Joe Woodard interviews Daymond John, co-host of ABC's "Shark Tank," about his experiences as an entrepreneur and business owner, suggestions for today's entrepreneurs and specific ways he believes accountants are integral to small business success.
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Full transcript of the episode follows:
Joe: Thank you for tuning into this episode of the Scaling New Heights Podcast. During this episode, we will talk with Daymond John, co-start of the Emmy Award winning ABC series Shark Tank.
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Let’s talk a little bit about Daymond John. Daymond John is an entrepreneur who is very familiar with the importance of good financials. This is a man who started a clothing company in his mother’s basement and he transformed it into a global fashion empire which has amassed over six billion dollars in worldwide retail sales to date. He’s the costar of ABC’s Emmy Award winning series Shark Tank, as we mentioned, and he’s also the New York Times best-selling author of The Power of Broke released earlier this year, a book I strongly encourage you all to read. He is the recipient of the Congressional Achievement Award for Entrepreneurship, the Ernst and Young’s the EY Entrepreneur of the Year Award and the Entrepreneur of the Year Award, and in 2015, he was named as a Presidential Ambassador of Global Entrepreneurship.
Daymond John is here with us today to discuss his connections with finance, tips for finance professionals and also to share with us his learnings and successes. You can see him almost every night on Shark Tank, where he is known as “The People’s Shark” and today I had the pleasure of speaking with him in person.
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Joe: Now, let’s get to the conversation with Daymond John. Daymond, welcome to the podcast!
Daymond: Thanks for having me. Thank you for that great intro. Amazing! Thank you.
Joe: Well I appreciate you joining us today, and we loved hosting you in the Bahamas in May. It's an honor to have you here with us. Backstage before the event, when you were with us in May in the Bahamas, you mentioned to a few folks that you're involved in accounting.
Daymond: The mother of my daughter is an accountant, she works for I think a company that has a couple of golf courses. She works in the North Carolina area. My oldest daughter just graduated, Meredith, college in North Carolina, and as an accountant. But she's also right now, kind of like where most of our kids are when they just get out of college, trying to figure out where she wants to be. She's looking around for some nonprofits where she can bring her accounting skills to the nonprofit sector.
Joe: Well, that's really, really exciting. Do they seem happy as accountants? Because a lot of people stereotype accountants as sort of like the melancholy sullen people in the back office that you just kind of invite to the party, but they don't show up. It's a horrible stereotype, but do they like being accountants? Is it fun for them?
Daymond: Well, my ex-wife, she really does love being an accountant. She loves numbers, she loves figuring it out. My daughter is just trying to figure out how to add accounting, which she loves the numbers, and she loves working through things, but she wants to add that also to another form of passion and connect them. Even myself, when I was 22 I had no idea what I was going to do when I finally discovered my passion for FUBU when I was 28. She has a couple of years to really kind of figure out what she's going to do, and let life give her some opportunities.
Joe: Well and the whole world is in front of her, it's an exciting thing to be 22, and have all those options, I wish her well.
Daymond: Thank you.
Joe: You speak about the importance of numbers a lot in your Keynote addresses, and I know you did, when you were on the stage of Scaling New Heights, also in your writings. What are a few pieces of advice that accountants and financial professionals should give to entrepreneurs specifically who are starting up a business?
Daymond: First of all, it's my theory of activating “The Power of Broke”. A lot of people believe that when it comes to numbers, the bigger the numbers are, the better a chance you have into launching a company, meaning the bigger of the investment you put in. That's really not that true, that's not important. The important part is to actually see how you can do with little to no funding, and put the numbers into the right place.
If you're going to put your numbers out there, you're going to have a certain amount of revenue that you want to create, well you have to build a company with a small amount of revenue. You have to do the best you can to ... Maybe you don't build a website for $20,000.00, and maybe you start off with a Facebook page, and you do a couple of Facebook ads, and/or have people who can help understand pay-per-click and things like that.
You can start off with $5,000.00 and maybe you don't take a big lease in a space, maybe you open up something like a co-share, or a we-work type of office if you're not even going to operate from home. It usually is how much debt do you acquire on the books when you start out. Now I think one of the most important things that small time entrepreneurs don't do is, they don't set up the structure in the beginning.
They don't go and hire a great accountant, they don't go and hire an attorney to set up the paperwork and create structure, because in the event that you get to a good place in business, most of the companies that I see, their biggest challenge is, they're not set up to take in investments.
They don't have the accountant that maybe they didn't hire full time, but they went in and had consulted them, and now all of a sudden they're coming over to my office with a bunch of boxes - shoe boxes - of receipts, and bills, and things of that nature, and I can't give them funding. The important part is to set up really good operations with ... Whether you consult somebody, or something of that nature, and then also start to try to scale with little money in so you can get proof of concept. Then when you have proof of concept, then you can go and take the investments, or take that opportunity to take a loan, or whatever the case may be to scale it because you've already proven the concept.
Joe: I think that's fantastic advice, and I really like what you said about seeking the advice of a lawyer, and the best accountants in my opinion are those that are partnered with attorneys, and they take a teamed approach. If the business isn't built on stable foundation, everything from the way they incorporate, to the way they manage their contracts, then they could be profitable, but they're going to start fracturing under the weight of their own existence.
I've noticed several times on Shark Tank episodes, somebody's come in with a great idea, fantastic business model, solid revenues, and then you guys ask a question like, "But is this invention patented?" And there are just blank stares, deer in the headlights, right? Then your hands are tied, there's not much you can do with that.
Daymond: Yeah, I mean, correct. That goes to not having good advice in the beginning, and as you just said, if the structure of the company is weak, you're going to be crushed under it. Because yeah, you could have that. Again, it's not hiring good accountants and attorneys who number 1, I think you brought up a good point, they need to talk to each other. It's almost the same as, in your company, if you don't have sales talking to design, or production talking to sales, everybody's going out doing their own thing, and nobody's talking. Halfway down the line you're going to find out, well, you're selling it for too little, because the production costs way more than that to make the product, so we can't go out and sell it to the market because there's no margin in there, or things of that nature.
If you don't have accountants talking to the attorneys to set up your structure, then you're really going to crumble. That happens when you're setting up, like you said, they don't have a patent, or you know what? They did a DBA and they named the company whatever the case is, and that has nothing to do with their URLs, that had nothing to do with the trademarks that they needed in this category, and now you don't even own the name when you go out there, or someone can contest it. Again, it's all about whether you're building a building, or you're building a company, it's all about the foundation that you build it on.
Joe: I couldn't agree more, couldn't agree more, and you're right, the best team approach is key there. We mentioned a couple of those investor ready components of a business, like the patent, like having a solid financial model. What other types of research do you and your colleagues on Shark Tank do before you consider investing in a candidate?
Daymond: Yeah, so of course, we look at your legal structure, is it set up? We look at what kind of corporation do you have, LLC, S-Corp? Are you ... Do you have any level of exposure out there in the market? We do look if you have QuickBooks, or you have any financials, and where did the money come from? How was the company funded? Because some people fund it in ways that can't transfer over, so do we have to set up a new Co.? Those are probably ... Then of course we look at the sales over the years, the sales, and the investments. We've seen people who go out there and say, "I have 2 million dollars’ worth of sales," but you have 20 million dollars’ worth of inventory. The 2 million sounds great, but the 20 million sounds horrible. All right, so we look at all those aspects.
No. 1, sales. No. 2, is how do you get out there to the market? What was your cost, your acquisition costs per customer? Do you know all those numbers? Number three, and none of these are in order, do you have all the proper trademarks, patents? Are you trademarked in the proper categories? Your URLs, and things of that nature. Also then, your legal, behind the scenes structure for the IRS, for your partners. Can you take in partners? Can you take in funding?
Joe: Yeah, and by the way, that's all ... That's an amazing answer, and I know that you live in that world, which is why it just kind of rolled off your tongue that quickly. I'm hoping that people as they're listening to this in their car, they'll tune back in when they can take those bullets down from what Daymond just said, because that's gold.
There's a concept that comes up sometimes on the episodes related to funding I wanted you to kind of elaborate on. Sometimes somebody will approach you guys for an investment, and you classify their request as gold digging ...
Joe: Can you explain what that means?
Daymond: Yeah, it's the people that we believe are … they either don't really want a deal, because they're very obnoxious in their requests because they feel that Shark Tank is this really great platform, and if they go on there and they talk about their company, that the whole world will obviously know about their company after that, and then they didn't have to give away any of the money to the shark. Or it's just a crazy valuation of the company, because the person has fallen in love with the brand, product, or concept, and then they believe that it is worth way more than what the market will actually pay for it.
We have to hopefully bring them back to reality, or that's a good indication that you have a potential partner that will always be challenging, because they just believe that they have the greatest thing that mankind has ever seen, and that they're going to over valuate the product, or themselves, and they're just not going to be able to go out into the market and sell, because it's just not realistic.
Joe: All right, so and I'm glad that you ... I'm glad that you broke that down because one, it's great to understand what you guys mean by the term on the show, but also I think sometimes small businesses can approach banks, or VC funding, or even private investors, maybe they don't have the platform of Shark Tank, but they have that same mentality. They're too emotionally connected, and they've described an emotional value component, and then they're deflated when they go to a banker and the banker is making it all about the numbers.
I think the big takeaway from there is any investor is investing because they want a return on the investment, and if a bank, or an investor, or somebody on Shark Tank isn't going to get the return, then they're not going to give you money, no matter how much money they might have. As accountants listening in the audience today, we need to make sure that we can connect that value proposition to the person that wants to lend our client the money. That's really good.
Daymond: Correct. There's two type of buyers out in the market. There are people that want to make an investment, and they want to scale the company, they see the opportunity there, and accountants can clearly share that opportunity. Then the other person is somebody that there's a strategic value to it. You are somebody, you are a great store, you have a lot of locations, but you haven't been able to get people, the millennials into your store, so you go and acquire a product and/or brand that is going to bring millennials in there. You may overvalue the opportunity, but you're doing it for a different reason.
Let's look at somebody like, Apple Computer, by going out and acquiring Dr. Dre's Beats, the headphone company obviously, and Dre's music catalog, or music services, they wanted to bring the cooler kids in there. They didn't need to create a new pair of headphones, there's a million companies that have headphones, so they paid a pretty big valuation for that due to bringing these millennials in the store.
The accountant out there needs ... They have two jobs. They have a job of looking at the potential buyer who's coming into the company and seeing where the numbers meet the sizzle, if there is sizzle. All right? That's their one job. The other job is to give that owner or person they're consulting, that advice of a realistic approach so that person understands and they can walk in the room and they can pick their negotiation tactics, but let them know, don't over inflate the number here or there because their accountant on their side is going to ask us some questions, some really hard questions you're going to have to come up with some answers for. Make sure that they give the owner that insight and that ammunition to walk into the room.
Joe: That's really, really good advice. Right now, small business lending, and small business funding is a major challenge, so all of this advice is really, really helpful to the accountants listening in.
I'm going to turn the tide for just a second, everybody knows that the successes of FUBU and all of your other interests, your clothing lines, and everything that you represent - powerful, powerful brands. We can celebrate those successes, but the reality is the path to success is never as smooth from the inside, as it appears from the outside. I wanted to know if maybe you would share some of the mistakes you made along the way, especially those related to the numbers, and some things you wished you'd approached differently?
Daymond: Oh, absolutely. There's too many for me to share, for us to do in this short period of time, but I can share some of those great failures, which it's taught me a lot of things. One that I like to talk about is more of a mistake I made when I had money. That's when I came up with the concept of “The Power of Broke”, because I realized that some of my biggest and most costly mistakes is when I actually had money, and I didn't activate the power of broke. Early in 2000, we acquired a company called Heatherette. Now the company Heatherette was, and it's a decent company now, but it was a very popular company then ran by two great guys named Richie Rich and Traver Rains.
This company sold clothes for the pop culture teens though, teens anywhere from the age 15 to 25, females. They had a huge amount of free advertising out in the market. Every time somebody would do a big fashion week in New York City that happened two times a year, they would give them an arena for free. Naomi Campbell, Kimora Lee Simmons, would walk the runway for free. Naomi Campbell costs a $100,000 to walk down the runway. She would do it for free, she absolutely wanted to be part of this, these kids. These kids were activating the power of broke, the entire world was talking about them.
The way I looked at it is, I said, "You know what? One of the black holes in any of our brands or companies is how to get it out to market? Do we do print, runway? Do we do commercials, radio, TV?” We can spend easy, millions and millions of dollars to try and get it out to the customer. These guys have it all covered. Daily News is writing them up, and ABC is running them on the news, and everybody's following them.
Now, I looked at it as a good portion of my investment - my customer acquisition - is going to not be there, so this is a great investment. I go and I acquire the company. Now 3 years into it, what I realize is, I spent about 6 million dollars. I spent 6 million dollars in this way, every runway fashion show that they were getting for free, now that they had backing, the people would charge them for it, so they cost me $250,000.00 per show.
That basically was $500,000.00 a year. Now I'm buying a bunch of inventory, because I believe they have this big swell of people who want to buy their clothes, so I'm buying a bunch of inventory blindly because I'm going to just sell all the jeans, the dresses, and the coats. I can't try them on, that's just never been my model, right? I'm dependent on these amazing designers that they're going to make the best stuff, and they did make the best stuff in the past, but they never made ready to wear products, they only made custom products.
They would put the best thing and fit it on Naomi Campbell on a runway, she'd walk down the runway, it would look great, but they never mass produced it that the everyday person could walk into Macy's or Bloomingdale's and buy it. I also then hired a bunch of other designers to help support them. What I realized was I was throwing money at a situation, and I wasn't rolling up my sleeves, and walking into the office, and doing all of the things, and the fundamentals that got me here from what I did with FUBU.
I wasn't asking the models how they felt, wasn't asking the end day user how they, or why they bought the product, or why they would not buy the product. I wasn't going to half of the shows, and I realized at that time that I didn't activate the power of broke. I thought money could buy my success in there, and it still needed to be managed like any of our businesses. Nobody's going to run your business like yourself, and that is one of the biggest mistakes that I've learned after 6 million dollars.
Joe: In that you really communicated too this concept of the power of broke powerfully, anecdotally, and the idea, what I'm getting from you is it's that hunger of the entrepreneur that you should never lose, no matter how successful you are.
Daymond: Yeah, you should never lose sight of what you're doing no matter how successful you are, and you have to understand who's operating it, and you have to look at the numbers. I most likely could have achieved that same loss, I could have failed fast with a million dollars if I had to, but I would have been in the system, and I'd have been looking at what's going on. But every time a sales person, or somebody else told me, "We need more this, we need more that," they figured an injection of capital was going to cure it all, and it wasn't, because I wasn't looking at the numbers.
If I did a show at 250, $250,000.00 a runway show, and the buyers only bought $20,000.00 worth of stuff, then maybe I should do a small show at $10,000.00 and see how much I sell there. Then go back up to the 250 when I know that I'm selling a million dollars of stuff when I do a show for 250. But I wasn't looking, I thought bigger is better.
Joe: Well that's really, really good advice.
A lot of the folks that are listening in to today's podcast are small accounting firms, and some of those firms operate out of their homes, their basements, just like when you launched your company. I'd like to wrap up our conversation by saying, okay if there's somebody listening to this podcast, and they're running their accounting firm from a spare bedroom in their home, or their basement, what can they do? What advice do you have for them to not only grow their businesses, and develop their businesses, but to become indispensable to their clients?
Daymond: Yeah, I mean that's a very good question. A lot of times in relationships we don't ask ... In any form of relationship, personal and business, we don't ask the other person what exactly do they want? What are they looking for? A lot of times we assume because of what we want in our lives, that we know what they want in their lives. Of course a general concept is, "Well, I want to make more money," but no sometimes somebody wants to be able to buy more things, or scale the business down, or maybe have more personal time with their family, so how do we do this and that? The accountants know the most personal things about a business owner, and they often don't ask, what are you trying to accomplish today? What is your end of the day goal? What is your 1-year, 3-year, 5-year goal? That is a lot of information that people really don't know about their clients, so number one, ask that.
Also, why is somebody using you for accounting? Is it purely because you crank out good numbers, or can you give them some solid advice, and are you dependable? I'll be very honest, my history with accountants, I hired several in my history, and the ones that have been career people with me have been absolutely amazing. They are the ones that when anything goes wrong, I have to go to them, and I have to get their solid advice, but I don't why, and earlier in the podcast you said you're invited to the party, they never come.
For the strangest reason, it's been very hard to find very consistent accountants to employ. I don't really know why. There is a great opportunity for accountants to stand out in the market because when you know that an accountant is somebody who is consistent, somebody who's always going to show up, somebody who's always going to give you the answer, they're not going out of business, they're not jumping ship and moving - when you find consistent accountants - they're probably the most valuable person in the business, next to the president, or CEO.
I think that there is a great opportunity for accountants to not only do that, but scale their business too, because if you can find a great firm that is consistent, that is something that's almost invaluable in business. I think those are a couple of things that they need to understand when they're at home. Number one, what's in it for the business owner, what's their true goals. Number two, how can you be of more value and be consistent to not only be that accountant, but be that advisor in different structures they're setting up, or different strategies they want to add to their business going forward.
Joe: Daymond, I am so glad that you ended on that very high note with this conversation, because that is the mandate that all of thought leadership, and the AICPA itself, is giving to the profession. That we need to take on a stronger trusted advisor role, and I'm currently in the process of writing a book called, "The Back Office to the Boardroom," where I challenge accountants to do exactly what you just said. To be more direct, be more insertive in their relationships, and assertive in their relationships in a healthy way, and coach businesses toward success. Not just to look back analytically at the numbers, but to look forward in a projective way, and help steer the company. So, for you to say that's what you need as a business owner, is a huge validator for the fact that we need to be doing that as accounting professionals.
Daymond: Well, great. I'm glad that you're sharing that with them, because at the end of the day, when the things don't go as well as the business owner wants, they're going to blame their accountant anyway, right? Why don't you be part of the success?
Joe: We might as well be part of the answer. Well Daymond, it has been fantastic having you on the podcast. Thank you so much for being here.
Daymond: Well thank you for having me, I appreciate it.
Joe: Thank you for tuning in to today’s Podcast and our conversation with Daymond John. This podcast episode and our entire podcast series is brought to you with the generosity of our podcast partners – Neat, SmartBiz and Entryless.
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For more information about today’s episode, to explore other episodes in the podcast series, to learn all about the special offers from our partners, to learn more about the Scaling New Heights conference, visit Woodard.com. As always, we encourage you to stay tuned, stay connected, never stop learning and scale new heights.