The ABC television show Shark Tank is a show about entrepreneurs – about budding business people looking for a hand up in developing their business. The participants who are entrepreneurs of a start-up company, appear before a panel known as the “sharks,” composed of successful business people who have money to invest. The sharks are well-known millionaires and at least one billionaire who receive a pitch from the participants for an investment in their business. The hopeful participants/entrepreneurs ask for an amount of money that varies from around $30,000 to well into six figures for a “percentage of their company.” The typical ask would be for “$150,000 for 10 percent of my company,” that the participant would propose would help to move their company along by enabling them to buy a new machine for production, buy inventory, or other make another important business development.
The sharks ask questions, perhaps even grill the participants, to figure out the viability and prospects for the business. There are five sharks, each with interesting and unique perspectives and during the pitch it is clear that the sharks also offer business advice. The contestants hope for at least one shark to be interested and the producers seem to show perhaps more failing proposals than successful ones, but the successful proposals and the discussions between the contestants and the sharks yield a wealth business advice.
The show is now in its fifth season and I think I have watched almost all 77 episodes. Each episode has a blend of good pitch ideas and bad ideas, of sure things and nutty participants. After watching carefully for this long, I have taken away seven important business principals that apply in the circumstances that these start-ups are in:
You need to know your numbers cold. If you do not know your cost-of-goods-sold, your cumulative revenue, your recent revenue trends, your profit margins on each sale, etc. you have no business being in business and the sharks will find a way of telling you that.
If you have a physical product – intellectual property protection is key. If you have a physical product, you are much more likely to receive an investment if there is some aspect that is protectable by a patent or copyright, etc. Even a trade secret like a secret recipe will work.
The sharks know a lot about manufacturing and distribution chains and they are very practical. If your idea is not patentable or protectable, they will ask what you think will keep someone from producing the same thing cheaper. If you cannot come up with a reason that others cannot copy your idea, you are much less likely to get an investment.
Your markup needs to be enough to interest the investors. If you are making something for $1 dollar, you need to be able to sell it for $3 dollars. This is a rough generalization, but profit margins that are too small don’t interest investors. From watching a lot of episodes, my guess is that a 3 times markup is good, but of course it does not necessarily apply in all cases. But a lot of the products pitched retail in the under-$100 category and in that price range there needs to be wiggle room.
The markup is not all for the entrepreneur and the shark, but rather because many products also need a distributor and the distributor will need some profit too. Note that in the real world, there are many products that don’t have 300% markups – automobiles, computers, etc. might have a markup of 25%, 40%, 60% etc. But if you are pitching an investor, you need to know how everyone in the distribution chain can make some money. This also means you need to be thinking about what the ultimate distribution chains might be. It is one thing to sell a few items online where you can have small margins, but it is another to place a product in a national distribution chain where distributors will want a markup, the retailers will want a markup, and you will also want to make a profit.
Be bold and decisive. You have come to sell a part of your company. Deal with the emotions of what that means and what you will be parting with before you see potential investors. The sharks have their pens and paper pads and are making calculations. Cold, hard calculations using the facts you give them. They make offers based on those facts. Whether you are getting a good deal is only a case of mathematics at this point. Leave your emotions and attachment to your company behind, don’t vacillate or waffle. Yes, sometimes they offer a bad deal, and sometimes the contestants negotiate for a better deal, but that is all based upon the math and the perceived value. Whether in the shark tank or in real life, in the heat of the deal, the shark tank teaches us to rely on the facts and use the data to your advantage.
You need to be personally “all in.” If you are going to be taking someone else’s money, they want to know you are committed. It often becomes apparent that an entrepreneur is doing this as a side business. They have a day job and are not fully committed to the business. It never takes the sharks too long to figure that out. And those that are not fully committed are unlikely to get a deal. Some will, especially if the shark can just buy an idea outright or figure out a way that the person pitching is no longer key to the deal, but overall, investors want to see commitment. This is true in anything in life. If you are going to do something, do it with excellence and true commitment.
Sales are the most important thing you can have in business. Investors might not care about whether you are profitable yet, but they do care about sales. A business that seems to have a “good idea” but very few sales do not seem to get much attention from the sharks. Even if the company is losing money overall, sales mean that people are interested in your product. Sales are what the sharks are looking for. That also means that it is unwise to look for much external money until you have a track record. Sure there are some VC firms that want to invest in ideas alone and sure a person can always get their friends and relatives to invest in the early idea phase, but it becomes quite clear that it is easier to attract money if there is at lease some “smoke” whether or not there is yet some “fire.”
Some businesses are good for an individual, but just won’t attract investors. Certain businesses work for the individual entrepreneur but don’t really scale in a way that it makes sense for outside investors. An entrepreneur should not be afraid of these businesses, but rather should just realize the limitations. Businesses that relay on an individual (say personal training) or that are good but unprotectable ideas can work on a modest scale but are very difficult to roll out on a large-scale basis.
The Shark Tank can be full of lessons, and this is my reading of some things I have taken away from the show. But of course they do a lot for drama and for the good of the show that might not be good universal business truths, but watching the show can result in some interesting perspectives. This show is clearly more “drama” than “how-to,” but there are reports that the investments resulting from the show have exceeded $20 million, so somewhere real-life intersects with this drama.