Flexscreen is a "better" window screen out of Pittsburg, PA, that flexes and doesn't bend like the one's we know and loathe. When a Flexscreen window screen pops out, it can be popped right back into the the frame because it doesn't use the same rigid aluminum frame that everyone is used to but a kind of steel that actually bends. The actual screen material is the same as it's always been.
The entrepreneur created the Flexscreen prototype in his garage and has demoed it to "window people" who suggested that he patent it (because, of course).
Mr. Wonderful being Mr. Wonderful, asks about the $13,000,000 value the entrepreneur has given to the company. The entrepreneur responds by saying that since bringing Flexscreen to market, the company saw $400,000 in sales in the first year, $2,000,000 in the second, $3,500,000 in the third year of business and $5,100,000 in the previous year. He projects seeing as much as $10,000,000 in sales by the end of the year. However, even though the entrepreneur claims to have a gross margin of $700,000 or 15%, Flexscreen only saw $40,000 in profits in the previous year. The entrepreneur claims that this is because he is re-investing in the company. He claims that Flexscreen could see as much as $1,000,000 at the end of the current year if he stopped doing "everything".
However, the claimed margin is difficult to understand when the entrepreneur says that the screens cost $10 per unit and are sold to window manufacturers for $11.50. The entrepreneur says that this small margin is because customers will only pay so much for a window and there's only so much margin the manufacturer will give up to Flexscreen. The sharks, rightly, wonder why the window manufacturers can't communicate to their customers about the better screen (and raise their prices slightly).
Kevin then asks if the entrepreneur might be willing to license the Flexscreen product but the entrepreneur responds that no one would be willing to license it without it first being proved in the market and it has only recently begun selling through the company website. Kevin then asks whether retail customers can buy one but the entrepreneur says that each screen must be custom made, so... no. Naturally, the sharks are unhappy at this answer and Lori questions why Flexscreen isn't being made to fit the several standard window sizes. But the entrepreneur claims that there are no standard sizes and that windows are very, very much a custom product. Mark, rightly, asks why if standard screens don't need to be custom made, why do Flexscreen's but the entrepreneur claims that all window screens are custom made.
The entreprneneur states that he wants Flexscreen window screens to become the new standard so that he can put whatever price he wants on his product.
Making A Deal
Robert is the first to drop out after he says he imagines the entrepreneur having gone to several windoww manufacturers and telling them that Flexscreen window screens were better even if they were more expensive but the window manufacturers responding that their customers wouldn't care.
But where Robert did see much to like about the deal, Barbara said she was interested because she replaced the window screens at her beach house every three years. She offers $400,000 in cash and an additional $400,000 in revolving credit in exchange for 50% of a new retail business that would manufacture about twelve standard sizes. The deal would be exclusively for the new business that's set up and just for those sizes. (It's almost like she doesn't care how hard that would be to value on this site!)
Kevin says that he'll get the entrepreneur meetings with every major window manufacturer. All he wants is 20% equity in exchange for $800,000 in cash and that's even contingent on making at least one licensing deal.
Lori looks to get into the deal as well, stating that she wants to help Flexscreen standardize on size and that she can help do it because several of her companies are in the hardware space. She also says that she likes the idea of expanding to selling directly to consumers. She offers $400,000 in cash and the other $400,000 as a thirty-six month loan at 6% in exchange for 10% equity.
Given the amount of debt on offer, it only makes sense for Mr. Wonderful to revise his offer to $800,000 as loan at 9% interest and 6% equity.
It's easy to forget with all the offers floating around that Mark was still there but he says he's not a "window guy" and drops out.
Barbara tells the entrepreneur that her brother is actually in the window business in Oregon, clearly trying to relate directly to the business at hand (even if she has little first-hand experience with it).
Lori then matches Barbara's offer. Because the entrepreneur thinks that Lori has the better connections in the hardware space, he opts to go with her. Because this is a new business, rather than the old one, a bite doesn't apply in this case. Rather, Lori invested $400,000 in cash for 50% of a new retail focused business, meaning that the new business is now valued at $800,000.
- It should go without saying that any investor wants to see an upward trend in sales. Should a company have a down year, they had better have a reason for it like a recession that effected everyone. Going from $400,000 to $5,100,000 in sales in just four years looks pretty good. A measly $40,000 in profits... not so much.
- Presumably, "everything" in this instance includes "re-investing" in the company, though one wonders at exactly what that might be. Most likely, it's marketing and travel costs related to demoing the Flexscreen product.
- Forgive your Stats Shark on this one but this reeks of a bit of bullshit. There may not be "standard" sizes across window manufacturers but each manufacturer no-doubt has their own standard sizes that screens can be manufactured for. There is no world in which every screen for every window is custom made.
- This isn't an unusual market position to shoot for. Sony has often tried to do exactly this, where they have a patented product that has become the standard that then allows them to set the price for the entire market. They have never been successful at it though as they then create a price ceiling that is easily undercut, the most famous example of this being Betamax. Despite claims that Betamax was a superior technology, its high price tag and Sony's exclusivity made it a market failure because VHS was a more open technology with a lower barrier to entry for other electronics companies. This made players cheaper, tapes cheaper, and, thus, had a wider adoption. Sony saw more success with BluRay because they got more buy-in but it, eventually, failed because of the market move to digital downloads. Cornering the market with a patented standard has almost never met success in the modern era.
- As I think we all do? Your Stats Shark sometimes replaces his twice in a season! And if you saw the size of the beach house he has in his head, you would know what a substantial amount of work that is!
- Given that Kevin often complains about company valuations, it's interesting to note that when he does make an offer, he often tries to preserve that value. In this instance, though the interest rate is higher than Lori's offer, the equity position he's asking for is actually lower, meaning the company would retain more of its value.