After decades as an investor, billionaire Mark Cuban has developed a keen instinct for whether a company's pitch is too good to be true.
Cuban put those instincts to work on Friday's episode of ABC's "Shark Tank," when the billionaire told sustainable wellness company Cabinet Health's founders he was suspicious of their lack of profit. Co-founders Russ Gong and Achal Patel told investors their over-the-counter pills, packaged in refillable glass bottles, were projected to bring in $14 million in revenue in 2022.
Still, Cuban said, he had to "call a little bit of B.S." Not because he doubted their impressive sales, but because he didn't understand why the business still wasn't profitable.
"You've got your sustainable packaging," Cuban said. "You're not inventing any medications that are going to go through FDA approval …. A lot of what you're doing does not add up to me."
Cuban's skepticism may have come from his own expertise in the field, or from his competitive nature. Like Cabinet Health, Cuban's company Cost Plus Drugs offers generic drugs at a fraction of the cost charged by major pharmaceutical companies.
Sharks worry about profitability, ultimately make a deal
Cabinet Health had no cash flow because they were investing their per-unit profit back into research and development, Gong and Patel said. And, they added, every size and shape of their glass containers does in fact need FDA approval.
Cabinet Health, which launched in October 2019, wants to reduce and eventually eliminate single-use plastics in medicine. Its business model, which was on track to break even by October 2023, has customers initially buy their prescriptions in glass containers and then receive refills in compostable packages.
The co-founders entered negotiations seeking $500,000 for a 2.5% stake in Cabinet Health, which would value the company at $20 million.
Cuban wasn't the only Shark disillusioned by the environmentally friendly company. Barbara Corcoran was the first investor to back out of the deal. "I'd wait forever to get my money out," she said, because the company wasn't yet profitable.
Kevin O'Leary said was willing to cough up money for more equity. He offered $500,000 for 12.5% of the company — a $4 million valuation.
Guest Shark Tony Xu, a co-founder of DoorDash, was also interested. He offered $500,000 for 10% of Cabinet Health, which would value the company at $5 million. Xu added that his expertise at scaling startups could help them push out more products directly to consumers.
Gong and Patel liked the sound of that. They looked to Lori Greiner and asked her if she'd be willing to join the deal as a third partner.
Greiner quickly declined, noting that she hated the $20 million valuation.
So Gong asked O'Leary and Xu if they'd split 7% of Cabinet Health for $500,000. Because it was less equity than either of the investors wanted, Gong said the founders were willing to add a royalty of up to 2% on every product.
O'Leary said they had a deal, but only if the founders were willing to pay the royalty up until he and Xu made $500,000 each, which would be double their split investment.
Gong and Patel accepted the deal and left feeling satisfied, even if the deal values their company at roughly $7.1 million instead of the $20 million valuation they sought.
"With Kevin and Tony on board, we can bring sustainable packaging to so many more medicine cabinets and learn from the best," Gong said. "We took a slight valuation hit, but what's really important is we're on a mission to eliminate single-use plastic from medicine."
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