One of my favorite weekly traditions is relaxing on the couch after a long day and tuning into Shark Tank with my girlfriend.
These days, I rarely get enthusiastic about TV, but who can deny watching the next hipster beard wax product, flying drone jet or QVC product you end up buying at the swap meet five years down the road.
Being involved in digital marketing, I have the opportunity to consult with a variety of tech start-ups and new, innovative ideas but there is something about watching an established investor (shark) assessing the contestants pitch that never gets old. I find value in Shark Tank not only in the inspiration of watching courageous entrepreneurs put it on the line but also getting a courtside view of what makes a deal ripe or a lemon.
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Each episode, you are intrigued to peel the layers off the onion and understand why proven multi-millionaires are willing to open their network and capital to complete strangers. What are the common denominators? What makes these uber savvy business folk jump or get into a good old fashion bidding war?
These core principles are the bait entrepreneurs need to consider prior to envisioning partnering up and killing the marketplace with any shark.
Principal 1 – Good Ole’ Equity
It’s tricky to grasp if you aren’t in the business arena or have never worked your way up the corporate latter to hear this vernacular. Royalties, Shares, Debt and the list goes on. However, Equity (a.k.a share) is an integral component of what goes on in Shark Tank. Equity is equally important to both sides of the table it seems.
Entrepreneurs tend to bargain down equity while Sharks may even consider turning down a deal based purely on low equity even if the idea is brilliant. One thing to note however, is some Sharks have their own perspective on equity, not all are the same.
Why the focus on equity? Well, many sharks prefer to take at a maximum of 49 percent share to leave the original inventors with a majority stake in the business. This ensures the original team will always have enough skin in the game. The more ownership the entrepreneur holds the more motivation to push the profit margins in their favor and bring long-term capital back to the shark.
The long-term investments the Sharks pursue most are the deals where everyone has the opportunity to get their hands dirty and equity is not already gone prior to beginning the pitch. To bait the shark effectively be savvy about equity investors prior to the show that may ask for high shares, look at other equity deals in the niche and mainly know it is very important to the Sharks.
Principal 2 – That’s all great but..WHAT ARE YOUR PRIOR SALES?
This is a question that never seems to escape the first 15 seconds of the show post pitch. Honestly, to hear an entrepreneur admit less than desirable sales (usually under $100k annually) you can feel the tension in the room.
Occasionally, there are legitimate reasons for zero sales (patent pending, lack of sufficient capital to grow, etc.) but nonetheless this is one of the most important questions the Sharks focus on. Why are prior sales so important? The Sharks have a very limited amount of bandwidth to allocate with all of their energy toward the wide array of ventures. It is imperative they have a minimum viable product to take such a large risk.
After all, these sharks are multi-millionaires - time is more important than the possibility of investment lost. They want to hit the ground running and do not want to spend valuable time testing a product or idea that doesn’t have any historical data behind it. If you expect to pitch the sharks into a solid partnership you first must have some favorable data for sales for most products/niches. For good reason the prior sales question ranks near the top of the list.
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Principal 3 – Internet Is A MUST
Just as with Sales, this question will surface eventually for 90 percent of the deals you come across on Shark Tank. For the 10 percent that it doesn’t apply, this is because the model is not well suited for the general public such as a government software, contractor, etc. The school of thought would be that online sales and branding is not going to accelerate profitability like most businesses nowadays – again this is not the majority.
The digital marketing or internet strategy question comes in many variations and different forms. The Sharks may ask, “do you have a website?, what does your social media look like?” or just simply “what are your online numbers?” The reason is very simple. The internet is unlike the offline retail world, whereas niche products and ideas can dominate market share much easier.
Most of the entrepreneurs on the show have very niche ideas and products so if they have not begun the digital foundation already they are losing a foothold in that market. The Sharks have experience with the power of digital so they factor in existing landmark online and if nonexistent they need to analyze the opportunity they can make prior to forking over their hundreds of thousands.
Principal 4 – Okay, I like the investment but..Do I like you?
I will marry these two elements together – Greed & Personality. The two traits I see the sharks focus on most. You may have a genius idea and excellent pitch, but the shark wants to build trust and work in a harmonious nature. Greed, is a trait the Sharks can sense in the negotiation period and do not take lightly.
Take XCraft for example, during the negotiation process they jumped from $2.5M to $10M. This almost was brazen enough to cause them the deal. Daymond John responded with, “I smell greed here.”Luckily the founders realized they needed to cooperate and the deal ended up being solidified.
As for personality or the idea of investing in a person this can be very impactful. It can completely turn around a deal when most of the Sharks didn’t feel strongly. This concept is very widely accepted in the investing community in general with cases of $2M being raised from a 5 slide demo. At the end of the day most of the sharks will agree that they are investing in the individual more than the product. If you want to bait a shark make sure you are not only focused on the deal itself.
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Living in a time an age where entrepreneurship is so popular it is crucial to understand how to be perceived as "the real deal". A simple search on a popular platform such as Quora will populate with so many entrepreneurial questions to answer. These days everybody wants a chance to run their own venture.
Shark Tank is exceptional because it is raw version of business. Watching an episode a week is a great supplement to those wanting to learn business or getting funded, what I like to think is similar to a free MBA.