While watching start-up cosmetic brands on Shark Tank……….
As most of my regular readers are based outside of Australialand I’ll just explain that ‘Shark Tank’ is not a nature program, it is one of those shows where entrepreneurs pitch their brilliant businesses to a bunch of highly respected and successful potential investors with the hope of getting one, two or sometimes three out of the five to invest in them. It is great viewing for a work-a-holic like me as I can truly multi-task – relax AND learn at the same time.
In general this is what I’ve learned
- On the whole people have NO IDEA how to value their business and are blissfully unaware of how ridiculous it sounds to offer a seasoned professional 10-20% equity in a concept, start-up or fledgling business in exchange for hundreds of thousands of dollars AND the technical help that comes with that.
- Many people go into an industry with no real understanding of the rules and regulations that underpin it.
- Quite a few of the businesses pitching seem to have been so wrapped up in their brilliance that they have failed to see that yes, there are competitors for your idea and it actually isn’t quite so unique.
This week there was a start-up cosmetic pitch in the mix, a pitch that attracted no investors this time although there was a bit of interest and the sort of ‘pat on the back, keep trying’ feedback that was probably quite encouraging. For me though it once again highlighted the dangers of starting a business in an area you know next to nothing about.
Rather than go through this particular example (as it will be irrelevant for over-seas readers and potentially embarrassing for this particular brand) I’ll focus on some generic tick-the-box things that a start-up brand seeking investment should consider.
What a new cosmetic brand intent on going places SHOULD know and do BEFORE seeking investment.
- Stability testing of your formula is very important. If you are planning to roll out your product globally or even nationally the big stores will require that you have stability testing data. You may be able to get an un-tested product into a small independent chemist or corner store but this isn’t robust enough for an investor who wants to make one call and secure 50-100 stores.
- Micro testing and Preservative Efficacy Testing should also be carried out or at least considered. Once you start putting your product into 100+ stores you will be making big batches – 100Kg – 1MT perhaps. MIcro issues at this level can cost your brand reputation as well as thousands in recall costs AND potential irritation/ skin infection of people who use your products. Don’t risk your money and DO NOT EVEN THINK ABOUT RISKING THE HARD EARNED MONEY OF OTHERS by neglecting to do this.
- Claim substantiation is also important for brands wishing to attract investment or wishing to grow internationally. Your products HAVE to do what you say they will and you have to prove it in a non-bias way, preferably at a third party lab or via extensive survey feedback. If you claim something like SPF that will HAVE to be tested by a third party.
- Overall product safety is also key for products entering a national or global market. The more people your products ‘touch’ the higher the risk of reaction and you want to know that your products are basically ‘safe’ or as safe as they can be. Testing your formula in a repeat insult patch test is a good place to start and if that is beyond the budget a safety assessment carried out by a registered assessor (EU style) is a good theoretical risk analysis.
- Know the laws that govern what is safe for your type of product. Using perfuming ingredients as an example (be they essential oils or fragrances) there are different guidelines for lip products VS body, for face vs candles, for massage vs sunscreen. Not knowing this can lead to a product that is actually quite irritating and even potentially dangerous. There are specific guidelines for AHA/ BHA products, those containing pigments and anything that contains hair dyes plus many, many more.
- Understand GMP. Good Manufacturing Practice is also going to be important as you scale up and want to access other markets. Many of my readers start off by making products in their homes and some even go on to make their own laboratories and manufacturing facilities. Chances are neither of these will be GMP accredited and therefore won’t pass international standards. Don’t risk an investors money by making this mistake.
- Market Research.
- Googling is not enough although googling other brands and prices is a good place to start.
- Use people who don’t know you to review your product to ensure they give you un-bias feedback with no emotional attachment.
- Employ professionals to run market surveys for you to ensure that data you get back is robust enough to support your projected sales figures and market point-of-difference.
- Contact potential stockists and find out what their stocking criteria is so that you can work towards that.
- You will have competition, even if it isn’t direct. Find them, see what they do, realise that they may be as ‘in the dark’ as you but then again they may not be.
- Barriers to Growth.
- Take a step back from your business for a moment and go through each step, looking at what might become a barrier to growth for you. Right now in Australia we have a shortage of good quality organic Rosehip Oil. If you have created a brand around this ingredient and suddenly grow from making 50Kg batches to 5000 Kg batches what would happen? How much control do you have over the supply chain? Your barrier may be perfume, packaging, space in your facility/ warehouse. It could be anything.
- Look at yourself, what do you want out of your business? If you wanted a nice easy, breezy ‘nobody to report to’ part-time job that you can do in your spare time how will you feel when you are working 20 hours a day to meet client deadlines and expectations? Prepare yourself mentally and physically so that your dream doesn’t become your nightmare. You need balls of steel to succeed and bags of resilience.
- Financials and Business Management.
- Make sure you know your own financials inside and out before trying to get others to invest – from cost of goods to wholesale and retail margins, volume discounts, price breaks, compliance costs, the costs to scale-up your business and meet growing demand, hardware costs, inventory costs, cash flow projections etc. Many of my start-up readers struggle to get their heads around turning % addition in a formula to grams or litres. There is no shame in that, we all have to learn but if you do struggle with numbers find someone who doesn’t as this is important.
- Exit strategies are as important as start-up strategies. Knowing how long you want this baby to fly is key to what costs and risks you incur and when plus how long you might take to repay any investment dollars.
- Risk strategy – this is also key as there are some business models that are as low risk as you can get in business – wide and diverse customer base, small product range, loyalty, solid need for product, high barriers of entry for competitors etc – and some that are as risky as all hell. The most risky can also be the most instantly profitable – I’m thinking “INSTAGRAM OVERNIGHT SUCCESS STORIES” here. These types of enterprise usually view compliance on a ‘needs to know’ basis and instead adopts a ‘ask for forgiveness, not acceptance’ modus operandi. This can go both ways – very rich very quick or in the deepest poo you ever did see.
- Are your team up to the changes? Not many people ‘like’ change, especially not the type of change that comes with a hands-on investor whose just injected a heap of cash into your pot. Make sure your team, and especially key members of said team are fully on-board before getting external help, have a plan B in case they can’t cope or don’t want to be part of it moving forward and most of all do what is right for your business as a priority – being a Director this is what you are legally bound to do.
There are heaps more things to keep in mind when moving from the small time to a big business and sometimes it’s the small, crazy things that become your undoing. Luckily there are business coaches and free small business networks around to help you work through these sorts of things before you end up pitching to the big boys.
My top tip for anyone who wants to move onwards and upwards is to take a step back from your baby and critically evaluate it. Go to the bank first and see if they would lend you some money or grant you an overdraft based on your business plan. If they won’t why not? This can be quite telling and will give you a good idea of how risky you or your business or both is to a third-party. After that it’s just a question of working out if you really do want to move to the next level as while you might make a few extra bucks you will most definitely pay for it one way or another. There is no such thing as a free lunch!