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May 06

More Lessons from Shark Tank

Posted by: Steve Marr

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Watching entrepreneurs seek investment funds on ABC’s Shark Tank provides interesting lessons about several business issues. Consider the following.

·      Valuation

If an entrepreneur offers 10% equity stake for $50,000 investment, the sharks know that the entrepreneur values the business at $500,000. Sharks will ask for sales and profit numbers. When the numbers don’t support the valuation, a shark will probably ask “Where did you get your valuation?” Most often the response is that the valuation is based on perceived future value, not today’s value.

I often encounter a business person who wants to raise money.  They want to sell equity based on future profits, not today’s profits. King Solomon wrote “Do not boast about tomorrow, for you do not know what a day may bring.” (Proverbs 27:1, NIV) A business may receive a higher valuation, like from Google, based on the market’s perception they will grow fast. Investors are willing to pay for tomorrow’s value today because they think future value will be very high. At times this strategy works out; other times it does not.

The sharks consistently refuse to pay for future value, but offer what they believe is a reasonable offer for today’s valuation. Often the entrepreneur refuses to face reality, and a possible deal escapes.

·      Negotiating.

Another mistake entrepreneurs make is over negotiating. A shark may take themselves out of the offer frenzy, but the entrepreneur tries to change their mind. This happens even when another shark has an offer on the table. The business owner can get too focused on a “no” that they fail to close the offer on the table. This generally irritates a shark and for good reason. The entrepreneur hoping to get an offer ignores the offer they have. I have seen sharks pull their offers back for this reason. Scripture relates, “Elijah went before the people and said, ‘How long will you waver between two opinions? If the LORD is God, follow him; but if Baal is God, follow him.’" But the people said nothing.” (1 Kings 18:21, NIV) An offer requires a decision. You need to decide with a yes or no.

·      Due Diligence

Most people do not know that 50% of the agreed deals never get done after the show. That’s because the sharks have the right to do due diligence before making a final commitment. In some instances, an entrepreneur may take 2 hours for the presentation. They make statements that need to be validated. King Solomon wrote, “The simple believe anything, but the prudent give thought to their steps.” (Proverbs 14:14, NIV) The sharks want to be certain that every verbal representation is correct before they finalize a deal and write a check.

Use these insights from programs like Shark Tank to help your business grow.

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