For a while I have been following the TV show shark tank. I hope you have as well, if not, then you should start doing so.
There are 5 business angels on the panel with different personalities and different backgrounds that make the show much more interesting than its brother “Dragons Den”. From Damion who’s the branding expert (founder of the clothing line Fubu) to Robert the Tech guy who sold his company for 300 million dollars or even Kevin the financial guru, they are all strong in different areas, which usually dictates the type of business they get into.
The sharks may fight among themselves for a share in the business, which usually warms the waters on the tank, and puts the entrepreneur with greater negotiation power. In order to prevent them from reaching bids that are much are higher than they were initially intending to make, eventually they agree on a mutual participation that the entrepreneur also sees with good eyes, since he recognizes the benefit of having to sharks coming along.
Sharks tend to be quite pragmatic with their questions, and these tend to be quite similar from business to business. If you have a start-up, even if you are not planning on applying to go on Shark tank, these are the most asked questions for which you should have answers for:
- What are your sales? This is a basic question, which every entrepreneur should have on top of their mind. It may be followed by some sub-questions, like how much the business did during the previous 3 years – decreasing sales figures are never attractive, investors like to put their money on healthy businesses, that have higher sales on year N than N-1. If it’s not the case you should have a nice justification.
From the sales number you can take it a step further and mention the total profit on it, and if that considers or not a salary for yourself.
- Why do you need the money? Although I don’t think this question is in 100% of the cases, it usually leads for the first “I’m out”. Answers like “we need to invest in marketing” “get more visibility for the business to increase sales” are usually red flags, and make the entrepreneur look like he is not hustling enough and is making excuses for an unsuccessful business. On the other hand, if you show Purchase Order for a big number of units from a major Retail company, and say you don’t have money to produce inventory, you will most likely close a deal, since it significantly reduces the risk of the investment.
- How much does it costs you to make? In case your company is about a product – Mention how much you sell the product for, and the price to the final customer in case you are not selling directly. You should have a margin of at least 50%, to make it look attractive.
- What’s unique about your business? Again if you have a product, you better have a patent, this protects not only your business but puts another option on the table, that the sharks tend to enjoy, the fact that you can license the product/invention, and earn a secure amount on royalties. In case your company is a food company or it provides some kind of service, you should be able to tell a nice story on how your company cannot be duplicated or Kevin will eat you alive. Truth is, there is no perfect answer, but you should at least look convinced on your concept to make them more confident on you.
- Why the valuation? If this question comes, it means like you have a business interesting enough for them to care about it. Since they are investing their own money, they will of course try to invest the least amount of money for the equity they are getting. Advice: you get an offer for what you were initially requesting, to be greedy asking for more, you might jeopardize your chance of a deal.
- How much money did you invest? Best scenario you will have started with your own money, meaning you have 100% of the business, and the amount is as little as possible. Worst case, you raised money from someone else that now owns part of the equity or even a royalty on perpetuity, and your company is running on debt since the beginning.
Here are some interesting businesses that I have selected:
Number one in sales after shark tank
Scrub Daddy – After it aired on Shark Tank and got Lori Griener as an investor, it has made 15 million dollars in revenue ranking it as the most successful one.
The business I would invest in
Onesole shoes – This already highly profitable business caught the attention of the sharks, and they did take a bite on it. It has a patent to protect itself, it has high demand, and has grown significantly it last few years. On the downside, the women who created it, looks a bit unstable. I wouldn’t mind investing a high amount but getting 51% of the business, so I would have to depend on her strategic decisions.
Element bars – Doesn’t take watching many episodes for you to notice that Sharks, invest in businesses as much as they invest in people. This is an example where they clearly bought into his vision, and mostly he was able to make them go down to the equity that he wanted.
Highest amount ever invested
Ten thirty one – It raised 2million dollars, and it wasn’t like Mark Cuban put much thought into it. He seems to know which where the market is going, and if the businesses fits into it, he will go for it.(skip to minute 24)
Lesson from the tank: Sell Sell and Sell some more!