When my Aunt Theodora, who owns a multi-million dollar lighting design business, asked me if I watched ABC’s Shark Tank, I figured it was time to get into the fray and watch it, too.
At first I thought the show was a farce to attract eyeballs and sponsors. After watching, it’s clear the sharks are serious about these startups and they ask superb questions. It’s like getting a mini-MBA in 60 minutes. Sometimes, the entrepreneurs have great answers, sometimes they blow a once in a lifetime opportunity. I’ll help you understand what the ABC Sharks care about so you can nab a big fish and not become shark bait in real life.
Here we go…
There are three questions that always come up on ABC’s Shark Tank:
Will I get paid back with a premium for the risk I’m taking?
When will that happen?
Is this business owner the right person to drive this business to profits and predictable cash flow?
If you pay attention, all other questions asked on the show hinge on the three you see above. The investors on ABC Shark Tank test the owners to see if they understand the marketplace, if they can prove how strong demand is for their product, and if the small business owner understands the concept of gross margin, which drives profitability. That’s why knowing your numbers is the minimum cost of entry if you’re an entrepreneur.
The first question recognizes that the odds are pretty low that an investor in an early stage business will ever see their money again, forget about getting a return. Just because someone has a great business idea is no guarantee they’ll make money. When I was panel moderating for the NYT/ AMEX Small Business Conference in NYC, David S. Rose, a big time investor here in NYC said he expects only one in two hundred investments to deliver 20X his original investment in two years. Those are his screens for a successful start-up investment. One in 200 is a .5% success rate even for the smart guys. If the sharks are tough, this is why.
Question two is about when payback happens. Time and not just investment returns become an important factor. If an investor invests in this company today, that precludes investments in other potentially stronger business ideas in the near term. So the returns have to be there, but there’s usually a time fuse on it. Revenue growth rates give the investors on ABC Shark Tank a sense of how quickly the business is generating gross profits and cash flow to run the business and pay back investors. If the owner has high profile retailers already on board, that’s golden. It lowers the investment risk for any shark or bank by building unit sales volume and credibility quickly. Remember, a billionaire has choices. He or she can invest in any project and the constraint for them is not money; it’s time. That means they’re looking for businesses with exponential growth.
Question three is about the owner’s attitude and aptitude. Even if the idea is a good one, the owner pitching the sharks might be the wrong person to take the idea to fruition. Here is what I can surmise about the qualities the sharks are looking for based on their questions and comments:
Does this person know their numbers and do they have discipline to follow through?
Are they uniquely qualified to develop this product or service and to run this company?
Did they do their homework on their competition?
Do they already have good relationships with retailers and customers?
Are they teachable or tone deaf?
Word to the wise, you can’t just be a creative type or tech nerd, you need to know what drives the financial viability of the organization and how to measure it. Every shark knows that net profits are driven by revenues and gross profits. If those are in place and growing fast, the business has a fighting chance of survival and returning investor capital with a handsome return. Remember, those must come within that magic two-year window. If you as a business owner have no idea what I just said, you better get smart fast. Learn how to read your financial dashboard which includes your Net Income Statement, Cash Flow Statement and Balance Sheet. If you ever ask for money without knowing how to read these, you will not get funding. Now you know.