Shark Tank

After a long, sun filled day in Vermont, I stumbled upon Mark Burnett’s new TV show, Shark Tank.  The entrepreneur-asking-for-investment show is the U.S. version of Sony’s Dragon’s Den international series.  Whether the show is your cup of tea or not, it was incredibly powerful for me to see the entrepreneurs ask the “Sharks” for money.  Yes, the entrepreneurs are self-selected to make good television, but still.

 All of the entrepreneurs told a good story.  All of them overvalued their businesses to start and almost all of them caved to a dramatically lower valuation when the Sharks put them to the test.  Those that took the money gave up a huge amount of equity (i.e., at least half their businesses).  Those that didn’t were either indignant or kicking themselves for not taking the money.  None of the entrepreneurs asked the Sharks what they were going to provide other than money when the Sharks asked for HALF of their businesses. 

For creative businesses, knowing what your business is worth and what you are going to get in exchange for giving up a  (huge) piece of your business is incredibly important.

My step-father taught me (and I learned the VERY hard way), don’t give up equity unless you absolutely have to because once it is gone, it is gone.  And if you are going to give up equity, make sure you get something more than money in the trade — operational support, marketing and PR, and strategic advice.  It is why you need the money in the first place — either to save or grow the business.  Money for money’s sake will likely not help in the long run if you don’t know what to do with it.

Then there is the thought that none of the entrepreneurs truly valued their businesses well.  Most were actually making money, but did not put a realistic multiple on the profits generated.  One entrepreneur, a pie maker from New Jersey, asked for $460,000 for 10% of his company (he wound up giving away half of his business for the same amount).  He generated $150,000 in profits per year, but thought his business was worth $4.6 million.  Another pair of entrepreneurs asked for $250,000 for 25% of a business that didn’t exist yet, but offered no part of a business generating $300,000 in profits per year.  One Shark called them pigs and, no, they didn’t take the money.  If you do not understand the true value of your business, you are at a serious disadvantage to those that value businesses for a living.  The same Shark who called partner entrepreneurs pigs also said that money has no feelings.  A little harsh, but he is right.  Unless there is a connection beyond financial, no one will invest in you or your business unless you have a realistic sense of what your business is and where it is going.

What I do think would be an incredible exercise would be to imagine yourself in front of the Sharks — what would you ask for and why?  If it takes you more than thirty seconds to answer the question, you have some work to do.