ABC’s Shark Tank has quickly become one of the most popular shows on television with over 7 million viewers on a weekly basis. The premise of the show is quite simple, entrepreneurs present their business idea to a panel of five well-known millionaire investors, including Mark Cuban (Dallas Mavericks), Daymond John (FUBU), Kevin O’Leary (SoftKey Software Products), Robert Herjavec (BRAK Systems), Barbara Corcoran (real estate), or Lori Greiner (prolific inventor), known as the sharks, in hopes of raising equity financing. The sharks pick apart the ideas, presentation style, valuations, and anything else the entrepreneur offers to better understand whether it represents a viable business worth investing in. A few lucky entrepreneurs will be presented with finance offerings from one or more of the sharks along with a relationship with a proven successful business partner.
The popularity of the show has raised a number of questions as to whether it truly is beneficial to apply for the show and there are some key concepts to consider for the general public understanding of raising capital for their businesses.
The ability to be featured on the show, regardless as to whether a shark offers investment, has shown an increase in sales up to 700% for these businesses. One company, BuggyBeds, went from being in 60 stores to being in 600 stores with sales going from $150,000 to over $1.2 million in the two months following their appearance on the show. Another company, Scottevest, walked away from a combined $1 million in offers from the sharks and after the episode aired generated so much traffic to their website that it crashed that night. This has been known as the “Shark Tank Effect”. It can take a business operating out of a garage selling a few units a month with its biggest concern being how to get the next sale, to a large company concerned about how to fulfill the rapid incoming orders. An entrepreneur who is informed that their presentation will air on national television needs to prepare the business to ensure that it doesn’t fail due to increased sales — certainly a great problem to have.
The producer of the show, Finnmax LLC, does not make applying for the show as simple as filling out a form and submitting a video like so many other reality shows. In reading the 19 page initial form and agreement, the entrepreneur is warned that they will be required to enter into additional agreements with Finnmax relating to the business presented which some have noted include giving up property rights but no clear understanding of what those additional terms would include. Additionally, the producer or their designee (collectively the “Shark Tank Entities”) will receive an irrevocable option to either (1) receive a 2% royalty of the operating profits of the business, or (2) receive warrants that give the Shark Tank Entities a 5% equity interest in the business. This option vests if the business enters into an agreement with one of the sharks within two years of the date of the presentation or if the entrepreneur’s presentation is included in an aired episode of the show. This could certainly be a steep price to pay for a start-up business whose ability to raise capital may be solely based on the available equity to provide to investors and whose minimal profits are valuable to the company in order to expand and grow.
An entrepreneur certainly must weigh the risks and rewards of applying for the Shark Tank. With only about 4-5 presentations per episode and undoubtedly thousands of applications, the chances of airing on national television to obtain the attention of over 7 million viewers can be very slim and the company may still be required to give up equity for no capital or a perpetual royalty.
San Diego is certainly full of very talented entrepreneurs with novel business ideas. The Shark Tank has already aired San Diego based companies, Tower Paddle Boards and GobieH2O, which both have experienced great success. Much can be learned from their presentations along with the other entrepreneurs on the show. Some key ideas that even the occasional viewer will pick up on are the following:
Know the valuation of the company, how much to ask for, and what it will be used for – Every segment on Shark Tank starts with the entrepreneur expressing how much they are looking to raise and what percentage of equity they are willing to part with. Each investor quickly jots down the numbers to essentially calculate the total valuation of the company. The entrepreneur must have a good understanding of how they determined the valuation and should be sure to balance between what the company could be worth to what a dream valuation would be. Over valuing your company could negatively impact investors’ view of you as a business person.
Understand the key terms and your numbers. Each of the sharks dive into the business model and always seem to ask the same questions about sales, margins, patents, and distribution or retail partners. Stumbling with these basic concepts could cause investor concern about your ability to run the business. Furthermore, understanding your competition and the size of the market can impact the valuation of the company and how successful it can become.
Tell a clear and concise story. Time and time again, entrepreneurs spend 5-10 minutes explaining their idea and expressing how much passion they have to make it successful, but leave the investor confused about the product or service and unable to see the value from a consumer level. The story must include all the facts that an investor would be interested in. And while a willingness to work around the clock to become successful is important, it doesn’t necessarily mean you have a viable business worth investing in.
Remember that Shark Tank is for television entertainment purposes. Watching an episode of Shark Tank can sometimes give the impression that capital raising is as simple as presenting your product before investors start throwing offers at you. Certainly the real world is quite different and the due diligence process for investors can be quite intense and time-consuming for the entrepreneur. Furthermore, entrepreneurs should truly understand the investor partnership they would be getting involved in to ensure that it is an appropriate fit for the business and the personalities of ownership. Finally, it is important to clearly understand all the terms of the offer agreements before signing to avoid future disagreements with investors, even minority investors, which can result in significant legal fees.
Hopefully we’ll continue to see other San Diego based companies take the dip into the Shark Tank in the future and come out without any bite marks.
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