February 27, 2014

3 Reasons Why Going Before Investors Is Not Like Shark Tank

DOLLARSSENSE2I’m the first to admit that I love watching Shark Tank.   For those not familiar with it, the show has entrepreneurs come on and ‘pitch’ their companies to five big-name potential investors.  During the course of the segment, you see the investors prod and question the entrepreneur and then either reject the idea or offer investment money.  Sometimes more than one investor will want in on the deal and fighting can ensue between the ‘sharks’ themselves.  Overall, it’s the type of show that I geek out on (should he choose investor A or B?, is that a good deal or should she walk away?), but it is leading to some misconceptions of what it’s like to go before investors in the real, non-Shark Tank, world.

1. Deals With Investors Don’t Close Before The Commercial Break

It makes for good TV to have entrepreneurs come in and by the time we break for commercials a deal has been struck but the reality is that deals take much longer to close.  The truth of the matter is that this is technically true in Shark Tank too.  Even though you see what appears to be a deal handshake, the deals aren’t technically ‘inked’ for several more weeks or even months.  But watching a bunch of lawyers and M&A bankers dot i’s and cross t’s doesn’t make for very good TV, does it?

2. Investors Look To Long-Term Growth To Recoup Their Money – Not Royalties

Spend any time watching Shark Tank and you’ll soon realize that there are several investors (aka – ‘sharks’) who make royalty-based deals.  That’s where they look to capture their initial investment by taking a little off of each sale.  There are times when that royalty even extends into perpetuity.  But when dealing with angel investors or even venture capital firms, they’re not usually look to skim off your profits.  Instead, they ‘re more concerned with your business’ long-term growth potential as that’s where they know the real ROI opportunity exists.

3. A Pitch Alone Is Not Enough

In Shark Tank all we see are entrepreneurs coming in and making their impassioned short pitches to the sharks.  What you don’t see is that behind the scenes, for those deals that interest the sharks, there is a tremendous amount of due diligence.  This is where the investors and/or their team look at the entrepreneur’s business plan, reviews the company’s financials, and essentially gut checks the business idea and the management team that’s supposed to lead it forward.   Just because you don’t see it doesn’t mean it doesn’t happen though and you need to be prepared when you meet with investors to provide the same amount of detail and documentation.

Though Shark Tank does take a bit of creative license when it comes to showcasing how deals are pitched to investors, it’s an entertaining show nonetheless and lets you test your chops as to whether you, in the entrepreneurs’ shoes, would accept the deals that are being offered.

While we’re on the topic of Shark Tank, on the off chance sharks Mark Cuban or Robert Herjavec ever want to invest in an online resource for food entrepreneurs, feel free to give me a call!  😉

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