that deal.

So what happened there?

All three of the sharks involved saw big money from this guy’s product.  Kevin, who is normally one of the more ruthless Sharks, offered the guy a little money now in exchange for potentially big money later.  Mark and Lori offered the guy a bit more money (but really only a little in the grand scheme of things, and considering their net worth) in exchange for nothing later.

Mark and Lori were counting on the fact that this guy was thinking small.  They knew if he saw the big money (but not all that big) he would sell out and think he got a great deal, when in fact he got screwed.

And since he was thinking small, he did.

He never thought about how big the wine market is.  About how many people love wine and might love his product.  About how much money that relatively small royalty would translate into over time.  If he had, he would have laughed at Mark and Lori and run to Kevin’s offer.  Or at least countered Kevin’s offer first.  But he was mired in small thinking.  Wow, $400k is a LOT of money!  Holy cow!  Well dude, you just potentially passed up millions.  In that light, you are DUMB!

But most people think small.  That’s part of the reason only a few people succeed and grow their businesses into multi-million or multi-billion dollar companies.  That and simple economics: the real world can only allow so many billionaire’s.  But more people could become billionaires if they did not cut themselves off at the knees.  In this case, Mark and Lori would not have offered that much (remember they WOULD HAVE payed $600k) unless they were pretty sure they stood to make several times that much in future income.  So what does that tell you about the wisdom of the guy selling out for a measly $400k?

Ok, Kingswood, what does that have to do with writing and publishing?

Exactly this: don’t screw yourself by thinking small.

Last summer, I wrote a post detailing how much of an advance would be appropriate for a book that’s already selling well.  My thesis in that post was that an acceptable advance was well above what most people probably think it is.  The world has moved on since then.  The market has developed, I’ve grown, and many other things have changed.  But people’s ability to get screwed by thinking small has not.

The world is a big place.  Publishing is a big business, worth lots of money.  Don’t sell yourself short just to get some nebulous prize of validation or some such crap.  If you know you have a good product, fight for it.  Don’t accept a deal that will end up screwing you long-term.  THINK, people.  Think big, not small.

That is all.

0 thoughts on “Small Thinking”

  1. I watched Shark Tank after I read this post because I was curious (man is that show addicting!) I saw the episode with the wine guy. Just to help you clarify: Kevin offered 40k upfront to the guy, in exchange for licensing the product and taking a 30% royalty in perpetuity (of whatever royalty wine guy would make). So at the very least (if the product doesn’t sell), the guy walks away with 40k, but he keeps his idea. Or does he? What if those “big players” looked at his product, agreed it was better, and then made a product incredibly similar without buying him out. He gets 40k, and then someone else makes the money off his original idea.

    The other sharks offered him up to 600k up front, but a 100% claim on the product, so he loses his idea. So at the very most he makes 600k. (Which then became 400k.)

    It’s a very tough call, and it really depends on the faith at that point. Will someone else steal your idea? The man self-admitted to keeping a spiral notebook of ideas. He walks away from Product A, but now has his own funding for Product B… and C… and D… and if those are successful, who knows how many products into the future?

    Well anyway, if it were me, I’d likely take the 40k up front with the royalty deal and hope for the best. Despite arguing for the 600k deal (which did go down to 400k). I think wine guy made a smart move in trying to secure a few points of royalties against the 600/400k scenario. In the end it made him lose 200k… and I think that should have tipped him off that they knew they were on to a good product and didn’t want to pay him those royalties. He only asked for 3 points. He even offered 2 points at 500k. That would have been the best deal for him. But in the end, with the offers on the table, I think he should have taken the 40k with 70 points of royalties.

  2. I guess I must have an “attitude” problem here. If someone had offered me $600k for complete rights (no royalties) and then lowered that offer down to $400k because I “waited too long” I would have told them to go screw themselves. These aren’t people I’d want to do business with in any shape or form. I don’t respond well to those sorts of odious pressure tactics.

    I agree that the wine guy shafted himself by thinking small. He lacked self-confidence by accepting the $400k total buy-out. OTOH, the “smaller” offer was a very fair and equitable one, with good promise for significant future earnings. And more important, that offer was made by someone who showed a measure of ethical business behavior.

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