Lessons From The Shark Tank
Bill Warner Monday, August 10, 2009
The new television show, Shark Tank, is more than a little hyped up and not terribly realistic about the process of raising angel or venture capital. A lot more preparation goes into getting a company ready to present to investors than is portrayed in the show. The investors looked much more arrogant and cut throat than they really are, and most of the entrepreneurs were substantially unprepared to make the presentations at this level of investing.
However, there were a lot of lessons that should be learned by entrepreneurs. Some good things were done and some terrible mistakes were illustrated.
- You must present a business story, not a story about an idea. Emmy the Elephant and Ionic Ear were the cases in point. Both were explaining what their product is and how it works. They never explained why they had attractive businesses. When you are presenting to any group of investors, you need to explain what the business model is, describing how you are going to make money. Then, in turn, explain how the investors will make money as well.
- A start-up business has to have a laser like focus and not try to approach too many markets at once. The Pie Factory had a great business going in wholesaling sweet potato pies. His major selling point to investors, a deal with McDonalds, almost had to be dragged out of him. He wanted money to expand his business, and was making thirty other varieties of pies, taking attention away from his core business in sweet potato pies. They got their investment, but at a valuation that was substantially less than their revenue. If he had been more focused on wholesaling and had a confirmed deal with McDonalds, he could have gotten a much higher valuation.
- Unrealistic valuations are common place, but are usually worked out prior to a major presentation like we saw. However, the lesson learned here is that entrepreneurs really have to spend the time to understand what their business is worth right now and offer the investor an appropriate share for the money they will be putting into the company. The Pie Factory was valuing an $850K business at $4 million plus. Poor Kevin Flannery was valuing his business at $10 million plus, with no revenue. Iconic Ear’s valuation was over $6 million at the prototype phase of development. These are not even close to being reasonable and show that these entrepreneurs did little research into the investor market.
- The heart breaker was WiSpot. Kevin Flannery showed a failing business in which he has personally invested his family’s life savings. The investors did him a big favor by telling him that his business model was not attractive and never would be. Their advice was all about knowing when to quit. Entrepreneurs should be listening for good advice from seasoned entrepreneurs and investors. When a lot of people are telling you that the dog is not going to hunt, then you need to move on to something else. It’s a shame that Kevin had to get that news in front of millions of people.
- Entrepreneurs really need to be prepared to negotiate. Emmy the Elephant was raising $50 thousand and was selling 15% of her company. The company is at the prototype phase. She was offered the money, but at 55% of her company. She took the deal, probably not knowing that she just dropped her pre-money value to about $40 thousand and gave up control of her company. Not a great deal, but maybe it was right for her. Nevertheless, entrepreneurs need to know their numbers and come into such a negotiation with clear reasons for their valuation and knowing what they are willing to give on as well as their walk-away point.
- Arrogance and a bad attitude is not a good thing to display in front of investors. The College Foxes Packing Company got hammered because they were not willing to share their current company with investors. Instead, they insisted on trying to sell a spin-out services company that has no revenue for $250 thousand and a 25% share. The negotiation got heated and the entrepreneurs insulted the investors and ultimately turned down a sweet heart deal because they were unwilling to share any piece at all of their current business. In reality, these entrepreneurs should have known that the negotiation would go the way it did and been prepared with a clear position and counter offer.
Once you peel away all the dramatic showmanship, this program has some valuable lessons for entrepreneurs. These mistakes are made every day, and can be avoided by good research, preparation and getting solid advice from experienced entrepreneurs.
Bill Warner is founder and Managing Partner of Paladin and Associates, a consulting firm that helps entrepreneurs create successful businesses by providing a broad array of services that help them create a business strategy and plan, and get them ready for raising the necessary financing to launch or expand their business. He is also co-founder and Executive Director of EntreDot, a business mentoring non-profit organization that assists entrepreneurs who are starting their companies. Bill is a Fund Executive of IMAF-RTP, an angel seed fund investing in start-up companies.