Whether they are meant to be there or not, real business lessons are buried within the made-for-TV, startup-pitch-event-turned-reality-show Shark Tank, and despite the raised eyebrows, I love the program.
A rotating crew of five potential investors, billed as self-made millionaires, hear quick pitches from would-be entrepreneurs of varying skills, interests and levels of experience. Sometimes deals are made; sometimes those entrepreneurs walk away with nothing, aside from a little exposure.
This is not the first time I’ve talked about the show: last fall, I wrote about what the Knight News Challenge could learn from Shark Tank.
I watched most of last season and all of what has come out so far this year. I’ve got to thinking there are a few lessons to be learned from watching. Updated: Tech Crunch has a newer post offering lessons for the show.
First, it’s the best reality show on TV because — though the drama is naturally turned up and the personality surely encouraged — it has the same quick-cut, digestible entertaining qualities of other programs, but it also has a taste of next-big-thing trends and dives into the American ethos of entrepreneurship with all the teachings of what works and what doesn’t.
Watch a clip from last season below.
So, yes, I’ve had some takeaways, some for pursuing investment and some, of course, for being the very unique experience of having five potential, competing investors sitting in front of you on national TV.
INVESTMENT PITCH LESSONS
- Have a strong elevator pitch – Well, obviously, first and foremost, you should have down exactly what you aim to say: simply what your business is, why it’s unique, what needs it fills, how much money it has made, how it will scale to make more and why you’re the person to do it. Gabe Weinberg recently wrote on this and many other angles for your investment pitch.
- Always offer your sales figures for the last calendar year — Or, if more relevant, in the last year or fiscal year, but the point is to have, ready immediately, how much in actual sales you made in a 12-month period. Projections are fine, recent numbers are cool, orders or forthcoming sales are great, but the first thing to say is what you’ve already done and that figure needs to be during a 365-day period.
- Have existing sales — Don’t seek outside investment without sales unless you have a very clear, special circumstance, like intellectual property concerns for high technology, pharmaceutical, heavy machinery of the like. ….Even then…
- Have a clear sense of why the investor needs you — Many of the entrepreneurs took for granted the idea that they were of value to the business being pitched, however in multiple pitches I watched the investors questioning that very idea. Have a rational, reasoned and succinct answer to why you are the best person on the planet to run or be involved in your business — other than just that you began it.
- Don’t make an investment pitch as your last report — As noted above, you need to know what you want and what’s the least you’ll take and be able to walk away if neither is met. If you’ll take anything and show it and are unable to walk away, you can get yourself in a world of trouble.
- What specifically will you do with an infusion of capital — You absolutely must be able to very specifically cite precisely what you’re going to spend outside investment on and it better be a very clear way to quickly grow revenue.
- Investment money is for scale — When speaking to investors (not friends and family) you’re essentially trading a chance to grow your business big for an efficient return of investment. That means, outside investment is for a clear next step to growing quickly your business, as noted above.
- Know your options for product direction — Startups are pushed lots of different ways, from direct to consumer sales for bigger yields, to private licensing for existing company for quicker payout, to distribution agreement with stores and more. Be well researched in which directions are possible, have a clear sense of which way you think you should go, but be aware of the other options.
- Getting on store shelves is much easier than staying there — Products can be put on trial by a store, but price point, shelf placement and customer reaction dictate if it will stay there. As I learned, it all comes down to “gross margin per linear inch,” a phrase I now love.
- Come with a clear direction in mind but be ready for others — Know how, where and why you want to grow your startup, but be willing (and eager) to get criticism and advice from investors who might offer varying directions.
- Products scale, not services — Don’t go seeking investment for your service. Go seeking investment for a product-driven business or a service made unique by a product that supports it. Perception is that that’s a far safer chance to make a return on investment.
- Know the size of your industry — Be researched enough to recite what annual sales are across your industry or a related one, be aware of units or other size scales. You need to be able to quickly prove that there is money to be made in an industry that those potential investors might not know well.
- Know your cost to produce and the retail price — Those are two very important figures to know well in advance of asking for outside investment. Compare to other similar products, pay for user testing, have existing sales and do whatever else will get you to those numbers.
- Have other investment to speak of and lessons learned – Before seeking outside investment, you should have used your own capital and that of friends and family. That’s where you start, and then have a reason why that money was successful and why you need more of it. If these tests of capital failed, getting more money from outsiders won’t look so wise.
- Know the difference between a product and a company – Having a single idea or product or service is a fine start, but without anything more, when you seek an investment, that single sale needs to scale in a bigger way than if your idea is to build a robust and diversified business.
- Licensing a product to an existing company can get costly — Let’s say you have a unique, cost effective way to better maintain the shine of motorcycle chrome, and you want to license the product to Harley Davidson. Assuming your product is good enough and connections strong enough that you meet with the company and get the deal agreed to, you just might be paying a hefty downpayment and pledging guarantee payments that will come from either sales or from limping away from the deal.
- Gaining investment is not a success, it’s a tool — This is a concept that also came up in a recent interview I had with a scaling tech company in Philadelphia and is an important one. No one’s goal should be to get investment. Investment should be a way to get to that goal.
- Know your competition — Be well versed in who is doing work similar to yours, directly or otherwise. Being unaware of relevant competition or simply ignoring someone who is can be a big mistake.
- Having a mission is a wonderful plus, but it doesn’t replace needing to be able to talk business — Offering a reason that you’re motivated to make your business succeed, through social entrepreneurship or personal experience, can inspire an investor, or at least sell her on the idea that you’re determined to succeed. None of that, though, will replace the need to be sure about the business sense of your project. Inspiration doesn’t keep missions alive, the funding does.
- Patents, trademarking and copyright matters more than almost anything you have – Unless you have sales to suggest otherwise, nothing you have is as valuable as the protection of an idea, product, brand or service to keep your sales your own.
- Know the lingo but never be dependent on it – Every industry have its phrases and specifics. Know it. Talk it. Talk shop with others in your industry enough that when you encounter an investor who knows that industry, you convey the idea that you know it. But always be able to speak in comfortable, recognizable language.
- Don’t take it personally — Women have cried, men have wined on the show. Be sure to keep your personal values and pride separate from a group of investors who could likely tear your plans apart.
- Royalty guarantees are commonly at seven percent of profit per unit sold — When investing relatively large sums for a promising product with little in existing sales, the investors often asked for a product royalty on top of equity. The argument was that the invested money would have to go largely to awareness and less to scaling, so to better get a quick rate of return, royalty on unit profit was desired. The royalty rate varied but most often landed at seven percent, described as a common rate.
- Evaluate your company appropriately — A surprising number of entrepreneurs came to the table without fully understanding that putting a price on equity in a company sets its evaluation; that is, if you’re offering 10 percent equity in your company for $10, you’re suggesting that your company is worth $100. That said, there’s some variation to evaluating companies, particularly startups and across various industries. Different methods include [A] multiplying your last 12-months of EBITDA by 2.5 or another multiple, [B] putting a dollar figure on all monthly users, [C] totaling full assets with a dollar figure and adding a calendar year projection. There are also startups like YouNoodle trying to get an algorithm to do the work or use resources from Inc. magazine or from CNN or perspective like here.
COMPETITIVE GROUP PITCH INVESTING LESSONS
- Ask for all potential offers on the table before negotiating — By simply asking if anyone else in the room would like to make an offer, you can improve the terms being offered from which to negotiate.
- Be confident, or at least look confident — The pack of investors swarm and cut down those who look nervous or uncertain.
WORDS OF WISDOM
- “Between an idea and a business is a hell of a long way.” – Kevin O’Leary, season two, episode five
- “Don’t cry about money, it never cries for you.” — Kevin O’Leary
- “Don’t ever be enamored by what something sells for. It’s more important what you get to keep in your pocket.” – Robert Herjavec
- How to evaluate your financial position — Some interesting, unique measurements of a business’s viability, like the very simple idea of dividing cash on hand by monthly expenses to get the number of months before you hit bankruptcy. That’ll keep you from focusing too much on sales, if overhead is skyrocketing.
- Real-Life Lessons From Shark Tank — Some good, broad takeaways
- Branding Lessons From The Star Of ‘Shark Tank’
- Business Lessons from ABC’s Shark Tank