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During each episode of ABC’s “Shark Tank,” you see budding and experienced entrepreneurs jump into the shark-infested waters looking for a deal. While many are quickly attacked and devoured, others survive.
So, let’s explore why some get a deal and others don’t.
During each episode the inexperienced entrepreneur will tend to make the same critical mistake: They overvalue their business. They also see market potential that cannot be supported by their current and past financials. The multiples they use are not based on reality, but what they believe the company will be worth.
A number of the sharks are quick to point out the flaws in the valuation and challenge the company’s value. In many cases, the entrepreneur is unable to defend the valuation, and the sharks attack. The result is “I am out,” and there is no deal.
Let’s look at a positive example from a past episode. Two young entrepreneurs Joe Demin and Rachel Connors developed Yellow Leaf Hammock in 2012, a business that directly hired weavers from small villages in Thailand. Their colorful cotton rope hammocks provide employment and income for these villagers and their families. The business has a dual mission, fostering sustainable economic development for marginalized individuals and empowering women to become breadwinners.
Their presentation in May 2020 attracted interest and investment from Daniel Lubetzky, the executive chairman at Kind snacks. He invested $1 million for 25% of their business. This is the largest investment ever made on the show.
Yellow Leaf Hammocks are now part of the furnishings on Carnival Cruise ships.
Many of the successful entrepreneurs who are looking for a deal have demonstrated growth in sales over a number of years. Others base their projected sales growth on limited market research and incomplete sales cycles. Many of these businesses are based on “niche” products or services and don’t have the wide appeal to be successful.
The reality is that a number of these entrepreneurs are myopic and don’t see the big picture. They underestimate the financial challenges they will face as they try to fund the scaling of their business and their increase in market share. Many have personal debt, SBA loans and in some cases established relationships with shareholders. As they share these obligations with the sharks, the pie gets smaller and the sharks are less interested. All of these elements are important factors in establishing the value of their business.
The entrepreneurs who get a deal come with a clear vision of what they want to achieve and what they are willing to give up in order to bring a shark onboard. In some cases, they have their eyes on a particular shark, who they feel will enhance their business and bring the necessary skills and funding required. Many times a particular shark will discuss how they can take their business to the next level. In some instances, more than one shark will team up to make a deal, bringing multiple skillsets to their business.
How do we translate what we see on the screen each week into our businesses? We must be mindful of the lessons from the members of “Shark Tank” when we enter the financial marketplace looking for funding to expand our businesses.
Prepare a multi-year business plan demonstrating your sales history and your strategies for future growth.
Be able to articulate who your target customer is and how you plan to reach them.
Discuss the multiple channels you will use to deliver your product. For example, web-based sales, retail distribution channels, wholesale distribution, and in some cases franchising.
If you have invested in a patent, copyright or other intellectual property protection, make sure the potential investor knows that fact. This is seen as a major asset to your business and can prevent competition from entering the market.
Have detailed up-to-date financials that show cashflows, profitability and inventory valuations, including aging. The sharks have turned down opportunities when there was too much invested in raw materials and finished goods inventories. In order to raise operating funds, they needed to liquidate all or a portion of their inventory.
More than once the sharks asked the customer acquisition cost. This is a cost you should know.
There is no doubt you will need to field tough questions from potential investors and funders, but are you ready to face the sharks? n