Tina Fineberg for The New York TimesJacqui Rosshandler, founder of Eatwhatever: Should she take the money?
Case Study
What would you do with this business?
We just published a case study about Eatwhatever, a recent entrant in the crowded, billion dollar breath mint industry. Begun by Jacqui Rosshandler in 2008 when she was in her mid-20s, her one-woman start-up took off quickly. Her energy and youthful slogan — 2 Steps for Kissable Breath — helped land a buzz-building mention on Daily Candy’s main page. She talked her way into New York retail outlets like C.O. Bigelow, Ricky’s, Joe Coffee and the specialty department store Zitomer.
But without mainstream distribution, especially to drugstore chains, sales languished. With capital dwindling, Ms. Rosshandler found herself in late 2011 about to run out of inventory — and with no way to pay for another production run at her contract manufacturer or a big marketing push. Banks and venture capitalists turned her down. Then an industry-wise savior appeared. Arthur Shorin, a former chief executive of the Topps Company, took a shine to her distinctive two-part breath fresher — a swallowable gel cap and suckable mint chaser. Mr. Shorin promised candy industry expertise and contacts, an immediate infusion of capital and as much as a quarter of a million dollars to follow. But in return, he wanted 75 percent of the company. Ms. Rosshandler would retain 25 percent and could earn back another 15 percent by meeting certain benchmarks over the next three years.
Below, you will find the recommendations of two venture capitalists and the owner of a small company that has successfully carved out a niche in the breath mint industry. Please use the comment section to tell us whether you agree or disagree with their advice — and to offer your suggestions for Jacqui Rosshandler. Next week, we will publish a follow-up post that will reveal her decision.
Steve Schuster, founder of Schuster Products in Milwaukee, maker of Blitz mints: “Ms. Rosshandler finds herself in a precarious cash-flow position and — typical of many start-up entrepreneurs — may not completely grasp how much money she actually will need to grow her brand to a reasonable level of distribution. Arthur Shorin presents a very shrewd and unique proposition. Basically, he is her lifeline. Shorin, who made a staggering amount of money selling Topps to Michael Eisner’s private equity company, has great knowledge of the candy industry. It is imperative for Ms. Rosshandler to move forward with this proposition.”
Josh Kopelman, a partner at First Round Capital, Philadelphia: “I believe that entrepreneurs, not investors, create great companies. In my experience, if a founder doesn’t retain meaningful equity at the seed stage, it greatly reduces their motivation and creates a real misalignment between investor and entrepreneur. I’d encourage Ms. Rosshandler to keep looking for alternatives, including the possibility of raising money from her friends. If she believes the company is going to create value and be successful, then she is actually doing her friends a favor by letting them invest — assuming she is candid about the extreme level of risk and that they don’t invest money they aren’t prepared to lose. I’d encourage her to consider tweaking the branding to make it more PG-13 than R-rated, as it might reduce some investor’s unease. I know it’s hard to turn down money — especially when a company really needs it. But I’d tell Ms. Rosshandler to take a deep breath, swallow and turn down a deal that sucks.”
Adeo Ressi, founding member of TheFunded and head of the Founder Institute, an early stage business accelerator based in Silicon Valley: “Ms. Rosshandler should definitely not take this deal. First, she loses complete control of the company, and she can be removed or wiped out of her equity at any moment without notice. Second, the deal is very unusual, so she will never be able to attract other investors again. Third, the round values the operating business under $75,000, around two times revenue. As the terms indicate, she will be an employee of Artuitive, so this deal resembles a generous employment offer rather than a viable investment. This is an angel investment opportunity, and there are the largest number of angel investors in history. The volume of investors is both good and bad. On the positive side, if Ms. Rosshandler dedicates four months and meets with a lot of angels, she will raise $500,000 with a seven-figure valuation. On the negative side, she will need to meet with over 150 angels and waste a lot of time pitching to people that will try to take advantage of her, like Arthur Shorin.”
What do you think?
Article source: http://boss.blogs.nytimes.com/2013/01/02/should-a-cash-poor-entrepreneur-give-up-control-to-keep-her-start-up-alive/?partner=rss&emc=rss