Ever since it made its debut on the national airwaves back in 2009, the TV show Shark Tank has been a hit. The show has proven extraordinarily popular in the years since and made household names out of entrepreneurs like Mark Cuban, Barbara Corcoran, Robert Herjavec, Kevin O'Leary and Daymond John.

The show has also served as kind of a crash course in business for its millions of fans--many of whom might dream of pitching their own idea for a business. Every show brings its own set of surprises as viewers learn about which sharks want to invest in a business and how much they want in return. Did you ever wonder how they come up with those figures?

What many of the people watching Shark Tank might not realize is that there is a risk-reward formula all of the sharks use when it comes to deciding how much they might invest in a business. In fact, most, if not all investors, use a similar five-point system as a way to decide not just if a business is worth investing in, but how they should value the business.

The more of the secrets your business has uncovered and cleared on this scorecard, the less risky--and more valuable--it becomes. If you're interesting in raising funding for your business, these five secrets can make all the difference.

Secret #1: Have a product ready to sell.

There are many times when we see people trying to get funding based on only a great idea they have come up with. But the truth is that very few people outside of the doomed dot-come era ever raised a lot of money with only an idea in hand. Rather, if you want an investor to value your idea, turn it into a product: whether that be a gadget, website, a service, or anything that someone could buy tomorrow. A demo of a real product is worth money.

Secret # 2: Have a paying customer.

What will impress an investor more than having a product you can sell? An example of someone actually paying for it! Even better: show that you have multiple people who have bought your product and continue to use it as repurchase is a sign of a healthy business. When a customer pays you for your product, the ability to sell isn't theoretical anymore--you proved it.

Secret #3: Show that you have real revenue.

It's one thing to show an investor that you have sold a few products. But when you can demonstrate that you have done that in spades--say, to the tune of a $1 million in annual revenue or more--then you're really get an investor excited to invest in your company. This means many people have bought and purchased again--a sure sign of something that can grow.

Secret # 4: Be profitable.

There are plenty of investors who understand that in the early stages of a business, it might not be profitable. But if you can prove that your business has reached a breakeven point and beyond--where you actually take in a little more money than you pay out--then you'll really begin to see your valuation explode. That's because you have proven you can make money and a pathway to making more, which makes your venture that much less risky to an investor.

Secret #5: Show that you can scale.

Anytime you can prove that your business can replicate the success in one market--say, Chicago--and then bring that to other cities like Dallas, Los Angeles, or New York, you'll be sure to excite even the most jaded investor. That's because you have proven that your business has the ability to scale--which is the ultimate goal every investor is looking for. That means, of course, that you'll also get the maximum possible valuation for your business. At this point you've taken most of the risk out of the business and the invested money will be used to scale a good business.
The big takeaway here is that the longer you can wait to raise money, the more of the risk factors you eliminate and the closer you can get to proving that your business can scale--the bigger valuation you can land. That doesn't mean that investors won't be interested in your company earlier than that. It's just that your valuation might be much lower than you were expecting. Ultimately, every investor will be looking to take your business from whatever stage it's in and grow it to the next step towards scale. If you can do the work to get it there first, the greater the reward you'll be able to reap.

Yes, that might mean being patient and working through some lean years. But the payoff is often worth it.

So the next time you tune in to watch Shark Tank, think about what stage the entrepreneur pitching their business is in and whether you think they can truly scale to the level the sharks are interested in. Notice how the valuation changes the further down the road they are. Then, think about your own business and apply the same logic. You might be surprised at what you learn by watching television.

 

Published on: Feb 16, 2016
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