Shark Tank can be a tough show to watch if you're an entrepreneur. I often find it difficult to enjoy, since I empathize so much with the people coming on the show to pitch their businesses. I get nervous for these contestants because, like most entrepreneurs, I've been in similar situations.
Believe me, business owners know their businesses better than anybody. Most of them can speak with tremendous ease about the product or service that they offer. However, on the show, the "sharks" often take the presentation in another direction by asking questions that have little to do with the specific idea being pitched. This usually leaves the business owner looking confused, and, to the audience, the line of questioning may seem a little bit off base or irrelevant.
The truth is that the sharks on the show are poking and prodding with a very specific purpose; they are trying to find the answers to some key questions about financial metrics. With these questions, the judges are truly hitting on some good points when it comes to evaluating these enterprises, diving into metrics and KPIs that are crucial to evaluating any company's financial stability--whether the company is a private company, an initial public offering, or a publicly traded business.
Through this fairly consistent line of questioning from the sharks, each episode of Shark Tank tends to highlight the major points of running a business. These are points that every business owner should understand and pay attention to, but many owners get so busy running their companies that they might overlook their importance.
Here are the questions that the sharks are trying to answer for each prospect. They're the same questions that you should be asking yourself about your business:
- How much revenue do you have? Notice that a lot of times, the sharks ask questions about actual sales, even if the business owner is trying to focus the conversation on orders. These sharks know that there's a big difference between having revenue and almost having it.
- What is your sales growth rate? Healthy businesses are growing businesses. When revenues are up, things are often going well. Even if your sales are increasing, however, it's important to keep your eyes on the actual rate of growth. Slowing sales growth can be a sign of trouble to come.
- Are you profitable? You could have decent sales, but if you aren't making a profit on those sales, your business won't last long without having to seek additional capital. This seems obvious, but it is a really important point that gets lost on some very smart business owners, especially during times when it's easy to raise money. It's always better if a business is keeping some of the money it brings in, rather than having it all going out the door on expenses.
- What kind of valuation are you placing on the business? Often times on the show, after the business owner reveals the stake they're offering (and the amount of capital they're seeking for that stake), you'll notice the sharks writing something down. Next, you'll likely hear the sharks express their views on how much the business is worth, as compared to the valuation that the contestant is seeking. There is often a big gap between the two numbers. Sometimes this discrepancy is due to the fact that the owner values the business based on what he or she thinks it can be worth, based on revenue projections or prospects for orders. The sharks know that they must have an accurate idea of the value of the business before they can agree to risk their own money, and that value is usually based on the cold hard cash the business is already generating.
Each of these questions is very important to answer before a shark or a business owner can really figure out whether a business is a solid one. That's why, if you watch enough of these episodes, you'll see that the questions nearly always generate answers related to something about revenue, revenue growth, profitability, and valuation. These are questions you should be asking of your own business as well.