“Shark Tank” is one of my favourite TV Shows. Not only because it is related to the early-stage investment field that is the main driver of major economies but also because it is fun to watch. The way that all interesting (or not) ideas are presented and pitched to high-net worth investors stimulates your mind and makes you think “how did that folk come up with this?”.
Some of the inventions do receive funding, some do not. Before an investor says “I am out” or “I will make you an offer”, he/she explains the reasoning behind the final decision and that is where all the learning process is centered. Watching numerous pitches I noted some key challenges entrepreneurs face as well as the reasons their ideas are rejected, sometimes harshly.
- Timing: Coming up with a novel invention that is marketable and has significant potential to generate profits and return on investment is great. However, entering the Shark Tank as a pre-revenue firm will not help you survive in the tank. Investors want some kind of track record that will attract their interest and eventually persuade them to invest in the target firm. Going too early will not necessarilly kill you but going too late certainly will; Asking for funding for an idea that started 7 years ago, has generated very few sales and has burned all the cash invested by the entrepreneur (or other investors) is certainly not appealing to the sharks.
- Getting Distribution: A potentially money making business will attract the interest of investors but what usually troubles entrepreneurs is when they are asked “how do you get distribution?” Many entrepreneurs make the mistake to assume that they can do everything on their own. That is a no-go for the sharks especially when founders are not open-minded to suggestions and insist on the idea of going alone.
- Asking for too much: I have seen so many ideas that have a great potential but are killed because entrepreneurs ask for so much cash for so little equity that makes investors not even think about making a counter-offer. These sky-high valuations proposed by entrepreneurs would make the investment prohibitive for any investor around the world.
- Character: Commitment and ability are the main personal characteristics that the sharks want to see in an entrepreneur. Having a full-time job while trying to go forward with an idea shows no commitment and of course, no willingness to take risks. In such case the idea will be, most of the times, considered a hobby rather than an actual business. Demonstrating the ability to sell and to take initiatives are skills that are always needed to have. Being hesitant to pick up the phone to call potential customers will make the sharks thing that they have to do all the work and that is not possible as they have their own business to run.
- I.P. protection: being copied by a large retailer that can manufacture the exact same item in a matter of days will not get you any market share, ever. Having a patented or at least patent pending invention is a pre-requisite before even talking about numbers.
- Margins / Pricing: If the product is too expensive or has very low gross profit margins will be considered as a threat to receiving a return on investment. Provided that the sharks decide to invest in the business, this will be a drawback. Entrepreneurs may overcome this challenge if they use investors’ cash to place orders of their products from manufacturers in large batches so that the cost of goods sold can go down.
- Ethics: Presenting a controversial idea might make investors re-consider to invest in the target business. But it is not only about ethics. It is also about a potential distortion of investors’ image. And that is something the sharks want to avoid.
- Deal Structure: Being open to accept various deal structures is crucial. It is unpleasant to see a businesses not receiving funding because a specific deal structure is not preferred by entrepreneurs, even though the shark’s overall offer is very close to entrepreneurs’ initial offer.
- Honesty: Showing honesty and integrity is vital. Presenting a product that is a part of the business and hiding the real “juice” will make sharks hesitant to invest in that person and think that a mutually beneficial relationship cannot be established.
- Marketability: As mentioned previously an idea or product must be marketable and appealing to customers. If not so, it will be a low revenue business that will not succeed in the long-term. Investors certainly want to avoid that.
In summary, entrepreneurs should avoid making these mistakes in order to maximise their chances of receiving funding. An innovative idea must be complemented by positive investment prospects as well as good personality traits.