Swimming in the Shark Tank

Even if you’re not a fan of reality shows, allow me to suggest you watch at least one episode of Shark Tank, which airs Fridays at 9 p.m. on ABC.

Like most reality shows, little about it is not scripted or staged. But the drama that unfolds is educational nonetheless, if you are - or wish to become - the owner of your own small business.

The Sharks are a panel of five billionaire (or at least multi-hundred millionaire) serial entrepreneurs who sit hungrily in their easy chairs, watching as three small companies per episode pitch them on the idea of investing a given amount of money in their firms in exchange for a certain percentage of equity ownership. The best known of the Sharks is Mark Cuban, owner of the Dallas Mavericks, currently worth about $2.6 billion.

The entrepreneurs file in to give their “pitch,” which includes what makes their company great, how much money they are looking for and how much equity they are willing to give up. Based on the personality of the presenter, the value proposition of the pitch, and the quality of the answers to the Sharks’ pointed questions, each Shark decides whether to invest, make a counter-offer or sit this one out.

In the most recent episode, a young couple who had created a successful line of vegan, gluten-free cookies was looking for $200,000 in exchange for 10 percent of their company, which had done about $1 million in sales in their most recent year. Most of the Sharks disliked the taste of their cookies and all except Cuban said “I’m out.”.

Cuban, who has an interest in gluten-free products because of their popularity with professional athletes, said, “I like everything you’ve said here except for one thing; the valuation.” He was ready to write the $200,000 check but he wanted a lot more than 10 percent of the company.

Almost unfairly, Cuban refused to make a counter-offer and instead said, “Come back with another number and I’ll give you an immediate yes or no.” The couple came back with an offer of 20 percent and Cuban turned it down. Afterward we found out he was looking for at least 33 percent. Based on my experience dealing with Sharks, I would have offered 40 percent to get the money and have Mark Cuban as my business partner.

Immediately after the young couple left in tears, viewers were treated to a “Where are they now?” segment with an entrepreneur who had accepted $150,000 from Cuban for a 30 percent stake in his company last year. His company has gone from $100,000 in lifetime sales to over $800,000 in just a few months. I’m sure the cookie couple would have offered Cuban 33 percent for $200,000 if only they had known that was his number.

My experience swimming with Sharks dates back to the late 1990s and very early 2000s of the Dot Com Era. I created and wrote the business plan for a company that raised over $3 million in early stage capital from a collection of angel investors and venture capitalists. I made investor presentations online and in person from coast to coast to some very tough customers. The experience was not always pleasant, but it was always instructive.

If you’re thinking about bringing in some money to grow your business - either through debt or equity - I encourage you to think again. The funny thing is that these people really expect to get their money back, quickly - with hefty returns - and they can get downright nasty if your projections don’t hold up. But, if you still think that raising money is the correct course of action, please consider the following thoughts.

Lifestyle vs. Growth Businesses
Most small businesses in the U.S. are lifestyle businesses which can provide a good six-figure income from a single location without a lot of staff or overhead. Sales and profits are generally consistent over time and there is limited upside potential. Most private investors are instead looking for businesses with rapid growth potential where there investment can earn extraordinary returns over time. And they expect the founders and management team to work their butts off to make that happen. Taking their money can quickly result in you going from working for yourself to answering to your investors 24/7. No fun at all, especially when things aren’t going well.

Know What The Sharks Are Looking For
Investors are looking for a clear, unique value proposition. They want a strong, seasoned management team and significant competitive barriers to entry. You must have a very clear, workable business plan with credible financial projections. They are going to want you to have significant skin of your own in the game and will not invest money to pay off existing bills or cover your paycheck.

Look For Smart Money
Most of the money that came into my Dot Com deal was dumb money; people with big checkbooks who really didn’t understand our business and had no other resources to bring to bear upon our success. There aren’t a lot of Mark Cuban’s floating around but each industry has a few folks with lots of money and connections looking for the next great idea. Don’t settle for less.

Be Willing To Give Up A Significant Share Of Ownership
Anything up to 49 percent is tolerable because you retain some vestige of control. Owning 51 percent of a company with Mark Cuban on the board and a fresh $200,000 deposit in the bank is a lot better than owning 100 percent of a company that doesn’t know how it’s going to fulfill next month’s orders. Take a deep breath and give up the shares.

The bottom line is that you really shouldn’t load up with other people’s money unless you have one heck of product and one heck of a plan. Even then, realize who you’re dealing with, give them what they want, cover your southern exposure and be prepared for a long, bumpy ride.