Increasingly in the business world, negotiators must compete not only with their counterpart across the table but also with others fighting for the same deal. A procurement officer may announce to a longtime supplier that she is putting their contract up for an auction for the first time, for example. Or competitors bidding for a coveted company might be invited to negotiate elements of the deal. Harvard Law School and Harvard Business School professor Guhan Subramanian calls a situation like this a negotiauction because it combines the competitive bidding of an auction with the one-on-one dealmaking of a negotiation.
Businesspeople often are uncertain about how to get a foothold in the unfamiliar and sometimes rocky terrain of a negotiauction. To see how experienced negotiators manage competition on both sides of the table, they might want to check out an episode or two of the American reality-TV show Shark Tank. The show’s format roughly mimics the process that entrepreneurs go through when seeking venture capital (VC) funding in California’s Silicon Valley or on Greater Boston’s Route 128, though the focus of the show is almost entirely consumer-oriented products. For many people fascinated by negotiation and entrepreneurship, Shark Tank is a guilty pleasure—but it is also bringing creative negotiauction moves to the attention of a wide audience.
Negotiating with sharks
Here’s how Shark Tank works. In each episode, real-life entrepreneurs take turns entering the “shark tank” (a TV studio) to stand before five actual VC investors, the “sharks,” seated next to one another in a row. Each entrepreneur or entrepreneurial team then pitches a money-making product or service and makes an opening offer: a request for a specific amount of funding in exchange for equity in the company (for example, $50,000 for a 10% stake). After hearing the pitch, the sharks ask probing questions aimed at assessing the product’s sales potential and the entrepreneur’s business acumen and drive.
Next, the sharks reveal one at a time to the entrepreneur whether they will accept his or her offer as is, try to negotiate a better deal, or go “out” (pass on the deal). The entrepreneurs can accept only one deal, which is sealed with a handshake and negotiated further offstage. Final deals typically include both financing and mentorship from the winning shark. Because the sharks—including businessman and Dallas Mavericks owner Mark Cuban and inventor Lori Greiner, the “queen of QVC” (the home-shopping network)—can bid against one another but also negotiate one-on-one with the entrepreneur (all in the space of about 10 minutes), the format is that of a negotiauction.
To see how the sharks variously compete with one another and with the entrepreneur, consider a segment from a May 2014 episode of the show. Emory University student Kaeya Majmundar presented the sharks with her prototype for a collapsible storage box she’d dubbed BZbox. After demonstrating that her box was a snap to assemble, Majmundar made an opening request for $50,000 in exchange for 20% of her business, contingent on her ability to have the product manufactured.
The sharks were underwhelmed. Three of them quickly dropped out, expressing concern that the price per box ($1.75) needed to be significantly lower to be competitive with conventional cardboard storage boxes. Just two sharks remained: Canadian businessman Kevin O’Leary and Greiner.
O’Leary opened by offering Majmundar $50,000 for 50% equity if she could find a way to reduce the price per box to 56 cents.
“Is that the only offer that I’m going to get?” Majmundar asked, looking worried.
Greiner, the final potential bidder, began to describe her qualms with the product. “Come on, Lori,” Majmundar said. Soon she was begging her for an offer. “I know that you’re the partner that I need.”
“I’m out,” O’Leary interrupted. “You never say that when you’re negotiating after you’ve got an offer,” he continued, referring to Majmundar’s insinuation that she preferred Greiner over himself. “Because you don’t know what the outcome is. You made a huge mistake!”
Majmundar nodded gravely, then turned her attention back to Greiner. “Please, Lori, just listen to me. I will work for you. I will listen to you. I will do anything it takes.”
Greiner ended up offering $50,000 for 40% of Majmundar’s box business, contingent on how well the manufacturing process turned out. “It’s really going to be something to figure out, but I’m willing to take the journey with you,” Greiner said.
“Lori, you have a deal,” Majmundar said with visible relief.
Lessons for your next negotiauction
In a follow-up interview with the Chicago Tribune, Majmundar revealed that Greiner’s offer ended up falling through after the show but that the businesswoman had been serving as her mentor. The young entrepreneur sold a flurry of her boxes after the episode aired but eventually turned her attention to launching a different product.
During her Shark Tank appearance, Majmundar faced the unenviable task of trying to keep two negotiations spinning without letting either one crash to the ground—a common challenge for the “auctioneer” in a negotiauction. As O’Leary noted, letting a potential partner find out you’d rather build a relationship with his competitor, particularly before that competitor has made a solid offer, clearly is not a smart negotiating move. Putting a good offer from Bidder 1 on hold to negotiate with Bidder 2 could convey to Bidder 1 that you’re not 100% interested in working with him and lead him to drop out of the race, as O’Leary did.
As the process setter in a negotiauction, you may be able to reduce this risk by minimizing delays between discussions with competitors. In the real world, entrepreneurs don’t typically negotiate, Shark Tank–style, in person with multiple bidders. Yet they do frequently drive up and down Sand Hill Road in Menlo Park or Route 128 outside Boston making the rounds of the big VC companies and, if they’re lucky, stirring up a bidding war. They certainly time such meetings carefully and stay attuned to the possibility of leaks.
Once you have two or more solid offers in hand, by all means try to play bidders against one another on issues where they can compete, such as price. But continue to avoid showing an open preference for a particular bidder on intangible issues such as rapport until you’re ready to make a commitment, lest other bidders find out and come to the assumption that they can’t compete.
3 game-changing strategies for bidders
Bidders often feel powerless in traditional auctions because their only source of leverage is to place aggressive bids. In negotiauctions, by contrast, bidders can gain an edge over the competition through “the relentless pursuit of game-changing moves,” according to Subramanian. Subramanian describes three such moves to change the game in his book Dealmaking: The New Strategy of Negotiauctions (W.W. Norton & Company, 2011):
1. Setup moves to establish terms of entry.
In a traditional auction, a seller (or sometimes a buyer) sets the rules of the game, and bidders follow them without complaint. In some instances, however, when your entry into a competitive situation has value, you shouldn’t give away that value for free. At the time that O’Leary made his offer to Majmundar, for example, his entry had enormous value because she had no other offers on the table. Clearly aware of this fact, O’Leary extracted a substantive concession in exchange for his bid: Get the cost of the product down to 56 cents. In other instances, wise negotiators extract process concessions: For example, exclusivity for a certain period of time or a commitment from the auctioneer for a single “best-and-final offer” round.
2. Rearrange moves to reconfigure the assets, parties, or both in a way that increases the value of the deal.
If you find yourself in a weakened position, a rearranging move can help unlock value. For example, two bidders in an auction might decide to pool their resources and submit a joint bid. Rearranging moves happen occasionally in the mergers-and-acquisitions world, where buyers can gain leverage when bidding on a prized company by joining forces. On Shark Tank, the sharks often make rearranging moves, trying to identify partners on the same side of the table. For example, Mavericks owner Cuban can put certain kinds of products into his basketball arena, and Greiner can get the same kinds of products on QVC. These sharks regularly join forces to unlock value, which then gives them more firepower against the other sharks.
3. Shutdown moves to prematurely cut off the competition.
While setup moves typically occur at the beginning of a negotiauction and rearranging moves occur while an auction is under way, shutdown moves can end the auction prematurely. Shutdown moves are a commonly used tool among the sophisticated VCs of Shark Tank. For example, Cuban will sometimes make an offer before the other sharks have heard enough about an entrepreneur’s product to know whether they want to bid—but he will condition his offer on the entrepreneur’s immediate acceptance. Analytically, Cuban is trying to short-circuit a competitive process with the other sharks through a shutdown move. Even though the entrepreneur would love to “shop” Cuban’s offer to the other sharks, the shutdown move often works because the entrepreneur wants to partner with Cuban, and the threat of his “short fuse” is highly credible.
In general, whether you are the process setter or a bidder in an auction that has features of a negotiation, don’t assume that the rules are set in stone. Instead, change the game by thinking about how you can influence the rules, parties, and assets to your advantage.
Have you found yourself in a negotiauction? What steps did you take to win the deal?