Shark Tank Is a Great TV Show, but Not Like Real-Life Investing



It's Television, for gosh sakes! Let's not forget that satisfying its TV audience is the show's first priority. (Not showing what happens in actual discussions between real companies raising funds from real investors.)


In real life, I have looked at 1000's of companies and met with 100's. I love the show, but often I grimace and groan when I see what the presenting companies do and say, and what the Sharks say in return.


Here is what irks me the most:

  • Companies that think offering 5-10% of their equity makes sense. No matter how great the company, there is always a lot of risk. For investors the only way to ultimately make a profit is for them to have a large share of the company and to invest in lots of companies, to compensate for the ones who will not survive. Imagine: Invest in 30 companies and have only 3 big wins, 3-4 others that earn a small profit and then a few that break even. More importantly, when you consider the strategic value of having one of the Sharks on your team (which translates into greater sales), you'd be wise to give a Shark 5-10% of your company just to get their business contacts (yielding greater sales), even if they invested nothing. Increasing sales directly translates to higher valuations in these early-stage companies. Nothing else matters. Companies in hot categories are often valued at 2-6 times their annual sales numbers.


  • Overly-clever investment mechanisms. Much as I appreciate the cleverness of Sharks like Kevin O'Leary, I don't think smart entrepreneurs would often fall for the same tricks. In fact, I was a co-founder of Knowledge Adventure, a direct competitor to Kevin's big win, The Learning Company. Apparently Kevin's company sold for $3 billion and my group only got $100 million. Sheeesh! Not to pick on Kevin, but his favorite method seems to be to ask the company for a royalty per unit, instead of taking equity. My point is... at the time that early-stage companies are working hardest to build sales and keep expenses low, what they can least afford is a big fee per unit (what Kevin keeps asking for.)


  • Early stage companies should be making a profit... Hogwash! This would be nice, but it's just not realistic. Anyone who's been involved in a successful start-up would agree. In order to take a company from zero to $5-10 million in revenue requires somebody to make a really big investment. This kind of equity investment would thus create an operating loss. In almost all cases, this has to come from investor funds, which means if the company is ultimately successful, investors could make 2-10X their investment. And... they well deserve it.


  • Best way for investors to profit on a company. More than any other way, (statistically) the most likely way for a company to reach a solid exit (liquidity), is for the company to get acquired. And, the typical acquiring company is making this acquisition to acquire revenue & market share, not to be getting some current profitability. As a much larger company with great confidence, the acquirer usually believes they will be pretty adept at ultimately turning their acquisition into a profitable company. They acquire companies (instead of building from scratch) to avoid the gigantic market risks that the acquiree has been making in the development and its go-to-market efforts.


  • I am frustrated to no end that companies on the show seem to have little or no mentoring about how to grow their companies, let alone how to work sensibly with investors. It's pretty clear the primary objective of the show is entertainment, not to select and show the very best companies that have been properly advised on how to present themselves and on how to work with investors. That would not be as exciting as watching some of the companies flub and embarrass themselves.


  • Again, I love the show. Even with all of its Hollywood compromises, it's the closest thing on Television to what we investors do every day in business. My wife also loves it and we get to discuss company critiques from the couch. We sometimes even dialog on company valuations. Finally my investment activities get understood at home. Cheers.