Category Archives: Advice for Small Businesses

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.