Twelve seasons. 260 episodes. Mark Burnett. Mark Cuban. Kevin O’Reilly. ABC, CNBC. Shark Tank. A true American legacy.
Since my YouTube channel launched, I have had numerous requests to do an episode on Shark Tank. Thank you all for your ideas and encouragement…
We have all watched episodes or glimpses of Shark Tank. One question that I always wondered is what are Sharks looking for? What attracts them to a company? Or what impresses them about a founder? Or what kind of product traction they are looking for? Or what valuations will get their attention? Or what is their bait?
As in, How to bait a Shark?
I educate founders and investors on the art and science of valuations. My experience of valuing 2000 businesses and valuing assets over $2.6 trillion comes in very handy.
I have worked with venture capital and private equity investors and founders to be involved first-hand in deals and investments. After analyzing data for over 800 deals I have come to the following conclusions.
The below FIVE factors are forged with war stories. It tells you what investors and Shark look for before investing….
1. Founder – money is always given to an individual. Not the idea. Not the company. Not the team. Always one person. To be worthy of investment, investors look for the following traits –
- Is she ‘likable’? Likable can mean many things, but in this context, they are seeking individuals who are relatable or will be well-liked by others. Others are customers, new investors, and their colleagues or team members.
- What is her track record? Has this person been consistent in her performance? At school. Keeping fit. With family and friends. With business or prior ventures. Life is a fractal. If someone has a history of delivering, they can then deliver what they are promising now. Success is a habit.
- Is this person reliable? Some may call it integrity. Will they keep their word? No one wants to work or invest in someone who isn’t reliable or will back out on their word.
2. Market Demand – what pre-existing problem is their product or service solving? How dire is the demand? Or are they looking for a problem and have a solution? If the demand for the product/service pre-exists, the founder can swim with the tide, and the investors would love to come along for the ride. If the demand/problem does not pre-exist, or if they have to create a market, they are looking at an uphill battle. Not ideal.
3. Business Model – how will money flow into the company?
- Is the revenue recurring? Will the customers pay their invoices once or on a monthly or yearly basis? Ideally, you want to set up a model where the revenue is recurring, and scales as the customer usage or dependency grows.
- What is per unit gross margin? For a company to scale profitability in long term, the per-unit pricing/profit has to make sense. There is no point investing in marginal gross profits, as increasing margin in the long run takes time and isn’t scalable. Investors don’t want to be running a $500,000 business in perpetuity. They are in this for a big payday!
- Does the product/service have the potential to become the next Amazon or Uber? Think the flywheel effect. Will increasing marketing spend add customers, which will add more add-on services, or more options for the customers, in turn adding more convenience and more customers. Will the Shark’s network and prior experience help this company become the next Uber or Amazon?
4. Traction – where is the company now?
- Do they have revenue and customers? Investors are most reluctant to invest in a pre-revenue company. They want to invest in a company where they have ample proof of concept.
- How much capital are they asking, and how does that stack up to their current ‘run rate’? Are they asking for $500,000 and have $100,000 in revenue; or do they have $500,000 in revenue and asking for $250,000? Guess which is better? Investors are looking to make long-term bets, but also want to hedge their bets. What’s better to hedge bets than to know that their investment can be covered with current annual revenue.
5. Valuation and Exit – Sharks and venture investors are not looking to buy a business and run it in perpetuity.
- That is not their business model. Think of them as universities. They want students to join as freshmen and leave after 4 years. After making them money. They are very good at incubating and growing businesses. So when it comes to valuations, frankly valuations are not that crucial as knowing how soon they will double their money?
- How soon can they get more investors, and create a flywheel for others to join? Investing $200,000 for 10%; or $500,000 for 40% is irrelevant. The kind of money Sharks have $100,000 is the same as $500,000, is same as $2,000,000. They can invest any amount when they visualize how they will get their money out. The benchmark is how soon can they double their investment. Think of them as blackjack players in Las Vegas. They just looking for the hand that doubles their money.
If an investment gets 3 out of 5, it is debatable. If the investment has 4 out of 5, it is attractive. And if the investment is 5 on 5 that is when they all want in.
They know when they see a rocket ship that is about to launch. That way they are Sharks. This is what they do all day every day. Evaluate opportunities. And if they think of the investment as a rocket ship, they want in. At any valuation.
As Sheryl Sandberg once said, “if you’re offered a seat on a rocket ship, don’t ask what seat! Just get on.”
Is your business a rocket ship just about to take off? If so, you have nothing to worry about…