Dealing with sharks
on October 07, 2009
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I know many of you read this blog for music only, but sometimes, I can't help but write about other things. One of my passions is entrepreneurship and that is what I want to write about today.
I have been enjoying Shark Tank, the currently popular "reality" TV show about entrepreneurs pitching their ideas to venture capitalists in the hope of getting funding to grow their companies. There is not much to learn from it because it is not in any way reality (I will explain that in a minute), but it is very entertaining.
I especially love hearing the valuations these entrepreneurs are putting on their companies (what they think their company is worth). I have to laugh because those valuations are almost always way too high. Every entrepreneur thinks their company is worth more than it actually is, and I am afraid that I fit into that category too.
As a person who has bought and sold companies and been through the process of raising money, I can tell you that Shark Tank is a dangerous place to be even if the show is not really realistic. Here are some things that these sharks do not want you to know.
1) A deal is not really a deal. The show wants deals to appear to be made, and they make it easy for the sharks to make offers because they do not really have to go through with them. The credits at the end of the show reveal that the deals close only when due diligence (research) has been done.
Because of this, sharks can make offers on the show that make no sense. No intelligent business person will invest money (even as little as $50K after talking to someone for five minutes). They will do research--verify numbers, check competitors, study patents, etc. This is where most deals fall apart. My guess is that most deals on Shark Tank never actually take place.
2) A shark does not want to work. Quite often, the sharks say that they want a deal and are going to provide their experience as well as their money. Not likely...
These guys are worth hundreds of millions. They do big deals and that is where their time is going to be spent. They are not going to spend significant time on a business where they only have a $50K investment.
Don't expect to hear from them after they give you the money. You might get an intern or someone else to give you a bit of help at least until things start going wrong. Then, you will likely just be abandoned.
What a shark actually wants is a quick flip. They want to make money without effort. That normally means doing only enough to get the company into a position to sell. In some cases, it could mean licensing an idea.
That is all fine and good if you have the same goals. But if you want the challenge of growing a large company, there will be conflict.
3) Giving up 51% of a company is an incredibly bad idea. If you give up 51% or more of a company, you have become an employee. You have no ability to control anything. If the shark wants to sell the company for a fraction of its value or even just shut it down, you have no recourse. You can literally lose everything you worked for along with every dime you invested.
I know that entrepreneurs regularly give up 90% or more of their company and sometimes walk away with hundreds of millions. But really, if you can possibly avoid going down that road, you will be happier for it.
4) The sharks almost can't lose. You may have noticed that Shark Tank has been showing a few success stories of entrepreneurs from earlier shows. They now have their products on QVC, can't keep up with orders, have 1000% growth and so on. But the sharks are likely not the reason for the growth--the free exposure on TV drove it.
Imagine making a deal with a shark where he gets half of your company for $50K. The next week, because of your publicity, your business jumps by a factor of 10. Still want to do the deal with the shark? Of course not; the shark has just acquired half your business for almost nothing because the valuation was based on the numbers before the show.
This built-in publicity may help you but it helps the sharks more. I would almost recommend that if you go on Shark Tank, determine not to take any deal unless it is at least what you asked for. Then do something memorable so people will remember you and cash in on the publicity.
That is it for "all" of you who are going to be on Shark Tank...