Prank-O’s Empty Gift Boxes Filled with Mark Cuban’s Cash

prank-o-shark-tank

Ryan Walther and Eric Nordby’s comedic pitch for their empty prank gift boxes was a hit with some Sharks, but their financials nearly cost them a deal in S10 Episode 7 of Shark Tank. The duo decided to pitch a fake product that is displayed on small cardboard box. They even included a prank valuation of 75k for 15% equity. They then handed out 5 other comedic gift boxes to show the Sharks their creativity and variety. They ended with a short pitch on the real company, Prank-O, and ask for $640k for 8% equity in the company.

Prank-O’s pitch and initial evaluation gains real attention from the Sharks. As a team, they seem to be a perfect fit; Walther uses his 20 years’ experience at The Onion as the comedic brain behind the prank boxes while Nordby uses his graphic design skills to hone in on Walther’s comedy in a visual way. They’ve had $10M in sales since 2013 and expect to do $2.8M in 2018. Furthermore, their ecommerce business operates at a 92% gross margin since they can make the boxes for 66 cents and sell them online for $8 a box. However, this is as far as the good news goes for Prank-O.

The rest of Prank-O’s business operates on very tight margins, which Walther explains nearly killed the company back in 2016 and 2017 when they tried to expand into other products. Their high margin ecommerce business only makes up a small percentage of their sales. To date, Prank-O has leaned on their line of credit to the tune of $3M and has nearly no cash in the bank. Also, Prank-O has $1M in debt outstanding that they seem to be in no position to pay back soon.

These financials combined with the seasonality of their business scares off Lori, Barbara, and Daymond. However, both Cuban and O’Leary have other business interests and expertise that could help Prank-O succeed. Both understand how to operate seasonal businesses and are attracted to the 541 million gifting occasions in the US every year. However, both have very different ideas when it comes to the company’s future and their offers.

Cuban offers to give Prank-O the $640k they asked for in exchange for 25% of the company. O’Leary offers $640k for an indefinite 38 cents per unit royalty on each sale. While O’Leary’s idea to hone in on repeat seasonal sales makes sense for Walther and Nordby, they decline O’Leary’s offer as giving him half of all top-line sales would crush the company’s margins even more. Cuban’s idea to license the boxes to NBA and NCAA schools for example helps Prank-O hone in on their high margin ecommerce business. After quickly being denied when Walther counter offers for a small percentage, Prank-O ultimately decides to accept Cuban’s offer. Prank-O leaves the Shark Tank with cash in the bank and confidence in Cuban’s plan to take Prank-O to the next level.

Analysis

i-arm-pranko-o-box

When I look at this pitch, I see two very creative product makers who are ill-equipped to efficiently run a business of this size. Their appearance on the Tank was about more than acquiring capital to keep the lights on; they also needed a strategic partner to help them focus on what will help Prank-O grow successfully as a multi-million dollar per year company. Walther and Nordby made the right decision in going with Cuban’s equity offer since they were in no position to allow an investor to cut into their margins with a royalty offer. However, once Cuban and Prank-O can make the company more financially stable, I wouldn’t be surprised to see them partner with someone like O’Leary who has experience working with seasonal businesses and can sell the same customers year after year.

As far as the company’s future success is concerned, I’m skeptical. I personally really like the idea and can personally picture multiple instances where I myself would want to prank a friend or family member. However, it’s one thing to consistently sell novelty gifts year in and year out; it’s a whole other challenge to sell empty novelty boxes to put actual gifts inside. Prank-O will need their ecommerce business to grow significantly to capture higher margins. I don’t envision the company’s sales drastically increasing in the short term. I see them increasing their repeat customer base slowly by licensing their product to other retailers and increasing their online presence. They could also launch a marketing campaign around holiday seasons to boost seasonal sales, but if they can secure a consistent repeat customer base, that base can help market Prank-O as well. Despite their current financial troubles and lack of vision, Prank-O now has a more complete management team with the addition of Mark Cuban as their business mind.