In Negotiauctions, Try a Game-Changing Move

Negotiauctions combine the competitive bidding of auctions with the one-on-one dealmaking of negotiations. The TV show Shark Tank offers lessons on best practices for such complex negotiation-auction hybrids.

By — on / Dealmaking

negotiauction

Often in business negotiations, we must compete not only with a 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. Or bidders for a company might be invited to negotiate elements of the deal. Harvard Law School and Harvard Business School professor Guhan Subramanian calls such situations negotiauctions because they combine 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 negotiauctions. To see how experienced negotiators manage competition on both sides of the table, they might want to watch the reality-TV show Shark Tank. The show’s format roughly mimics the process that entrepreneurs go through when seeking venture capital (VC) funding, with a focus on consumer products. Shark Tank is bringing creative negotiauctions to the attention of a wide audience.

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Negotiating with Sharks

In Shark Tank, real-life entrepreneurs take turns entering the “shark tank” (a TV studio) to stand before five actual VC investors, the “sharks.” Each entrepreneur or team 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). The sharks then 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 whether they will accept the entrepreneur’s 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. Because the sharks can bid against one another but also negotiate one-on-one with the entrepreneur, the format is a negotiauction.

Consider a segment from a May 2014 episode. College student Kaeya Majmundar presented the sharks with her prototype for a collapsible storage box, BZbox. After demonstrating that BZbox was a snap to assemble, Majmundar asked for $50,000 in exchange for 20% of her business, contingent on her ability to have the product manufactured.

Three sharks quickly dropped out, saying the price per box ($1.75) needed to be significantly lower to be competitive with conventional cardboard boxes. Just two sharks remained: Canadian businessman Kevin O’Leary and Lori Greiner, the “Queen of QVC” (the home-shopping network).

O’Leary opened by offering Majmundar $50,000 for 50% equity if she could reduce the price per box to 56 cents.

“Is that the only offer that I’m going to get?” Majmundar asked.

Greiner, the final potential bidder, described her qualms with the product. “Come on, Lori,” Majmundar said. “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, because you don’t know what the outcome is. You made a huge mistake!”

Majmundar nodded gravely, then turned back to Greiner. “Please, Lori, just listen to me. . . . I will do anything it takes.”

Greiner ended up offering $50,000 for 40% of Majmundar’s business, contingent on how well the manufacturing process turned out. 

“Lori, you have a deal,” Majmundar said with visible relief.

Lessons for Negotiauctions

In an interview with the Chicago Tribune, Majmundar revealed that Greiner’s offer fell through after the show but that the businesswoman had been serving as her mentor. The young entrepreneur sold a flurry of boxes after the episode aired but turned 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—a common challenge for “auctioneers” in negotiauctions. As O’Leary noted, letting a potential partner find out you’d rather build a relationship with his competitor before you have a solid offer is not a smart negotiating move. 

As the process setter in negotiauctions, you may be able to reduce this risk by minimizing delays between discussions with competitors. Once you have two or more solid offers, you can try to play bidders against one another on issues where they can compete, such as price. 

3 Game-Changing Strategies for Bidders in Negotiauctions

In negotiauctions, bidders can gain an edge over the competition through “the relentless pursuit of game-changing moves,” writes Subramanian in his book Dealmaking: The New Strategy of Negotiauctions:

  1. Setup moves that establish terms of entry.

In a traditional auction, a seller (or sometimes a buyer) sets the rules, and bidders follow them. But when your entry into a competitive situation has value, don’t give it away. When O’Leary made his offer to Majmundar, for example, his entry had enormous value because she had no other offers on the table. O’Leary extracted a concession in exchange for his bid: Get the cost of the product down to 56 cents. In other instances, wise negotiators extract process concessions, such as an exclusivity period or a commitment from the auctioneer for a single “best-and-final offer” round.

  1. Rearrange moves that increases the value of the deal.

If you find yourself in a weak 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. 

  1. Shutdown moves that prematurely cut off the competition.

Shutdown moves that end the auction prematurely are a common tool among the 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. Cuban is trying to short-circuit a competitive process with the other sharks through a shutdown move. The shutdown move often works because the entrepreneur wants to partner with Cuban, and the threat of his “short fuse” is highly credible.

What advice do you have for those participating in negotiauctions?

The Program on Negotiation at Harvard Law School
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