Business Lessons from TV’s “Shark Tank”

I just discovered the TV show “Shark Tank” a few weeks ago and have been eagerly devouring each episode. Sure, I’d heard about the show a few years ago, but ignored it because I don’t like watching TV and find most reality TV shows to be a total waste of time. But I should have checked out Shark Tank much sooner—it’s really exceptional. I don’t really watch the show for entertainment value, but for the business lessons. Hopefully, what people realize is that when they’re watching this show, they’re getting golden nuggets of wisdom from insanely effective businesspeople for FREE! Boy, I wish colleges would teach this kind of information.

In case you’re not familiar with the show, it’s really simple: entrepreneurs come into a room full of investors, make a pitch for funding, and then either get a deal, or don’t… usually all in the span of 3-5 minutes. That’s basically it. Aside from what I think is a fairly awkward format that has contestants walking into the room and introducing themselves by saying “Hello, Sharks,” (facepalm) and ignoring the fact that the show has no host which makes it lack flow and direction, it’s one of the few shows worth watching on TV these days. Here are a few of the biggest lessons I’ve seen demonstrated on the show, and these, I think, are lessons most of the actual contestants miss. Pity.

Lessons from Shark Tank:

Lesson 1: The amount of equity you’re offering in exchange for the dollar amount your asking for shows how you’re valuing your company. Contestants will get up and say “I’m asking for $X, in exchange for Y% equity in my company” and will then be grilled by the Sharks for the valuation of their company. Nearly every time, the investors will do some quick reverse calculating, and then beat up the contestant over what he or she is pegging the company’s value at. Kevin O’Leary, the most belligerent of the investors, will quickly bark back “wait a second… you’re offering me 10% of your company for $100,000? That means you’re telling me your company is worth ONE MILLION dollars?! Why is it worth one million dollars?” It’s startling to watch the contestants wince, and they frequently stutter and stumble at this point. Big mistake. What this tells me is that they have never seriously calculated what their company is worth, and why. Major mistake. You have GOT to know how much your company is worth, and you have to be able to justify it with hard data rather than saying “I think it’s worth a million dollars.”

Lesson 2: The investors will ALWAYS ask you if you’ve had any sales in the past. They do every time. If you say “none,” they’ll rightly accuse you of asking for money based on an idea for a business, and not for a real “business.” A business with zero sales is not a business, so if you say “zero sales” when they ask this question, you’ve failed. There’s another observation here as well—if the contestant says “we’ve done $70,000 in sales,” the Sharks will just as quickly ask “over what period of time?” In this case, even the contestant who proudly stated that he has sales in the tens of thousands will sheepishly admit that his impressive number covers the past four years. Oops. $17,500/year in sales is not impressive. It’s a nice little side job, but it’s not a business.

Lesson 3: Asking for investment capital is not about the money. Really. This seems to be the hardest for entrepreneurs to grasp. Some people think they’re asking for a big sum, and they’re bashful about it. C’mon… asking Mark Cuban for $150,000 is no big deal. And if he thought it would benefit the company and give him a return on his investment, he’d be just as happy (or even happier) to invest $500,000 in your company. …if he believes in you. If you’re looking for an outside investor, what you’re really looking for is a father figure of sorts for your company who can help guide you as you build your business. The money you take in isn’t just to pay for marketing campaigns, employee wages or inventory. It’s to secure the interest of a mentor by giving him equity in your company with a promise of future returns. They’re taking a vested interest in your success.

And on that note: sometimes people get shifty about the amount of equity they’re willing to split with. They usually start out at offering 10%, which is insultingly low. Why? If they truly believe in the investors they’re seeking money from, they need to offer REAL equity! Give them ownership of the company. What I think most people forget is that if you get Mark Cuban to invest half a million dollars in your company, he will not allow you to fail. You have his attention, his interest, his help, his expertise and his passion. If he’s invested in you, you’re joined at the hip. If you fail; he fails. And THAT is why you’re a contestant on Shark Tank. Not for the money.

Lesson 4: Investors REALLY care about intellectual property. The first question the Sharks ask when presented with a physical product is “do you have a patent?” Sometimes, contestants do. Sometimes, they’ll shuffle awkwardly and say “well, we’ve re-purposed a patented device and have a patent on using the patented device in a re-purposed way.” Sometimes, they’ll plainly say “I don’t have a patent.” Bad move. Investors are very protective of their money. They want to make sure that if you’ve created a widget, someone else isn’t going to come along and create a widget like yours—but better—right after they’ve sunk their cash into you. You’ve got to own the intellectual property. If not, that’s a fail. Make sure you own your creations and all associated IP before asking for an investment.

Lesson 5: You MUST know what you’re going to spend their money on. I’m surprised by how often people don’t know how to explain this because it’s the most obvious question of all. If you’re asking for $75,000, why did you pick that exact number? Why do you need $75k but not $76k? What are you going to spend exactly $75k on? And almost as important is the follow up question to that: “if we give you that much, then what?” Are you going to burn through $75k and then need another round? If so, why not ask for $150k now and just get it all at once? A lot of contestants have not thought this one through. Referring back to question #3, if you aren’t asking for enough, they’ll be HAPPY to give you more, IF they’re convinced you need it and that you’re a good investment. Think about it: there’s not an investor on earth who will only be willing to spend $80k on funding you when he knows that you really need $100k. If you’re going to make him money at $80k, you’re going to make him even more money at $100k. But you have to justify what it’s for.

Lesson 6: The borrower is slave to the lender. This one goes all the way back to Proverbs 22:7, and it’s just as true now as it was in King Solomon’s day. If you’re asking the big kahuna for big bucks, you’re working for him now. It’s the cold, hard truth. Even though you may own more equity in the company, at least in some fashion, he’ll be calling the shots. Why? By taking his money, you’ve established that you can’t survive without him. You need him a heck of a lot more than he needs you. So keep this in mind when asking for capital. In one episode of Shark Tank, a contestant asks for some money in exchange for 5% equity in his company. Daymond John, the founder of the clothing line FUBU, responded most appropriately: “You’re offering 5%?! 5% doesn’t get me out of bed in the morning. 5% has me working for you. I’m out.” Don’t insult your investor. Ask for real money, give him real ownership, and treat him like an owner. Because he is.

Lesson 7: Only ask for money when you’re actually ready for it. More than once on the show, I’ve seen people approach the Sharks with funding requests for a half-baked idea. The investors will invariably say “You have an idea, not a company. It’s too soon. You’re not ready.” Don’t ask for money too soon. One contestant who had absolutely no ideas for ways to take his product to market told the Sharks that he’d need them to figure that out. They responded “you can’t offload the strategy to us—that’s your job.” Again, don’t insult you investors. You need to run your company. Do your job, and they’ll do theirs. Your job is to run the company; their job is to empower you to make your company bigger, better, faster and stronger.

Lesson 8: Don’t get emotional about your ideas and or think too highly of yourself. The worst contestant I ever saw was a salesman who had created a “Sales System” and said he’d sold it to employees of large companies like MetLife. He claimed that salespeople who use his system increase their sales by a whopping 40%. After being asked some prodding questions, (that were highly appropriate in my opinion), one of the investors asked if his system was so great, why MetLife didn’t buy it for more of their staff. Ouch. Fast forward through his disastrous pitch (for which he got no offers), to the commentary at the very end: the contestant told the camera that the investors had made a big mistake and they’d be sorry. I laughed out loud at this point. Nobody will ever hear about this guy again, and the investors had already forgotten his name by the time he walked out the door. They will not be sorry. Even if this guy had been Mark Zuckerberg pitching Facebook, these investors wouldn’t have been sorry. Not even now when Facebook is making billions. Why? Because if it wasn’t a good investment at the time, it wasn’t a good investment. Period. They are not going to live in regret. If you make a good pitch and get the deal, great. If they don’t bite, they will move on. Very quickly. They will not think back to your pitch and kick themselves for not investing—they’ll be glad they didn’t, and they may wonder how you had any success when you pitch was so bad in the first place.

I’m sure there are more than just these, but that’s all I’ve got for now. I’ll add to this list as I watch more episodes. What about you? What insight have you gotten from this show?

19. June 2012 by
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