I was recently turned on, unfortunately 4 years after it first aired, to the most incredible show in production, ABC’s Shark Tank. I’m “hooked!” If you are an existing entrepreneur (successful or not), a “would- be” business owner, or thinking of turning your incredible idea into an enterprise, this show is a must.
There is something to learn by everyone.
Basis of the show
Five to six “self-made” billionaires vet three projects an episode, presented by the founders of various companies, looking for “the next big thing” or idea that needs capital, strategic guidance, or both. Similar to the BBC’s Dragon’s Den in the U.K., these “Sharks” “know their stuff” as far as business goes, and can easily smell through the fluff and see real value. It’s a priceless learning adventure every time, as what they offer is invaluable. It’s not just money that’s available to the hopeful entrepreneurs, its experience, branding and connections which include sports teams, home shopping channels, and “Big-Box” turnkey distribution. The Sharks invest their own capital and expertise based on merit and interest, but as a student and avid watcher of the show, there are some obvious traits that the Sharks look for. In fact, they cut through like a “hot knife through butter.” This can also be titled “What to make sure you do or don’t do when asking for funding.”
• Funding amount: This is where many first time entrepreneurs mess up. They calculate the least amount they think they can “get by” with and ask for this figure. They think that if they ask for less, it will be more palatable to a prospective investor. Nothing could be further from the truth! A seasoned investor gets scared by smaller numbers and views a $1 million dollar investment more risky than a $5 million dollar investment. Professional investors know what it takes, know that there must be realistic projections, and know that a proper business takes time. I suggest to make sure your required capital is projected with minimal to zero sales for 1-2 years, to make it more attractive to a potential investor. Let them decide what is ridiculous and over-cautionary.
• Valuations: Usually the lynch pin of a successful presentation or not. More projects are turned down because the entrepreneur doesn’t want to give up “their baby.” The other situation is that they are valuing their business, which has been doing business for three years and generating $4000 (kiss of death) at $10 million. With that being said, I have only seen one project where the Sharks wanted more than 40%–and usually letting the founder run with their vision and using the Shark’s money. Have realistic and calculated projections that are based on true demand that you can substantiate. Stating that if you just get 1% of a potential multi-trillion dollar market doesn’t mean that this market actually wants or needs your product. Example: Morninghead, a shower cap that absorbs water and can be twirled around for a quick fix to your displaced hair after waking. Yes, 230 million people have hair in the U.S. How many people will buy this cleverly named cap for $7.99? Can you make a business out of it? The Sharks didn’t think so.
• Identify a clear exit or a return of capital: In Grace Century’s own dealings, we identify an exit before we get in. Growing a business is wonderful and exciting, but investors want their capital back. Having this clearly defined with timelines and benchmarks will make the deal far more attractive. Most investors realize the risk and acknowledge the huge potential; this is a given. Defining the risks, clearly, will go far to add to an entrepreneur’s credibility and bankability. My suggestion is under-promise and over-deliver in all timelines and valuations.
• Close the deal: Many of the projects come in asking for a certain amount and certain percentage of the business. They get offers from the Sharks that meet this, but still shop the other Sharks. This aggravates the Shark and more times than not; they pull their offer. I think it is not a personal attack that the Sharks resent; I think it is a window into the owner’s psyche asking for the money. The ability to make decisions is paramount for an owner, as they must do this every day. Hesitating is a warning flag.
Starting a business can’t be a hobby or a past-time. It is a full-time venture when done properly. In addition, it’s as important for the entrepreneur to objectively look at his project as the investors do. Founders have a responsibility, especially in the beginning, as friends and family might be putting in substantial funds early, out of love and friendship. They might be counting on the individual and this should be taken into account by the founder. They have an obligation not to hurt these people.
Going after a shark as an investor? Adhere to the points above and I wish you “good fishing.”