Question:
Lately I have been watching the TV show Shark Tank and really like it. What always amazes me is that the people whose products I don’t like often get money and those that I do like get nothing. Why is that?
Answer:
Like you, I enjoy Shark Tank as well, and for any entrepreneurs or inventors out there who are looking for investors, making Shark Tank part of your weekly viewing is highly recommended. (Actually, even if you simply own a small business and have no need for investment capital, the show is worth your while – its educational, fun, and entertaining to boot.)
For the uninitiated, people who have businesses and products in need of angel investments go into the “Shark Tank,” give their best elevator pitch, and try and get the five millionaire and billionaire investors (the “sharks”) to put their own money (and intellectual capital) into the venture. The sharks are people like my pal Barbara Corcoran (NY real estate legend) and Mark Cuban (NBA Mavericks owner.) As with any angel or VC deal, the entrepreneur has to be willing to give up a percentage of their business to the shark. How much? Well, that’s part of the fun.
People come on the show at all levels of skill, abilities, experience, and needs. One guy might be pitching an alarm clock that wakes people up with the smell of bacon, needing $10,000 while another might pitch a toy company that allows parents to rent toys for a few months, and later send them back for new ones, a la the Netflix model. That entrepreneur might need $100,000 for a 10% equity stake in the business.
So why do some of the people get the money and the opportunity to have someone like Daymond John (creator of FUBU) be their business partner while others go home empty handed? Why do some entrepreneurs get VC funding while others don’t?
Here are 5 lessons for money seeking entrepreneurs from the Shark Tank:
1. Know your numbers: I can’t tell you how many times variations on the following conversation occurs on the show:
Kevin O’Leary [shark]: “Let me get this right. You are offering 20% of your company in exchange for an investment of $50,000?
Entrepreneur: “You bet, we have a great product!”
O’Leary: “But that means that you are valuing your company at $2.5 million. You only have $120,000 in sales. Your company is not worth close to that my friend.”
Entrepreneur: “Uh, uh . . .”
Investors want to know how you are valuing your business, how much money you are going to make, how much profit you have made, and why you need their money. Potential is great and all, but numbers talk, BS walks.
2. Understand that money has no feelings: Kevin O’Leary is fond of pointing this out. This is about making a profit for the investors, nothing more, nothing less. How, exactly, will you do that? How you feel about your business is fairly irrelevant.
3. Have a real business that can be scaled: The business cannot be you doing labor, unless that labor can be duplicated en mass. If you make homemade cedar toy chests that cost $300 but take 25 hours to build, it is difficult to see how that is a business that can be ramped up to sell mass quantities. A business that makes widgets for $2 that retail for $4 is a business that is scalable.
4. Have real (not false) confidence and be emotionally intelligent: Yes, it’s all about the numbers, but then again, it’s not all about the numbers. You have to be a cheerleader for your business while being able to read the room.
Says Barbara Corcoran, “Make sure you can sell your product, because if you as the head of the company can’t sell it, who will? Also be sure you’re ready to answer the two key questions too many of the entrepreneurs who come on the show can’t: 1) What will you do with my money? and 2) How will I get my investment back?”
5. Be unique in the marketplace: The products that get some love are usually those that are 1) different, and 2) clearly serve a market need. Again, Barbara Corcoan puts it well: “If your business idea clearly answers a need in the marketplace, it’s probably a good idea. If the need is already being met by well-entrenched competitors, it can still be a good idea if it’s a new, cheaper or more clever way of doing it.”
Follows these rules and hopefully you wont be eaten by the sharks.
Today’s tip: Finding business is always a challenge, but fortunately there are always new ways to accomplish this these days. Here is a cool new way that you should check out: Verizon (a company I do some business with) recently launched an online marketplace on Facebook called WeCommerce. By registering your business on the site, you can easily locate simpatico businesses with which to barter, trade services, team up with, or sell to. Steve says check it out.