Wednesday, April 5, 2023

Next Up in the Tank – Lessons from Watching the “Sharks”

Acknowledging up front that “Shark Tank” is not exactly breaking news (the show premiered in 2009 and one of the other authors of entreVIEW wrote a post about it back in 2014), I still like to point out how helpful it can be to entrepreneurs, even those who don’t make it into the “Tank”. In initial consultations with start-ups and early-stage companies looking to raise capital, I often bring up Shark Tank and the lessons that can be learned from watching it (I generally recommend casual viewing – my husband can watch for hours, which drives me crazy).

Seriously – learn from watching often-hapless people pitch often-ridiculous products and concepts to a bunch of millionaire/billionaires, frequently subject to brutal ridicule? Actually, entrepreneurs can incorporate many lessons from the show when making their own pitches to potential real-life investors.

One of the first questions an entrepreneur needs to figure out how to answer is “how much is the company worth?” A frequent question I get from clients looking to raise capital is how to determine the overall valuation of the company, which in turn goes directly into the calculation of how much money the entrepreneur is looking to raise, and what percentage of the company that amount will represent. The short and simple answer is “whatever you say it is” (although I usually use the slightly more legal-sounding “it’s somewhat arbitrary”), but you will need to be ready to support “whatever you say it is” (and you’ll need to find investors who are willing to give you money at the value…).

Regular viewers of Shark Tank have no doubt seen an entrepreneur try to pitch an investment based on a high overall valuation, only to have the Sharks elicit, often ruthlessly, an acknowledgement that the company has no revenues, no employees, no patents, only a prototype or undeveloped product, and no market for the company’s product or service. Granted that it’s hard to value a company that doesn’t have a lot of historical data on which to base its valuation, but there are factors to consider in coming up with a reasonable approximation – what is the product or service, what demand exists (how big is the market), and what is the competition? What is the product’s development stage and what risks remain to finalize development? What assets does the company own? What are your costs and expenses, and what is your expected revenue ramp and profit margin? How solid is the management team, and what strategic relationships have they established? Perhaps most importantly, what is the business plan for monetizing and growing the concepts on which the company’s based? There are more mathematical valuation formulas that can be helpful, but in the very early stages, valuation is way more an art than a science.

Related questions that can stymie early-stage entrepreneurs – how much money do you need to implement your business plan, and how much of the company are you willing to sell for this money? (This obviously ties to the overall value of the enterprise, but it’s clear that many Shark Tank hopefuls jump to this step before thinking through the valuation process. If you decide you need $2 million for 10% of the company, boom – you’re valuing your company at $20 million. You’d better be prepared to back that up or the Sharks – and any other savvy investor - will eat you alive.) As far as answering these questions, think about what you need the investors’ money for – how do you intend to use the proceeds? And how much control are you willing to give up in exchange for this money?

Finally, entrepreneurial fundraising is largely a sales job – you need to sell the ideas, the concepts, the structure, AND your team as the right people to execute on the whole plan and provide a return to your investors (this is why they’re investing). I’ve found that this is often where entrepreneurs truly excel, but I always caution not to get too carried away. At the risk of sounding like a lawyer, in ANY AND EVERY sale of securities, you need to comply with state and federal securities laws, including exemption filing and a prohibition against making any misstatement of a material fact, or to omit a fact that makes a statement misleading.

One final lesson from Shark Tank – many of the joyful handshake deals you see on the show actually fall apart during the due diligence process because the information presented during the pitch was inaccurate or incomplete. You’re selling, but you must also be factual – you may lose your deal or worse, face a claim from a disgruntled investor or a securities regulator.

Taking the time to work through these questions and being prepared with thoughtful answers can be the key to successful fundraising at any level, but especially in the early stages. So to paraphrase Shark Tank – Entrepreneurs, who’s with me?

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