Outer
Outer is a company that has innovated a way to keep your outdoor furniture dry against morning dew and the occasional rain storm with cushion cover that comes with the furniture. Their patent pending "outer shell cover" drapes over the back of a piece of sectional outdoor furniture and can be easily pulled across the seat and back cushions to protect against morning dew. They can also be secured to the cover that loops under the seat cushion to form a handled carrying device to bring the cushions inside during a rain storm.
The entrepreneurs behind Outer claim that the materials for the entire outdoor sectional line are ecologically friendly.
The soft demonstrated on Shark Tank was said to cost consumers $2,500 for what was there. They stated that each piece of the sectional costs between $800 and $825. These sectional pieces cost Outer $225 to manufacture.
Outer claims to have developed a "proprietary P2P showroom" where prospective customers can go over to a past customer's house to see the furniture where and how it will actually be used, on an appointment basis, naturally. They say that customers that open themselves up to these visits will receive between $20 and $50 per visit.
The entrepreneurs begin to talk about the size of the outdoor furniture market, violating the First Rule of Shark Tank and the sharks recoiled.[1]
Outer only launched four months before and had booked $800,000 in sales in that time. Unfortunately, none of that could be booked as profit. They project earning $1,500,000 by the end of the year and $5,000,000 the year after.
The company is 85% owned by the two entrepreneurs presenting Outer. The other 15% is owned by by one of the entrepreneur's family who owns the factory in which the furniture is made. This allows Outer to manufacture their furniture almost at cost to help keep their prices relatively low.
Making A Deal
Daymond says that he doesn't like the $18,750,000 valuation that they're asking for and drops out. Guest shark Anne Wojcicki says that, while she's used to sky high valuations after having been in Silicon Valley for a long time, she doesn't see Outer as a world-changing business and is, like wise out. Mark seems to like the idea and thinks it could be large but also doesn't think that they would bring in enough business to compensate for the risk versus the reward and drops out as well.
Kevin says that he likes the company but that the previous VCs they've dealt with are not him nor do they bring the value. He also states that, while he would ordinarily want some kind of cashflow from the business, he's feeling generous (but not too generous to not ask for a 16% equity increase over what was on offer) and offers the entrepreneurs their request $750,000 in exchange for 20% equity.
Lori says that she loves the product but that the company just started selling and that it was very early. As such, she offers a $750,000 loan with a royalty of $20 per unit until earning back $1,000,000. In addition, she'd like 10% equity in the business.
Mr. Wonderful remarks with pride that she has learned well from him.
When the entrepreneurs ask if Kevin would match her deal, Lori threatens to drop out. Still, Kevin offers everything exactly the same except with a 5% instead of 10% equity kicker. The entrepreneurs use this to try to counter Lori by having her bring down her royalty to $750,000 in returned earnings and a 4% equity kicker.
Lori says no. They try to see if she'll match Kevin O'Leary's 5%, she asks if they'll take the $750,000 loan at a 3% interest rate for 5% equity and a $30 per unit sold royalty until earning $1,000,000 and, surprisingly, the entrepreneurs accept.
Analysis
Have we ever seen a deal on the tank that is this... sharky? Honestly?
This deal is great for Lori and... why wouldn't it be? There's almost no downside in it for her. Every sale they make brings her $30 and she gets that money before they can profit on every sale until they've earned her $1,000,000 in returns.
Additionally, the money she's giving to Outer isn't as an investment that they can use to expand or grow. It's a loan that, while carrying an interest of only 3% is unbelievably cheap, still has to be paid back. If it's a revolving line of credit, that could be great for Outer as they would, essentially, always have a free source of money to fund purchase order with. But it also means that Lori doesn't have to make any kind of cash outlays until the company requests it.
Lastly, Lori also gets a 5% interest in the company for free. Which means that, even once the company has paid back their loan (if it's non-revolving) and paid out her full royalty term, she still gets to profit as any other traditional investor might.
Admittedly, Lori is a great partner for this product, which represents a baby step up from just throwing a tarp over the furniture at the end of the day, and one can imagine her QVC connections might help push this product in a major way. But it's still strange that the entrepreneurs would be so desperate for the money or a shark that they'd give away five percent for the ability to borrow money while also paying a royalty.
Your Stats Shark won't go so far as to call this greedy, every investor is entitled to see what they can get for their capital, but it's a little odd to soak a company you would like to see succeed over the longer term this hard.
Notes
- ↑ The market for outdoor furniture is certainly in the billions, as the entrepreneurs began to mention but, the reason why you should never violate the First Rule of Shark Tank is that this market is no doubt dominated by other large players. In this case, how many of those billions cites, are not being spent on things like chairs and sofas but instead on the various version of the Webber Grill? Your Stats Shark would estimate a fairly high percentage...