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Shark Tank: Venture Investing Reality, or Fiction?

Shark_Tank_LogoEveryone seems to love Shark Tank.

Many people tell me that they (and their families) are glued to ABC engrossed in the dogged entrepreneurs’ search for private capital and the ensuing road to riches while trying to guess what Mr. Wonderful and the gang will invest in and at what terms.  Don’t get me wrong.  I love reality TV at least as much as the average viewer, but as a long-time private equity and angel investor it is fascinating to reflect on the media’s embodiment of my career.

Shark Tank is entertainment first, last and always.

As such we must assume and consider that timelines are altered, presentations are staged and edited for maximum broadcast value and results are not always as depicted.  In other words, what you see on TV may not actually play out in real life.  For example, every “contestant” who accepts an offer is not necessarily the recipient of the sharks’ funding.  Many of the “investment deals” will fall apart on due diligence, documentation and the like.  This proportion is probably reasonably high given the lag between episode taping and broadcast.  And the producers’ selection process will naturally skew toward the startups that close/succeed.  But many of the investments will fail, founders will be fired, sharks may lose interest and move on and companies will pivot based on internal and external opportunities.

startup fundingThe closed or limited nature of the shark tank is an interesting dynamic.

The Sharks have a natural negotiating advantage.  For each one who says: “I’m out,” the remaining Sharks gain negotiating leverage.  That limited and shrinking addressable investment pool, coupled with the open nature of each offer and the open ability to team up against the entrepreneur is unique and instructive.  In negotiating almost anything, close control of information is an advantage that cannot be overstated.

I also wonder why the sharks do it.  Making $50 or 100,000 investments in early stage startup companies is expensive (according to a Business Insider interview with Damon John, each Shark has hired 15-20 people to help manage the investments), takes a lot of work, failure rates are high and total dollars can’t be that interesting (particularly for Mark Cuban).  So maybe they’re revitalizing their own careers and personal brands, ”giving back” and in the process gaining a few true bargains and or strategic partners to other portfolio companies.

But back to the original question: what can we apply to the process of pitching and investing?

Here are some takeaways for startups and would-be “sharks”.

Shark Tank Lessons for the Entrepreneur:angel investor

  • Be prepared.  Know your finances (particularly gross margin), use of proceeds, competition.
  • Remember that investors bet “on the jockey not the horse” – so listen closely, be personable, sincere and show your willingness to adapt to opportunities.
  • Does it scale?  The investor wants to know that the model has been proven to the point that by adding money and expertise they can greatly accelerate sales and profits.  If your startup has a proven model, you will likely be able to capture a higher valuation for you and stronger returns for the investor.
  • Know your audience.  What else does the investor own or influence that can help your company? Positive experiences elsewhere will make for a much more receptive potential partner.
  • Anticipate changes.  As noted above, many things will come up in investors’ diligence or during the term of the investment.

Shark Tank lessons for the Investor:

  • Be prepared, know the market and defer to the experts.  There’s a reason that the other Sharks want to partner on Internet deals with Mark Cuban or with Barbara Corcoran on Real estate deals.
  • Develop a portfolio. Even with drop-outs, the average Shark probably closes 10 deals per year through the show (and other, larger ones outside).  Investing in more deals has been proven to improve your likelihood of having one of your investments become successful.

Shark Tank- it’s good entertainment and instructive to boot.

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3 Comments

  1. Charlotte Phylrich

    it’s on ABC not CNBC. That’s it’s main channel

    1. Sarah Robinson

      I edited it, thank you for letting me know!

  2. Mark Lassoff

    Perhaps the biggest problem with Shark Tank is that it inappropriately focuses many business owners on growth through investment, when their best strategy is likely growth through customer acquisition.

    Investment is an often an appropriate and best avenue for a small percentage of businesses.

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