The success of Shark Tank has brought much attention to the venture capital world. People from all walks of life are yearning to learn more about risks and potentials in the fast paced world of start ups. It important to how the difference in types of capital investment. For example; take venture capital (VC) is financial capital provided to early-stage, high-potential, growth startup companies. The venture capital fund earns money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology and IT.
The typical venture capital investment occurs after the seed funding round as the first round of institutional capital to fund growth (also referred to as Series A round) in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. Venture capital is a type of private equity.
Understanding this, a Texas couple was able to take $500 and build a $1M Shark Tank winner. Please see the story from our pal Elizabeth MacBride, a contributor to Forbes.
It doesn’t take much to start a company in the Internet age. Two entrepreneurs I met last Friday have a business they say is set to gross $1 million this year. They started Sleeping Baby with $500 in savings just two and a half years ago.
It’s a classic up-from-the-bootstraps entrepreneurial story, but it’s happened at hyper speed, and the latest chapter is quintessentially of the media age. The company, Sleeping Baby, got its latest round of funding — $200,000 — from mogul Daymond John on the ABC hit show Shark Tank.
I talked to a couple of people about why the show is so appealing. Most people say they like rooting for the entrepreneurs against the capricious Sharks — and we’re in an age where entrepreneurs are even more celebrities than celebrities are. On a practical level, the show offers some great insight into the mechanics of venture capital, which is all about aligning incentives so that everyone is invested in producing a winning company.
“In the end it’s important that enough ownership remains with the founders so they stay highly incentivized,” said Bob Greene, co-managing partner of Manhattan-based Contour Venture Partners, which has invested in such startups as OnDeck , Ticketfly, Movable Ink and Bounce Exchange. And “it’s important to the entrepreneurs that the investors have skin in the game.”
He says his kids ask him whether Shark Tank is true to what he does — and it’s close, in terms of the kinds of questions asked about the size of the market and the quality of the business, he says.
Of course, a venture capitalist like Greene is investing other people’s money; angels like those on Shark Tank are investing their own money, so they’re freer to follow their hearts, which is what makes the show interesting and the results sometimes unexpected.
Brett and Stephanie Parker used to watch it even before they started building their Fort Worth, Texas-based business.
“We’re both business-minded and we’re both dreamers,” says Brett Parker, who was a regional sales manager for Cintas before he quit to help his wife sell the baby sleep sacks she was sewing. Their daughter refused to sleep, so one night, out of desperation, Parker says she sewed one of the Zipadee-Zip sleep sacks.
“She slept 12 hours that night,” Parker says. “It was right around that time that I was going to have to go back to work for financial reasons and the prayer of my heart was to stay at home with her. So this was like the answer to a prayer.”
The company followed a startup’s dream path. After they spent $500 to put up a rudimentary web site, they found an early market with evangelists: mothers who were willing and eager to share a baby sleep solution.
With $70,000 in revenue, they pitched Shark Tank and were actually chosen. Here they showed incredible judgement.
“We made it on the show after being in business for four months,” Stephanie Parker says. “But we realized we didn’t have the manpower to support manufacturing.”
(Their manufacturing at that point was being handled by women at the local fabric store that Brett had begged into working for his wife on the side).
The couple declined the show. In the meantime, they kept building, investing in a better web site, and locating a manufacturer who could comply with all the regulations that go into baby sleep wear.
They built the company to $1 million in sales over 18 months.
When they decided to pitch Shark Tank again, Stephanie was pregnant with their second. She gave birth to a boy by C-section seven days before the all-day lineup — it was about 500 people– to pitch to the show’s producers, so Brett stood in line starting at 6 a.m. and called her when he reached the front.
“We did our little pitch and left,” she says.
They were picked again, taped the show in June, and it aired on Friday. They got offers from three sharks, and were particularly flattered to get one from Mr. Wonderful that didn’t have a royalty attached to it, they say.
In the end, they accepted Daymond John’s offer for $200,000 in exchange for 20% of the company. They thought John’s experience in the textile business would benefit them.
“We’ve been so reactive in our growth,” Stephanie Parker says. “So we really wanted someone to give us the wisdom.”
Since the show ran, they’ve sent 5,000 orders to their shipper and received thousands of emails.