You've all seen the "Sharks" from ABC's award-winning television show Shark Tank. The setup goes like this: The entrepreneur seeks $100,000 in exchange for 5 percent of the business. The Sharks offer $100,000, just like the entrepreneur wanted, but for 25 percent of the business.
Deals made on the show land all over the place. Different amounts of money for different amounts of equity. And this happens for a variety of reasons.
During the negotiation process, the Sharks often say things like, "5 percent just doesn't get me out of bed" and "I can't wet my beak on 7.5 percent." It is a negotiation tactic, albeit entirely truthful, to tell the entrepreneurs that they're not interested in a deal where they don't have more ownership.
I've cheered for some entrepreneurs that got deals on Shark Tank. I've cringed for others that I felt took the wrong deal.
The fact is, a billionaire Shark probably shouldn't get excited about owning 5 percent of a small business they don't believe can mature into something great. Likewise, for a hungry entrepreneur, they probably shouldn't get excited about a Shark taking away 25 percent of their business.
Mark Cuban's ironic fundraising backstory
Few know this, but Mark Cuban himself has shared publicly that when he raised money for Broadcast.com, he gave up just 1 percent of his business in exchange for a $30,000 investment. You might read that and feel bad for the investors, but don't. When Cuban sold the business, his investors were paid north of $20 million for that same 1 percent. Not a bad return!
Many entrepreneurs are able to raise money from angels, or investors who are willing to agree to more favorable valuations and let you retain more equity in your business. Investors by the tens of thousands can "wet their beak" on 1 percent of your business.
When I started my business, the first angel who invested in my company didn't care about the exact valuation. He knew whatever it was, that we were still prerevenue, and that there were no guarantees of a return. He alone was investing an amount he could afford to lose, but he believed in the idea, and he trusted me. He also trusted that if other investors bought in, whatever valuation I agreed to with them would be fair for him as well. And he introduced me to lots of other angels. In total, we raised more than $700,000 from angel investors--$250,000 while we were prerevenue. In our first seed round, $25,000 bought 2.87 percent.
On Shark Tank, you very seldom hear of deals where they invest in prerevenue businesses. In fact, most entrepreneurs are shamed by the Sharks for even having the audacity to try such a thing. However, angels invest in prerevenue businesses all the time.
The argument here is not to say that you should never go on Shark Tank, or that there aren't successful deals that come out of the show, or even that you shouldn't give up a larger stake in your business for the right investor with the right connections. The point is, there are angels out there. Many of them. Many folks who are looking to get in early on the right investments, and they're not as greedy as the Sharks. They may not have the connections that the Sharks have, but you may not need them.
Quit fishing for Sharks. Hunt for an angel
Have I persuaded you to get off the Shark fishing boat and start hunting for an angel investor yet? If so, here are a few things you'll want to remember:
- Angels are like sheep; they like to follow.
- If you find one, ask for introductions to others. Remember that they know other angels.
- Pitch to venture capitalists. If they turn you down for not being far enough along, ask if they can recommend any angels.
- Retain a business attorney who specializes in startups. They know angels.
- Retain a chief financial officer (CFO) who specializes in startups. They know how to attract and manage angels.
- Ask for advice from other successful founders. They know angels.
- BEWARE: If the investor brings up Shark Tank and starts talking like a Shark, they're probably not an angel.
If the fact that angels are friendlier and cuter and don't demand as much of your business isn't enough, here's one more thing to consider: Go through the Inc. 5000 list. You'll find lots of successful startups that weren't on Shark Tank. Many of them had an angel help them at some point.
Best of luck on your angel hunt!
Pro Tip: It is a good idea to remind potential investors that scenarios like the Mark Cuban example above do happen. It will help you stand your ground when they ask for a lower valuation or more equity. Just be careful that you don't start making guarantees and promises of returns. That is a big no-no and can get you into a legal battle later.