If you’re an entrepreneur pitching to investors, chances are you’ve already shed a little bit of metaphorical blood to get what you want during a capital raise. You may watch reality TV shows like ABC’s ‘Shark Tank’ and think, “If only I could pitch to those guys.” Reality TV doesn’t always reflect the real world—it rarely does—but there are still lessons from Shark Tank that can be valuable to you as an entrepreneur or even an investor.
While counter-intuitive in the animal kingdom, in the business world, what a bleeding company needs to stay alive is a shark. Debuting in the fall of 2009, Shark Tank became a quick hit by featuring idealistic entrepreneurs proffering various innovations and negotiating on-air with celebrity investors whose rejections are often quick and brutal. The four-time Emmy-winning show is innovative within the reality TV market and certainly has no shortage of drama.
It’s not always easy to spot the winners and losers, however, because the high stakes world of venture investing is fraught with complexities. Is the entrepreneur who scores an investment, but then loses a portion of their equity and a level of control really a winner? Is someone really a loser if they don’t score a deal, even if they attract enough attention from the show to land other investors? Its entertainment value is indisputable, but is Shark Tank investing realistic? Is what we see on “Shark Tank” representative of how VC investors and entrepreneurs negotiate?
Each episode of “Shark Tank” introduces three to four business owners who make a pitch in front of a panel of five potential investors. The panel varies, and includes the likes of Dallas Mavericks owner Mark Cuban, real estate mogul Barbara Corcoran and, at times, celebrities like Richard Branson and Alex Rodriguez. Contestants pitch their businesses, state how much equity they are willing to give up in exchange for an investment, and take questions from the panel. If any of the investors are interested, they’ll make an offer. The entrepreneurs must decide on the spot to accept the offer, decline or negotiate for a better deal.
Without a doubt, the high-pressure deal making is exaggerated for TV. In reality, Shark Tank captures the essence of deal-making, but the overall format is fudged for entertainment. Jim Taylor of the Florida Small Business Development Center at USF describes it this way:
“Rarely do billionaires and decamillionaires listen to business presentations from what are essentially tiny businesses. Mark Cuban is worth approximately $2.5 billion dollars in net worth. Assuming that he earns a conservative 6 percent a year on his net worth, Cuban earns or grows his net worth by $150 million a year. The chances of a business startup getting in front of a billionaire for a $150,000 investment just doesn’t make mathematical sense.”
Each week, the Sharks ask questions that capital-seeking entrepreneurs would face in reality. Sharks inquire about valuations, margins, sales, revenues, the business model and the owner’s experience. In short, the Sharks evaluate each business pitch the same way a venture capitalist or angel investor would even if she or he weren’t holding court for an audience of millions.
And therein lies the rub. Because it does hold high entertainment value, it’s easy to dismiss the show as schlock TV and ignore lessons from Shark Tank deals. But reality TV investing actually parallels the scrutiny that entrepreneurs and their products face when pitching to investors.
One of the ways Shark Tank digresses from real-world pitching is how the Sharks negotiate. Pitching to investors is a private affair, and it’s not as cutthroat or competitive among investors as entrepreneurs might hope. Eric Quanstrom from Pipeliner CRM said, “No VC I’ve ever met wants to conduct a pitch meeting in conjunction with another VC.”
Whereas reality TV investment Sharks do not conduct much, if any, prior due diligence, real-world investors do their homework on a company before the pitch. Because of the think-quick approach on TV, some Shark Tank panel members have been known to withdraw offers or restructure deals after making their on-screen offer based on later findings, when the adrenaline rush has died.
Eric Durtschi, CEO of Crio Brü, appeared on the show in Season 5 and observed, “The Sharks make it look like they know about your business because they have the file, but they have spent very little time looking at it.” Then there’s the fact that the show needs to balance a variety of businesses for entertainment’s sake.
“Negotiations do not happen during the pitch in my experience as an angel,” said Kelly Keenan Trumpbour, founder of See Jane Invest and a director with Baltimore Angels. “The show needs to entertain audiences and they often include entrepreneurs who would never make it through pre-screen. The show includes them for the same reason ‘American Idol’ auditions people who are tone-deaf. Without that contrast, the content all looks the same and risks boring viewers.”
For all its white-knuckled dramatics, Shark Tank can give novice investors an idea about the value of due diligence. Each celebrity investor has his or her own style and investment criteria.
For instance, for Kevin O’Leary, aka “Mr. Wonderful,” a solid investment is all about the numbers. In contrast, the “Queen of QVC,” Lori Greiner, will not invest in any product that she isn’t personally passionate about, regardless of how good the investment looks.
An aspect of Shark Tank that reels in viewers week after week are the bidding wars. Sharks take playful potshots at each other while trying to convince an entrepreneur that they offer the best deal. Entrepreneurs make counteroffers, after which the Sharks reconsider whether or not they want to bite. Just over 55% of Shark Tank entrepreneurs secure a deal, but off camera, the percentage of businesses securing VC or angel funding is much lower.
In spite of the theatrics, some Shark Tank investors do agree to real deals. A few of those deals go on to generate high yields for both parties. Others flop around on the deck. But just because business owners don’t land a deal on the show doesn’t mean their companies ultimately flounder or die.
Kelly Costello, founder of Puppy Cake, a novelty dog treats company, appeared on Shark Tank in Season 3. While Costello didn’t land a deal, her business did expand tremendously after her appearance, a phenomenon known as “The Shark Tank Effect.” Puppy Cake products are available in thousands of retail stores and now also include puppy ice cream and cookie mixes.
At the end of the broadcast day, Shark Tank investing may not be an accurate reflection of how it all goes down, but when it does work, the money is real and that keeps investors, audiences and entrepreneurs lining up to take the bait. And more importantly, these lessons from Shark Tank—its triumphs, failures and fakes—get business owners and investors thinking more about the process of how to set the hook and reel in their own deals.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Raising Capital – Negotiating with Potential Investors and Due Diligence Before Investing. This is an updated version of an article originally published on October 20, 2017.]
©All Rights Reserved. May, 2020. DailyDAC™, LLC d/b/a/ Financial Poise™
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