3 Dealbreakers that ABC’s "Shark Tank" Can Teach Entrepreneurs

Advice for Small Businesses, Common Business Mistakes, Entrepreneurship0 comments

By Kim Palacios

One show I never miss recording on my DVR is ABC’s “Shark Tank,” which pairs private investors with entrepreneurs.  The format is straightforward: enterprising individuals or business owners who lack funds to self-finance pitch their ideas to the “Sharks,” who make competing offers if they think the business is promising.  Of course, every entrepreneur believes in the market potential of his business—the first test he must pass is agreement around whether his product or service is “the next big thing”.  Yet, even the most promising business idea may not be enough to compel the Sharks to invest.  If you pay close attention, these three factors consistently show as deal breakers for the Sharks, as they do for most business investors:

#1: Implausible Business Valuation. I’ve seen it dozens of times on “Shark Tank:” at first, the Sharks like what they see but they want to hear about the financials.  “What investment level are you asking for?” they will eventually ask, at which point John Business Owner responds with confidence something like “I’m asking for $500k for a 5% stake in the company.”  Hang on—that means the owner values the business at $10M!   In a (very) small number of cases, John Business Owner’s company or idea may actually be worth this amount; but in most cases, entrepreneurs ask for a high number of investment dollars and name a high valuation despite an utter lack of revenue, profitability, or other promising results.

Entrepreneurs get better responses from investors by avoiding broad-swathing assumptions about the size of their target market and their ability to capture a percentage of that market.  They avoid over-optimism by making conservative assumptions, pricing in risk and demonstrating that they understand these factors.  Certainly, financiers expect a certain degree of optimism from entrepreneurs, but it is a huge red flag when a company valuation is widely off base.  The signal it sends to investors is that the business owner does not understand financial basics, skipped critical research and market sizing steps, and may not have enough business acumen to run a profitable company.

#2: Lack of Basic Financial or Business Acumen. You don’t need an MBA, or even previous experience, to successfully run a business.  You do, however, need an understanding of the basic elements of business and a grasp for how they work.  Often times I have seen the Sharks ask this next simple question: “Is your business profitable?”  Many times business owners who answer with a “yes” subsequently reveal evidence of the opposite:  usually, that they have not repaid initial investors, and that they cannot afford to pay themselves at full salary.

Here’s the misstep: when an entrepreneur gives an inaccurate answer to a question that deals with basic business concepts, the investor is forced to wonder how reliable other information about the business could be.  An entrepreneur with a poor grasp of business concepts creates risk for the investor by putting her in the undesired position of having to provide (or mandate) management support to ensure that the business is run well.  If the investor does not want a role in managing the business, she will be unlikely to take on this risk.  It pays for entrepreneurs to gain a thorough and concrete understanding of their business model, revenue, cost, profit, valuation, exit, and ROI dynamics included.

#3: Difficult Personalities. Anyone who has worked with entrepreneurs knows this: they can be VERY passionate about their business ideas.  But it’s a big red flag to any potential business partner, whether they are playing a financing role or not, to be confronted with an entrepreneur who seems difficult or inflexible.  Though an  entrepreneur may know his product better than anybody else, I have seen countless entrepreneurs fail to separate their products from assumptions they make about their products.  For example, an entrepreneur may be able to speak with 100% authority about the technical capabilities of his product.  However, any opinion he has on the market potential of his product is an assumption.  Yet, many entrepreneurs end up arguing with business partners who challenge their assumptions.

Smart investors avoid entrepreneurs who seem deaf to hard data and sage business advice.  These investors know that no product or service can reach its potential without leaders who are willing to make principled business decisions.  No investor wants to be at war with an entrepreneur who thinks he’s got it all figured out, and who is unwilling to accept guidance from professionals who can be valuable partners in his success.

The Price of Intuitive Decision Making

Common Business Mistakes, Executive Coaching0 comments

By Kim Palacios

Some of the toughest executives to advise are those who describe themselves as intuitive decision makers, executives who attribute their career success to good instincts.  While instincts should play some role in decision making, so also should data.  In the absence of relevant metrics, it is nearly impossible to replicate the formula for great results and isolate (and avoid) decisions that lead to failure.

Intuitive decision makers rarely have trouble making plans—the trouble comes with sticking to them.  The train goes off the rails when, early on, the decision maker changes course in such a way that impedes the measurability of the original tactic.  The decision maker may defend this plan revision on the grounds that the second tactic also moves the enterprise toward the goal.  Yet, even if the second tactic ultimately achieves the goal, it still robs the enterprise of something important:  defensible lessons learned.

Suppose that a marketing executive at an in-store DVD kiosk company has $30k to spend on growing its user base in a given quarter and plans to spend the entire budget on radio advertising.  Now, suppose that one month into the quarter, the executive decides to scale down the radio campaign and invest half of the remaining budget on radio and the other half on television.  By the end of the quarter, the executive will have spent $20k on a three-month radio campaign and $10k on a 2-month television campaign.  Suppose that the first month sees 1,000 new users, the second month sees 1,500 new users, and the third month sees 750 new users.

Based on these results, how much should the executive spend in the subsequent quarter on advertising, and on what medium?  The answer isn’t clear.  By diverting from the plan before an isolated action could be correlated to specific results, the executive has no way of knowing what will be most effective in the future.  The results are also ambiguous enough to make it unclear as to whether the intuition to shift dollars to television was correct.

This has real business implications.  Companies are most successful when they understand their business drivers and can pull well-understood levers to cultivate specific results.  By making it more difficult to predict business performance as related to management decisions, businesses place more dollars at risk.  It also does not bode well for investors and Boards of Directors, particularly when business results are poor.  An executive is more likely to keep his job and be viewed as effective if he can prove he made justifiable, data-supported decisions, even if those decisions led to poor results.

So, what rules should intuitive decision makers follow?  The goal isn’t to ignore business instincts.  Again, these are important and do have an important role to play in business success if they are called-upon at the right time.  Business strategies and tactics should be tested as follows:

  1. Develop a goal-oriented plan
  2. Think through a sensible way to measure results
  3. Work the plan long enough to gather data-supported facts that justify future decisions
  4. Abandon what you can prove is not working
  5. Do more of what you can prove is working
  6. Let your instincts come into play only when it is truly the right time to try new things that might also help you reach your business goals