What is Shark Tank and why should I even care?Well, you don’t really have to care. It’s a TV show featuring 5 or 6 individuals, who have earned oodles of money by building their own mega-million dollar businesses and also helping others do the same. They listen to the heartfelt pitches, ask lots of good business questions, and then decide whether to invest. And I happen to love it.Folks come looking for help with their business dreams. And often enough they get it. I especially love that part. But also often enough, they go home empty-handed with a hard-won lesson about business reality. And the smart ones can take that to the bank, too.While some of the “sharks” can be harsh at times, I think what any budding entrepreneur can learn is invaluable. It also offers good insight for anyone about business and how business owners need to think to run a successful business. Kind of like a free MBA class. Plus it has fascinating ideas and inspirational stories of hope and the potential rewards of throwing ourselves heart and soul (and head) into something we love.
What’s in it for the investor?An investor has money and wants to make more money. And unless the investor is buying in just for the fun of it whether it makes money or not (like some Broadway or film investors), to compensate for the risk, they want a return on their investment (ROI) that is HIGHER than they could make with a CD, fund, bond, or other traditional type safer investment.So they are looking at the potential for your company to make money in the near future, and hopefully big money in the more distant future. And for most, they also want to be fairly sure that there will be enough revenue flowing in steadily and low enough expenses that are managed well so that they can actually receive a regular payout, their share of the net earnings.And if you are not paying yourself yet, they will also factor that in since whatever you eventually pay yourself will become an expense and therefore cut into their realizable share of the profit pie. It can also affect the net worth (ownership asset value) of the entire business, something that really matters if you eventually sell the company or issue stock.
So what’s this important lesson about business valuation?It’s pretty simple. Even if you sell half a million dollars worth of your new invention, unless you are making actual positive NET income (gross revenue minus ALL expenses, including debt repayment), your business may not be worth anything to a would-be investor. They look at some multiple of your NET income (varies by industry), and any multiple of zero is still zero.Of course you can try to sell them on potential, and for many of our biggest tech firms potential is all they had for many years. But for most investors potential is as valuable as magic dust. You need to make sure your expenses (cost of goods sold, salaries, rent, insurance, marketing, distribution, operations, equipment, debt repayment, etc.) are less than your revenue.And if they aren’t, you need to do something to produce a positive profit margin (that difference between income and outgo). You also need to show sound management and all-points planning, with an upward trend if at all possible – or at least a grounded-in-reality map of how you expect to get there. Then you have something solid to show an interested investor.And THAT’s what you can learn from Shark Tank. And maybe even apply to building your own business one day, also factoring in these concepts to your business plan should you ever be ready to look for your own investors!BONUS TIP: Know how to calculate your cost of acquiring each customer (new & returning), so the investor has faith in your ability to understand and control a key indicator of effective marketing. If you can wow them with a low cost vs a high return on investment here, it’s a big plus.
More articles you might enjoy