When many of us think about venture capital, Shark Tank may be the first thing that sparks to mind. Here at Rockies Venture Club, we joke about Shark Tank because we know that it’s not an accurate depiction of how venture deals work. Here are some of the reasons why we call it “venturetainment”.
A lot of the deals done on Shark Tank involve the shark receiving a very high amount of equity. Some of the deals on the show have sharks getting up to a 75% stake in a business.
At RVC, we consider giving up any amount of equity above 30% a bad deal—for both the investors and the owner of the company. This is primarily because it reduces the incentive for the owner to go above and beyond to make their company grow, as they now gave up a lot of the potential profits their company could make. And if a company’s profits are lower than they could have been, returns to investors drop as well. Therefore, it is important to keep the entrepreneur in mind when making deals involving equity.
Feel-good deals (Lack of due-diligence)
Some of the deals featured on shark tank are heartwarming, but they’re not really smart deals. During one season, the sharks made a deal with a sweet old lady whose company made baked goods. While it was heart-warming to see this lady emerged out of the shark tank with a deal, it’s hard to fathom how her business would become successful. An incredibly small, unknown baked goods brand trying to compete with hundreds of other huge competitors? The chance of that shark getting their money back is unlikely.
The sharks clearly didn’t conduct their due diligence—getting in depth information on the company, its market & competition, as well as the people running it. This is an absolute prerequisite in the venture capital world. It takes a good amount of research, sometimes taking weeks or months, to make an intelligent investment. With proper due diligence, you can unearth some shocking things about a company that may make you think twice about investing in it. On the other hand, you can find some information about either the company or its market that may make it seem like its currently undervalued—a better deal for you.
An Emphasis on Ideas
The sharks on Shark Tank often put more value on a company by its idea, tending to ignore other important elements.
In the venture capital world, much more factors are considered in valuation. What stage is the company in? Is there proof-of-concept? Does it have a minimum viable product ready? Is there a market for its product or service? How are its sales, if any? Is its team capable of executing their strategy?
While Shark Tank is fun to watch, keep these things in mind next time you put it on. In the real world outside of the show, it takes a lot more than an idea and compelling story to persuade investors to invest in your company!