Vending machine founders get $1.5 million ‘Shark Tank' offer—despite a business model Mark Cuban called ‘a huge mistake'

Dan Braido, Audley Wilson and Andy Siegel are the co-founders of RoboBurger, which makes vending machines that dispense customized burgers — a concept they call "the future of fast food."

Their path toward that possible future got off to a rocky start on Friday's episode of ABC's "Shark Tank," after the show's investor judges criticized the Jersey City, New Jersey-based company's presentation and argued over its business model.

Kevin O'Leary called the presentation "chaotic," and initially declined to make an offer, after the co-founders struggled to explain the specifics of how the company could eventually become profitable.

"How do I make money? All the rest doesn't matter," O'Leary said.

Yet by the end of the episode, O'Leary teamed up with a guest judge, Fanatics CEO Michael Rubin, to offer the RoboBurger founders $1.5 million. Here's how they came around to the idea and "did a 180," as Rubin termed it.

Seeking $1.5 million despite no profits

The trio of founders brought a vending machine for the judges to try. It churned out a "rethermalized" burger patty on a toasted bun, with cheese and condiments, in around four minutes. The burgers have sold for between $5.99 and $6.99 apiece, the founders said.

"'Rethermalized' is a fancy word for 'reheated,'" noted Mark Cuban — though Braido, the company's CTO, said the pre-cooked patties are grilled in the machine to form a crust and ensure the meat is "fried in its own juices."

The sample burgers were tasty, the Sharks agreed. Then, the founders made their request: a $1.5 million investment in exchange for a 5% stake in the company, implying a $30 million valuation for a business that hadn't turned a profit yet.

"Whoa!" several of the investors said in unison.

RoboBurger brings in revenue by leasing the machines out for $3,000 per month, or selling them outright, said Siegel, the company's CMO. The buyers and lessees are responsible for keeping the machines stocked with ingredients. (RoboBurger didn't immediately respond to CNBC's request for clarification on its sale prices.)

At the time of filming, RoboBurger had been in "beta testing" for 18 months, with more than 12,000 burgers sold, the founders said. They projected $1.4 million in annual revenue by the end of the calendar year — but an overall annual loss of $700,000, they added.

The company needed funding to scale up its production process — "to get these machines out there at a faster rate and continue to grow," said Wilson, RoboBurger's CEO.

'A very high-risk project'

Robotics is a highly competitive industry, and its technology can quickly become outdated, Cuban noted. He called vending machines "hard capital assets that cost a lot of money" to produce and maintain, and suggested that RoboBurger would be better off making "a licensing play."

"Because you're driven by the physical location and the physical leasing, I think that's a huge mistake," Cuban explained, declining to make an offer.

Rubin also expressed doubts about the business model — specifically, whether tens of thousands of people would be willing to pay $3,000 per month, plus food costs.

"This is a big idea, and for that, I commend you guys. I just don't think you have the business model right," said Rubin. "But I think this could be very successful ... If it actually works, it could be massive. It could be a multibillion-dollar business."

Instead of an equity investment, Rubin suggested an alternative form of funding: a loan. He offered $1.5 million, with "market rate" interest payments and a 10% stake in the company as conditions.

"I think this is a very high-risk project [with] a very low probability of working. What you heard here was a lot of skepticism," he noted.

Barbara Corcoran chimed in to call Rubin's offer "greedy." But O'Leary warmed up to what he called "a very Mr. Wonderful structure," and offered to split the cost of the $1.5 million loan with Rubin.

Rubin agreed. The RoboBurger founders negotiated O'Leary and Rubin down to a 9% stake before saying yes, and expressed their excitement to partner with "two Sharks we would love to work with."

Explaining his decision to return to negotiations after previously dropping out, Rubin explained: "Sometimes in business, you do a 180 [degree turn]. I just did a 180 on myself."

Disclosure: CNBC owns the exclusive off-network cable rights to "Shark Tank."

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