If you've ever seen an episode of the award-winning TV show, Shark Tank, then you know how intense things can get seconds before a 'Shark' decides to invest in the startup pitching them on set. While it may seem like a simple back-and-forth once a deal is struck on the show between investor and startup, it is rarely that simple.
The Sharks do not know in advance about any of the entrepreneurs or the businesses that are about to pitch them. This leaves the Sharks with only the limited information they're presented at the time of the pitch. Therefore, just as in any investment deal, due diligence must be conducted afterward to confirm the facts and figures presented during the pitch before an investment is finalized and money changes hands.
I recently interviewed the entire cast of Shark Tank about the important criteria they seek during the due diligence process. Because some deals do not get finalized in due diligence, TV viewers may not know that this is a normal business practice--some deals just don't close. However, Shark Tank actually does have a higher closing ratio than most traditional VC pitches.
The Sharks tell us why...
Your favorite investor's favorite investor, Mark Cuban, rode the 'tech bubble' wave in the 2000s and sold his streaming website, Broadcast.com, to Yahoo for nearly $6 billion.
Before Cuban makes an investment in a startup present on Shark Tank, he takes the time to firmly understand and confirm the presented opportunity. "I want to know that what they pitched is factual, that trends are consistent with what was originally expressed on the show, and that there are no material changes." But that's just common practice. What gets Cuban excited are the entrepreneurs who very clearly embody the positive traits and habits that will allow them to execute on their plan and grow their idea into a substantial company.
From humble beginnings to selling his basement technology company, BRAK Systems, to AT&T in 2000 for $30.2 million, Robert Herjavec has gone on to build the Herjavec Group--an extremely successful cybersecurity services company.
For Herjavec, doing his due diligence before investing comes down to understanding the business operations. "We poke holes, look for gaps in processes, and really try to understand what is driving the decisions that are being made," he said. Prior to investing, Herjavec takes a significant amount of time understanding exactly where his money is going to go within the company, and how success will ultimately be measured.
Herjavec continues to guage an entrepreneur's passion and drive during the due diligence process, looking to see that the fire he saw in them in their pitch continues through the due diligence process.
With $1,000 loan and a vision, Barbara Corcoran built The Corcoran Group, a real estate company, from the ground up. She later sold her empire for a stunning $70 million.
Deals can fall apart for a lot of reasons - financial, organizational, and legal, to list a few. A few examples ... on set, the entrepreneur always talks about their sales, which we take on face value, but in the due diligence process we find out that those sales numbers are really unconfirmed POs that haven't come to fruition. That's a deal killer. Sometimes legal issues get in the way - the patent the entrepreneur claims to own is actually owned by his ex-brother in law. That's a problem. Sometimes the paperwork alone speaks volumes as to the kind of manager the entrepreneur will soon prove to be. There are no books kept for the business and the factual information is too difficult to get and impossible to discern. That makes it hard to close a deal," Corcoran said.
A true basement to billboard story, Daymond John is best known for his years of work building the iconic clothing brand, FUBU, from the ground up.
On the show, John does more than just spot the next "hit" idea. His due diligence practices comes from years spent in one of those most competitive business markets--clothing. He looks closely at things like distribution plans, customer acquisition, and most importantly how the company plans to scale--a "growing pains" problem he faced personally with FUBU.
But John also gives a considerable amount of thought to the vision and morals behind each company he invests in. "If you do not morally agree in the direction the company should go, then you will most likely bump heads down the road," said John. So he looks for partners who share those fundamental positive outlooks and perspectives.
The Queen of QVC, Lori Greiner has launched over 250 products and earned herself more than $350 million sales.
Greiner is a veteran when it comes to understanding how to bring a certain type of product to market. When she does her due diligence, she looks closely at the pricing structure. "I need to know what your costs are, what you are able to manufacture it for, what you can wholesale at, and what you are able to sell to the end consumer for on a retail basis," she said. She is also careful to make note of any and all liabilities, investor notes or other types of debt that are secured by the company and its assets.
But behind her questioning process is nothing but positive intentions. After all, Greiner is known for saying on the show, "I make millionaires." She looks for partners she truly believes in, and whom she feels she can help become extremely successful.
Kevin O'Leary, also known as 'Mr. Wonderful,' became a 'Shark' back in 1999, when he sold his company, The Learning Company (previously Softkey) to Mattel for over $3 billion.
On the show, O'Leary is best known for giving startup founders "tough love," looking hard at the numbers of each and every opportunity. "When I conduct due diligence, my primary concern is always the numbers. Do they add up? Is the cash flow what it looks like? Or are there hidden money vacuums in the business the entrepreneur didn't talk about in the Tank?"
But should an entrepreneur earn O'Leary's support, he is 100% on-board. "If an entrepreneur commits themselves fully to the company, I commit fully to making the time to work with them in the necessary capacities," he said.
In many ways, each of these 'Sharks' share similar best practices when it comes to effectively investing their capital. What makes each Shark unique, however, is their own personal stories and hard lessons learned along the way. They have all said on various occasions that the true joy of being a Shark on Shark Tank isn't simply the investment opportunities. It's to provide knowledge and guidance to new, aspiring entrepreneurs who are just getting started.