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4 Lessons From Shark Tank: Be a Founder, Not a Flounder

The massively popular ABC reality show Shark Tank puts entrepreneurs in one of the most high-pressure situations you can imagine – pitching their business ideas to venerable titans of industry on national television. I enjoy watching the show, and through my work with countless founders and investors, I’ve also found that the common mistakes made by hopeful contestants on the show provide good reminders for founders to keep in mind while plotting a course of growth for their business. These seemingly minor mistakes often demonstrate flawed thinking or incomplete planning that will raise red flags with investors, and can ultimately torpedo potential capital-raising opportunities for any early-stage business. Below, I highlight some key takeaways based on mistakes repeatedly made by entrepreneurs on Shark Tank.

1.   Prove the Market Need for Your Business Idea Before Seeking Investors

This is the practice of “customer development” advocated as part of the “Lean Startup” methodology developed by Eric Ries,1 and contributed to by Steve Blank2 and other thought leaders. On Shark Tank, shark Robert Herjavec3 has often criticized an entrepreneur’s failure to undertake this important step in their business development. The idea is straightforward. Before focusing on seeking money from investors, you should first have demonstrated the need for your product or service in the market based on actual customer input and data. Talk with potential customers early in your company’s lifecycle to determine whether there is interest in your concept and then rework and refine it as needed. It’s easy to see how, after sinking countless hours and resources into a new business idea, entrepreneurs can adopt tunnel vision and forget about the larger picture of ensuring their idea solves a legitimate problem for real customers in a cost-efficient way. But without demonstrating that you have customers or the ability to get them, it’s probably too early to start soliciting money from outside sources, and as seen in Shark Tank, successful founders will have completed this research upfront while the failure to do so will deter investors from investing in your company.

2.   Avoid Overemphasizing Market Size

According to Mark Cuban: “. . . one of the things we repeat over and over again is that one of the worst ways to sell in Shark Tank is to come in and talk about how big the market is.”4 Market size is often emphasized as a critical statistic for any entrepreneur, and it’s true that learning your market and understanding the opportunities within it are important for analyzing the feasibility of your business concept. However, overselling or hyping market size as proof of the potential future performance of your business isn’t helpful to investors. Why? Because market size is just a number. Savvy investors will instead want to see each individual business owner’s concrete plans for penetrating that market, regardless of its size.


1  Ries, Eric. The Lean Startup. Crown Business,2011.
2  Blank, Steve. “Why the Lean Start-Up Changes Everything”. Harvard Business Review, May 2013, https://hbr.org/2013/05/why-the-lean-start-up-changes-everything (June 16, 2020).
3  Wise, Sean. “’Shark Tank’ Investor Robert Herjavec’s Best Advice for First-Time Founders”. Inc., Aug. 24, 2019, https://www.inc.com/sean-wise/shark-tank-investor-robert-herjavecs-best-advice-for-first-time-founders.html.
4  Canal, Emily. “Mark Cuban Called This Entrepreneur a Liar on ‘Shark Tank’ Here’s Why she Still Left With a Deal.” Inc., Mar. 25, 2019, https://www.inc.com/emily-canal/shark-tank-season-10-episode-17-dare-you-go.html.


3.   Don’t Overly Focus on Maintaining Vast Amounts of Equity for Yourself

A common refrain among founders on Shark Tank and many of the founders I work with is to balk at deals they fear will give up too much control of the company. For instance, a founder may seek $500,000 from investors based on the working capital needed to get the business to the next stage, but want to only give up 5% of the equity in their company for that investment. This can result in a vastly over-inflated valuation of their company ($10,000,000 in my example), at a time when the business is perhaps only at the proof-of-concept stage with no operations or profitability. In reality, the amount of equity you give an investor is just one piece of a much larger puzzle. I’ve seen eager founders give investors overly generous board rights, or even board control, for a relatively small investment amount at an early round, because they think it’s a less material term or even justified since they got the “right” valuation. And, if you set such a high valuation at the outset in order to keep your equity, how feasibly can you increase the valuation of your business in later rounds? An accurate valuation of your company is critical when bringing on investors, but it can often be too easy to become so consumed by the valuation and the amount of equity on the table that founders will overlook bad deal terms, such as potentially severe conditions attached to the investor’s money, and the impediments that those terms can later present for the founder and the business.

4.   Do Your Due Diligence When Deciding on an Investor

For the majority of entrepreneurs on Shark Tank that draw interest from more than one shark, they’ll accept the offer from the shark willing to invest at the highest valuation. However, you’ll notice every so often that an entrepreneur on the show clearly favors a specific shark based on the individual expertise or experience of that shark given his or her background/experience as an entrepreneur or investor. These select entrepreneurs recognize and appreciate the value that shark can bring beyond just money. This is smart! You want investors that can add more to your business than just money – such as contacts, advice, experience in your industry, and strategic direction. Plus, once an investor is an owner in your company, the relationship is essentially permanent until there is an exit event. That’s why it’s critical for founders to do their due diligence on potential investors before pitching them, and before that, to have seriously considered whether investor capital is even needed at the particular stage of the business. Always check several references for each investor, no matter their reputation or track record. Talk with other founders to find out how it has been to work with the investor and whether they held up their end of the bargain. Ask the investor the right questions that will help you determine whether your interests and those of the investor are aligned, in both the near-term and the long-term. Taking the time to do this work upfront will save you many headaches down the road. And don’t be like the majority of Shark Tank entrepreneurs that focus more on a shark’s valuation only rather than applying a holistic approach that balances valuation against investor fit and background.

Conclusion

Unlike so many other reality shows on TV, Shark Tank actually provides some practical, actionable lessons that both new and experienced business owners can use in the real world. As seen time and again both on and off the show, a founder’s upfront preparation will demonstrate, in concrete terms, how their business idea (and even more critically, the founder) is worth the risk to an investor, while a lack of preparation will result in just the opposite. 

About Linden Law Partners

Linden Law Partners is a boutique transactional law firm founded by professionals with decades of experience. We’ve advised companies, entrepreneurs, and investors in hundreds of early-stage and venture capital financings, and have been lead counsel for M&A transactions ranging from hundreds of thousands of dollars to $700 million. Contact us to discuss how we can help.

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Linden Law Partners

Linden Law Partners is a boutique law firm that represents clients throughout their business life cycles, from formation to exit. We are business and transactional law specialists with extensive experience in all aspects of corporate law and governance, partnerships, joint ventures, emerging companies, private equity and venture capital, private and public securities offerings, and mergers and acquisitions. We offer clients big firm experience at a better price.

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