While random surfing some years ago I stumbled across Shark Tank, the American version of Canadian show Dragons Den which apparently originated in Japan. The basis of the show for those of you who have not seen it is, people with businesses or ideas seek to gain investment from any or all of 5 venture capitalists ( Sharks ) to take their idea to the next profit making level. Over the years of watching it I have compiled a list of concepts and lessons I have learned from watching the show which are compiled below in no particular order of importance.
- The valuation of your business is ultimately going to come down to a multiple of sales. It seems no matter how much time, effort, money and sweat equity you put into a business all that matters is how much sales and profit has it made each year for the past few years. Two – Three times annual sales is a common starting valuation.
- The patent portfolio and other hard assets go into the valuation. You might get away with a higher sales multiple valuation with a proven ( i.e. revenue generating ) IP portfolio as well as other monetize-able assets.
- While in many instances patents and other Intellectual Property may be essentially worth nothing, if you have a patented process or trademarked name the Sharks will see that as a good sign. The reverse is also true lack of any attempt to secure intellectual property rights or even “Patent Pending” status can be a turn off to investors.
- The most common mistake people seem to make is an over valuation of their company. Investors often see this as a slap in the face or at the very least burst out laughing. While i’m no expert in valuing a business on shark tank the metric seems to be a multiple of annual sales. However I do sympathize with people who have invested large amount of time and effort into a business that doesn’t generate the sales required to justify a valuation which will give them a reasonable return on their investment. With that said though, if the business doesn’t generate enough sales to justify the owners initial investment then sharks aren’t going to want to be involved anyway.
- Don’t be clueless about your numbers especially your sales and profit margins. This is an even worse mistake to make than to overvalue the company. If you don’t know the basic numbers for your business you have no hope and worse yet you look like a fool.
- Have control of the company. The sharks will not want to make a deal without the presence of company owner(s).
- Be enthusiastic. They like people who are excited about their idea. Excitement is contagious.
- Know your market. This goes without saying, if you don’t know who you’re selling to the sharks won’t invest.
- Approach Sharks that know your market. The Sharks all have money but some have special insight or relationships that offer a strategic advantage in a partnership. This can also backfire because if someone with keen insight into your industry does not want to invest then the others with less insight definitely wont want to either.
- Have a product that is already selling with growth potential. This mostly boils down to having proven sales. However some large companies were formed by people who just had a good pitch without any sales. Shark tank investors probably wouldn’t fall into the category of investors that don’t require proof of concept though. Especially pitches of the type “They are 150 million males in America and 50% of them wear hats and if we could only capture 5% of that market then we could make 100 million dollars”. Those types are doomed to failure.
- Allow the investors to get their money out ASAP. No one is going to want to invest in a company that takes 15 years to see a return on their investment. They want their money back in a year or 2 but depending on the situation may be willing to tolerate a bit more. Not only do they want their money back but they also want the equity and some interest to cover the risk they incurred. Make sure you have a clear idea of when they will get their money back and articulate your expectation.
- Be credible. Shady characters or damaging secrets will come to light pretty quickly. Bankruptcies, infighting between partners, pending legal issues and more will quickly come to light. Even though there major problems may exist if you could present a solution and how to minimize the effects of these problems then that could help.
- Understand the basics corporate structure like the positions on a board and their responsibilities.
- Know how much of your own money you put into the venture they will ask this. After all if you don’t want to put your own money in why should they? This question can often lead to painful moments if they think you’ve been poring your life savings down the drain. “That’s not a business that’s a hobby” or “this isn’t an investable idea” is a common phrase when that happens.
- Be able articulate the idea in less than 90 seconds – make it obvious what is is you are doing and how the Sharks could make money on the idea.
- Have a strong personal brand – make it obvious that you are the right person to execute the idea. They may like the business and they may like the idea but they may not like you. And if you are successful in securing funding they could just have you replaced at the earliest possible time. There have even been cases where they have invested in people just because they liked them and not because the business was sound. They call this investing in the person.
- Know what you are going to do with the money if you don’t know the answer to this question then this will signal a red flag.
- If its a product have a finished product not a prototype.
- Know what help you want. Investment is not only about money but it is about insight you can obtain from a strategic partnership.
- Make things easy for investors, don’t make it seem like it will take a lot of time. They have money but not a lot of spare time so the more of their time you’re going to take up the less appealing your offer looks. Understand the mindset of an investor – they don’t want to do much, they just want to wake up richer in the morning. They don’t want to get involved but they will if they think its worth it.
- Know your negotiation range. Sharks don’t get excited about offers that are less than a 25% stake in the company. To offer this much or less you have to have an extraordinarily good deal i.e. the pie has to be really big.
- Sweeten the deal – make it seem like its a once in a lifetime opportunity or its a great time to get involved.
- Know the basics of business terminology. Simple mistakes like confusing cross selling and up selling is a red flag to investors.
Watching this show has allowed me to realize some of the key differences between small and big business and why not every business is scalable. Even though this article was about Shark Tank I think much of the information here can be applied by anyone seeking investment from venture capitalists.
A good example