Lessons from the Shark Tank (Part 1)
I must admit I don’t watch a lot of television but I did enjoy the latest Australian season of Shark Tank where contestants (with an existing business or idea) seek funding from a panel of wealthy entrepreneurs (the sharks) in exchange for a percentage of their business. The funding is designed to help them grow their businesses or take their idea to market. While it’s another form of reality TV the show does provide business owners and budding entrepreneurs with some valuable business lessons.
The show has been running in the US for a number of years but is relatively new in Australia and the local ‘sharks’ in the tank are five incredibly successful entrepreneurs who collectively are reported to be worth close to $1 Billion. The shark panel is comprised of:
- Janine Allis (owner of Boost Juice and Salsa’s Fresh Mex Grill)
- Steve Baxter (internet pioneer and one of Australia’s most successful tech entrepreneurs)
- Andrew Banks (Talent2 Recruitment)
- John McGrath (McGrath Real Estate Agents)
- Naomi Simson (Red Balloon)
The contestants pitch their business concept to these self-made multi-millionaires who then grill them and then decide if they want to make an offer to take some equity in the business and mentor these entrepreneurs. It’s entertaining and like any television show, it’s heavily edited and I suspect several hours of footage is cut down to about 15 minutes per contestant.
It may well be a television show but it provides business owners and particularly people in the start- up phase of their business with some incredibly valuable lessons. In a series of blogs I’m going to address some of these important lessons starting with the importance of business planning.
FAILING TO PLAN IS PLANNING TO FAIL
There’s an old saying that serves as a warning for people looking to start a business, “failing to plan is planning to fail”. Sounds elementary but I cringe when the contestants get mauled by the sharks because they were under prepared and struggled to answer basic questions a potential investor is always going to ask.
I will address the obvious financial questions in a separate blog but you need to know the size of your market, have a clear picture of your ideal customer and a marketing plan. Of course, should you get the shark to invest in your business you need to tell them what you plan to do with their capital injection.
If you’re looking start a business or want to take your business to the next level you need a business plan. It provides a road map of where your business is today, where you plan to go and how you intend to get there. Within the plan, you need to demonstrate your current financial position and how it will change when you implement the various strategies. Without a business plan you can’t establish your priorities or measure your success. (If you need a business plan template just call the office.)
As accountants we can do some financial modelling and prepare some ‘what if’ scenarios. This tells you if the business is viable and gives you an understanding of your business’ best and worst case profit scenarios based on a number of assumptions. When the sharks ask you these sort of questions you need to have a clear answer:
- How many items do you need to sell in year one to break even?
- If you could order in much larger quantities and secure the product for a cheaper price what would that do to your gross profit?
- What would be the projected profit if you increased the product price by 10 percent?
- What is your marketing budget this year and what distribution channels are you using?
- Where applicable, have you got patents and trademarks in place?
The list of potential questions is long but the moral of the story is you need to plan and prepare. Every investor or shark demands that you ‘show me the money’ and in another blog we will look at the importance of knowing your numbers.
Of course, you also need to plan your pitch and it’s common for sharks to say “I’m out”’ because the product or idea is not in their field of expertise. The sharks come from diverse business backgrounds including real estate, franchises, food, IT and online sales so if you’re thinking of swimming with the sharks or pitching to an investor you need to carefully research their background and areas of expertise and interest. Understand their business model, pitch to their passion and do extra homework if you have a product that compliments one of their businesses. Planning can reap big dividends and it’s not difficult because these sharks have very public personas and you can readily access their background, business interests, net worth and hobbies online.
Your planning doesn’t stop with the pitch because you’re about to present your product to a massive audience for 15 minutes on national television. The show is repeated several times during the week and that exposure and advertising is worth at least a million dollars. If a shark bites that’s fantastic but the publicity your product receives from appearing on prime time TV could lead to being the talk of the town the next day. You need to make sure your website is ready for a flood of traffic and your online shopping cart needs to be ready to take orders. Some contestants were shattered when they failed to land a shark but the show offers unbelievable free publicity.
With this exposure and potential free advertising you would expect a long queue of people wanting to appear on Shark Tank and you’re right. I don’t know the numbers from the Australian version of the show but in the US the producers tell us that only a 0.4 percent of entrepreneurs who apply to go on the show get selected to appear. That’s right, four people out of each 1,000 applicants get to swim in the tank. As an entrepreneur you need to be persistent and tenacious so don’t let those stats worry you. Interestingly, in the US version of Shark Tank forty nine percent of entrepreneurs get a deal done with a shark.
Your preparation extends to making sure you have patents and trademarks for your products. Surprisingly, a lot of entrepreneurs on the show confess they don’t have them in place and this is often a deal breaker for the sharks. These trademarks stop others from stealing your design or product and they reduce the risk for investors.
Finally, if you’re going to jump in the tank and swim with the sharks you need to know the dangers. Every business sale (or part thereof) is subject to a process and I’m almost certain that some deals done in the shark tank eventually sink. These hardened sharks bring an exhaustive due diligence process with them and you also need to satisfy their legal departments. Ultimately this is a TV show designed to provide entertainment and when an excited contestant ‘hooks’ a shark they leave the tank with a verbal offer. There is a lot of water to go under the bridge before you have a legally binding contract.
If you’re looking to start a business or raise capital you need to do your planning. That includes the preparation of a business and marketing plan plus you also need to prepare cash flow projections. We can help you with these and if you’re contemplating an appearance on the Shark Tank program, contact us today and we’ll make sure you’ve got the perfect pitch and the right bait to attract the sharks.