The hit TV show “Shark Tank” helps start-ups get started. Would-be business owners come on the series to solicit money and help from a panel of five heavy-hitting entrepreneurs. After giving a pitch and going through a grilling, the contestants find out if they’ll get funded or not and how much equity they will have to give up.
On the air for five years and counting, “Shark Tank” is an entertaining and successful show. However, as a founder of 16 start-ups, my criteria for evaluating potential businesses differs from most of the panelists—I often find myself arguing with the screen.
Of course, it’s a TV show, which means its primary mission is to entertain, which increases ratings and profits. But entertainment has its limitations—in this case sound and practical advice. Budding entrepreneurs should understand this and not mistake it for educational watching. Though you can learn plenty from it, taking it as gospel can lead you down the wrong path to success. Don’t get me wrong—it’s an honest show with panelists of high integrity and brain power. But, just as you wouldn’t emulate professional wrestlers if you want to be an amateur one, don’t follow a show to be a business pro.
Here are some things to think about before acting on the panelists’ ideas for building a successful company.
1) The very successful panelists are far removed from their roots—the days of hunger are long behind them; their questions on scaling a company reflect their valuing a big company over a small one. One might get the impression from their advice that there’s no value in running a small company. That is plain wrong. Running a small but profitable company can offer you an excellent living and a lifestyle you want.
2) You don’t need a revolutionary idea to get started or succeed. Many companies are based on an old mundane idea that is improved, marketed to a new audience, sold at a new price, or with superior customer service, etc. Panelists lead you to believe you need to invent the iPod to get started. Not true.
3) The show is carefully scripted for maximum entertainment—sometimes at the expense of great advice. For instance, Mr. Wonderful, Kevin O’Leary, plays the heavy with his questions and offers. Many of his deals ask for a royalty on every product sold until he gets his investment back. Then the royalty drops, but he still gets his equity. That’s a ridiculous, one-sided offer—as Mark Cuban tells him occasionally. It’s not really an investment. It’s basically a high-cost loan. It also hurts the fledgling entrepreneur, as it drains her of needed cash.
Mr. Wonderful always says the equity offered is way too low based on sales to date and asks why he should pay on the basis of future profits. Interestingly, venture capitalists do the opposite. Companies like Facebook, Amazon, Groupon, and many others made no profits in the early years, yet investors gave them lots of money, gambling that the company would be a big success some day.
4) The panelists’ commitment to invest after only several questions and no study of figures does not happen in the real world—much like the people who agree to marry on “The Bachelor.” They may get all the numbers and detailed plans ahead of time or have the right to withdraw their offer after later due diligence. We don’t know.
5) Many of the panelists often say, “My offer is contingent on you answering at once!” That’s TV, not the real world.
6) The panelists often harp on the question, “Do you have a patent?” The implication is that if you don’t, you won’t be successful or you need to drop your asking offer substantially. The truth is an idea is not patentable. There are all kinds of legal protection to take, such as copyrights, trademarks, utility patents, etc. The costs differ wildly. Many of the protections are easy to get around, though, and if you have the type that isn’t, it can be very costly to defend against people trying to knock you off. So entrepreneurs need to be educated on this subject and not rush to secure a costly patent, which can drain limited cash. However, if you have the rare product or process that lends itself to a good patent, you should pursue it with the help of an intellectual property lawyer. There are also many other ways to protect your idea—that don’t involve a lawyer.
7) Most every entrepreneur is asked on the show “What are your sales?” This is a great question for proof-of-concept and sustainability of the company. However, without two other follow-up questions, it can result in inaccurate assumptions. The first of these is to ask the amount of reorder sales versus initial sales. Reorder sales prove whether the company is sustainable. Reorders indicate that customers are satisfied with their initial experience, will buy it again, most likely try your new offerings, and very importantly, recommend it to others. (This is word-of-mouth, the most effective and inexpensive form of advertising.) No reorders often indicates an unhappy customer experience and eventual demise of the company unless new satisfactory measures are adopted. Of course initial sales are important, as without them no reorders are possible. They also indicate that demand for your product exists and/or a good sales and marketing effort.
Also, when an entrepreneur answers the sales question with a number sold over the last two years, panelists say, “Wow” or “Are you kidding?” I’ve never heard them respond with a question to spell out the sales by year and month. A steady progression of sales is much more encouraging than a regression of sales for proof-of-concept. Further, as critical as sales are to the business, unless they are profitable sales, all is for naught. So in addition to the sales question, the what are your profits should be posed.
8) I like that the panelists regularly take stock of the entrepreneur’s passion for the business. Passion is the one thing that can’t be taught. It can overcome many of the setbacks the entrepreneur will face and can be the tipping point in successful selling.
9) Often the panelists will tell the presenter that he is not asking for enough money, mainly because if the idea works, they will not have the working capital to fulfill orders. Panelists are absolutely correct in this observation, but I have never heard mention of other approaches like bootstrapping ideas to solve problems in lieu of cash; the use of factors and sales reps; building supplier relationships for extended terms; faster manufacturing lead times; incentives for quicker payments from customers; partnerships that don’t include equity, outsourcing, etc. Aspiring entrepreneurs should somehow be told of all the free help available in the form of incubators, SCORE, SBDC, Mentors, Board of Advisors, and more.
10)Many entrepreneurs have partners. I have not seen any questions on the division of responsibilities of partners and the wisdom of a buy/sell agreement, which is akin to a pre-nuptial agreement.
Should Fledging Entrepreneurs Bother with ‘Shark Tank’?
It is clear that many of the panelists offers are much too harsh. At the outset of the show, it was even harsher, as ABC demanded 5% equity or 2% royalty for just appearing on the show, even if did not receive an offer. When the media learned about this and revealed it to the public, ABC rescinded the requirement.
But I don’t want to leave the impression that aspiring entrepreneurs not appear on the show because of the tough and sometimes one-sided offers of panelists. The opportunity to make a passionate pitch to millions of viewers that include customers and potential investors is invaluable. My advice to aspiring entrepreneurs is to go all out to get on the show and if selected, practice, practice, and practice your presentation after getting credible advice on how to structure it.
However, if you don’t get an offer to your satisfaction, refuse it, thank the panelists, smile, and leave. You’ve won (high-fives okay) by having the opportunity to present yourself to many more than five people and increasing your odds of success.
How ‘Shark Tank’ Can Serve Entrepreneurs Better
I believe the producers of Shark Tank can in fact teach entrepreneurs and in doing so raise their ratings. I humbly offer the following:
- The show’s producers can prep the panelists to be educators and entertainers. For instance, when the subject of distribution comes up, a panelist can throw out the fact that sales reps can solve their problem on a variable cost. Or when there’s a discussion on the need for more money to satisfy growing demand, factors (organizations that lend you money in advance based on receivables and inventory without asking for equity) can be introduced to avoid the problem of raising more money without asking for equity. There are many situations in which a valuable business tip can be introduced.
- Consider adding a sixth panelist who can add the educational element at the appropriate time.
- I’m sure the producers don’t want a panelist to spend much time on any of the above or on other tips. That can be handled by telling presenters and the audience that a detailed explanation of the tip can be seen on the “Shark Tank” site. Just as “Top Chef” judges blog after each episode on Bravo’s site, the panelists can offer detailed advice, resources, and bootstrapping tips online.
To do this, it would help if the show had an expert or panel of experts to advise them. This need not be an expensive undertaking, particularly in light of the revenue that can be generated for a high-traffic site, to say nothing about increased audiences watching the show.
So, Shark Tank Producers, Get Creative and Do Good.