by Christine Wong
Tech startups are constantly reminded that even when it looks like a financing or acquisition deal is done, it ain’t over til the due diligence is done.
But who’s performing due diligence on the investors and acquirers?
It might seem like a crazy question to even ask in the first place. But why should a startup just accept the first investment deal that comes along or jump into bed with the highest takeover bid they can get?
Kevin O’Leary got me thinking about all of this.
As one of the original judges on CBC TV’s Dragon’s Den, he relentlessly grills entrepreneurs who pitch their wares on the show in hopes of scoring some financing.
But what do the startups facing O’Leary on national TV know about him (especially since he’s a guy who might actually buy part of their company)?
O’Leary has an impressive track record. He started software publishing firm Softkey out of his basement, grew it phenomenally, acquired The Learning Company (TLC) in 1995 for over $600 million, then sold it to Mattel in 1999 in a stock deal worth over $3.5 billion.
The glow from that deal faded fast: earnings from TLC plummeted immediately and Mattel sold the unit just two years later for a pittance of what it paid. BusinessWeek later called Mattel’s TLC acquisition one of the worst deals in history. Mattel shareholders sued Mattel, O’Leary and his TLC co-founder, alleging TLC inaccurately reported its financials. Mattel settled the suit for $122 million. O’Leary told Maclean’s last year that “none of (the allegations) was true. They had forensic accountants tear our books apart for two years.”
O’Leary has rebounded from the debacle, starting his own investment fund, joining the board of another, and seeing one of his investments, Storage Now, acquired for $110 million in 2007. He’s now starring on two other CBC TV shows (Redemption Inc. and The Lang and O’Leary Report) and Dragon’s Den copycat Shark Tank on ABC. Mattel made him a mega-millionaire –TV has made him a star.
Full disclosure here: I used to work with O’Leary and his CBC News Channel co-host Amanda Lang in the mid-2000s at Report On Business Television (since renamed Business News Network). I don’t pretend to know him as a person at all and can’t shed any light on his character off-screen.
I can shed some, however, on the way TV works and how it relates to due diligence for startups.
While filling in on O’Leary’s ROBTV show one time, he was late rushing into the studio for his daily on-air chat with Lang. She wanted to start with some banter about how the Asian bird flu epidemic was affecting stock markets.
“Bird flu? What the hell! Can anybody give me something about this bird flu?” O’Leary called out into the newsroom just two minutes before going live on-air.
I ran in and gave him a 60-second primer on the latest bird flu business news from that day. When the red light came on, O’Leary expertly riffed on the bird flu like he’d just filed an analyst report on it.
The point I’m making isn’t just that O’Leary is amazing on live TV; it’s also that what you see on TV doesn’t always give you the full picture of what goes on behind the scenes, just like O’Leary’s official bios don’t mention the downside of the Mattel deal.
And if you’re a startup vying to get on Dragon’s Den or Shark Tank, you should go in realizing what these TV shows are about: entertainment first, business second. Startups want to be on these shows to get financing. But the main goal of the TV producers is to attract viewers. The best way to go on these shows is to consider it free publicity for your idea or product, not a financing opportunity.
How does this relate back to why startups should do due diligence on investors and acquirers? Well, investors and acquiring companies may have different goals than the startups they deal with, too. They ultimately want to end up making a hefty return on their own investment or acquisition, which is not the same goal of the startups themselves. Startups must do due diligence to reconcile this gap and make sure any deal is truly a good fit for them.