7 Secrets to Getting a Deal on Shark Tank
Going on Shark Tank is a great experience you should never pass up. Getting a deal on Shark Tank is an even bigger deal. When I went on Shark Tank, my business was on track to make $100,000 that year. Within 4 months of the show, sales grew by another $150,000 to $250,000 for the year. The following year, we did $2 million in revenue. Gift Card Rescue went on to sell over $60 million in gift cards during our 8-year run. Shark tank gave us the launchpad we needed, for an idea that was fairly new, in an industry that most people didn't know existed.
As a startup, there is no greater validation than for one or more of the sharks to take an interest in your business. That not only makes your business credible in the eyes of millions of viewers but also gives you leverage in attracting other critical partners you need to succeed. As a result, I find it unfortunate when I see some entrepreneurs go on the show and blow the opportunity due to poor preparation or a lack of understanding on of what motivates the sharks. From my own experience and years of watching the show, I have compiled 7 secrets to landing a deal on shark tank. If you take the time to answer these questions, you will increase your odds of getting a deal.
Even if you don’t make it on Shark Tank, most of these tips are applicable whenever you are asking someone for money for your business, whether friends, family, angel investors or venture capitalist.
1. What's the Business Model?
The first hurdle you have to overcome is describing your business to the sharks in a clear and concise way so they get it right away. If you get this wrong, things begin to fall apart quickly. Here’s why. The sharks usually spend a few days taping all the episodes for an entire season. That means that on a typical day, they are listening to a few dozen pitches. It is in your best interest to make it easy on them. In addition, depending on what time of the day you are scheduled, their patience may be running thin. The best way to get them to pay attention to your pitch is to have a solid introduction. To do that, here are a few points you have to absolutely hit:
a.) Define the problem and state the market size (the bigger, the better)
b.) Tell them how your business solves the problem and how you make money
c.) Explain what makes your solution unique
d.) Show them how much traction you’ve gained in a short period of time selling your product or service and why they will make a lot of money investing in you.
e.) Be clear about what you are asking for and what you plan to do with the money (sales and marketing, fulfilling a large order, building capacity so you can produce more to meet demand etc).
Be clear about what you are asking for and what you plan to do with the money (sales and marketing, fulfilling a large order, building capacity so you can produce more to meet demand etc).
2. Know your Business and Industry
It’s surprising to me how little some entrepreneurs know about their industry, competition or threats their business could potentially face. Competition is actually a good thing. The sharks will probably grow suspicious when you tell them there is no competition. To them, that means no one has found the idea worth pursuing. You should be prepared to talk about the competition and why your product or service is better, especially when you are going up against a large, more established competitor.
You should also have to be prepared to answer this question: “what prevents someone from doing what you are doing?” This is your opportunity to discuss the secret sauce that makes your product unique or any intellectual property you hold. You can also talk about a deal you have with a large company to buy from you or stock your product. For me, one of the key points that swayed the sharks during my presentation was when I told them I had just signed an agreement with Amazon.com to exchange gift cards for Amazon.com credits. That was a defining moment when they realized this could be big if Amazon is getting on board.
3. How are you going to Acquire Customers?
It not good enough to tell them you are going to use the money they give you to grow your customer base or invest in sales and marketing. You have to explain how you are going to do that. How much does it cost you to acquire your current customers? If you don’t know, figure that out. Your customer acquisition cost is going to be key in figuring out your profit margins, which is all they care about. In addition, what customer acquisition channels are you currently using and which ones can you tap into if you get additional funding? You also have to define how much market share you think you can really capture in the next few years. To answer this question, you have to be specific about the customer segment you are initially targeting. It is not enough to say for example, “we plan to get 10% of the market”. You have to explain the steps you plan to take to do that.
4. Be Realistic about Valuation
This is where even entrepreneurs with a solid business trip up. In a way, shark tank is a game and you have to understand the leverage you have. According to the rules of the show, you have to get the money you asked for or more - but not less. So unrealistic valuations almost always ends up in no deal. I have watched entrepreneurs box themselves in the corner on the show where even if they offered the sharks 100% equity, there is still no deal to be had since their company is not worth that what they are asking. Be realistic with your valuation and also give the sharks room to negotiate.
If you’ve paid attention to the show, the sharks like to get to 50% equity real quick. That’s because most businesses that are pitched on the show are still trying to nail down their business model so the risk is greater for the sharks. If that is you, then think about how much money will make giving up 50% of your company worth it. Pick a starting point that allows for negotiation if 50% is the most you are willing to give up or if that’s where you think they will end up.
If your business has gained traction, you can ask for more money or offer less equity. The danger is asking for a lot of money and offering little equity in return. My rule of thumb is that if you are a startup and you think your business is worth a million dollars or more, you better have something very solid to back up that valuation, otherwise, you are likely to box yourself in with no room to negotiate. That’s why whenever people come on the show and want say $200,000 for 10% ($2 million valuation), you see the sharks collectively shrug because they now expect to hear something blockbuster for that kind of valuation.
That is not to say that some businesses are not worth a few million. It’s your job to justify why you have such a large valuation, knowing that the sharks are going to start from a place of skepticism.
My advice to justifying your valuation is to keep it simple. These guys invest in businesses for a living. This is not the time to dust off that business school or M.B.A jargons you learned about valuation. Here are some reasons you can use to justify a larger than usual valuation:
a.) You have a solid intellectual property that creates a big barrier to entry in your space
b.) You have a large purchase order you are trying to fulfill that will launch your revenue into the stratosphere
c.) You have gained traction quickly selling your product or service and can realistically project how quickly revenue will shoot up with the additional investment.
d.) You are currently in the process of launching an additional product or service that will be a game changer
e.) You have a large retailer willing to stock your product if you can expand production to meet their volume
One final thing about valuation. You should carefully consider the cost of passing up an opportunity to work with a shark or two. In addition to the investment and the publicity from the show, they can open huge doors for you quickly. You may find that owning 70%, 60% or even 50% of a business when you are in partnership with a shark is going to be worth a whole lot more than owning 100% of a business you are going to end up having to run by yourself.
5. Be Nice and Likable
There is nothing more infuriating to the sharks than entrepreneurs who show up on the show with a chip on their shoulder. There is a fine line between being confident and being cocky. These guys are called sharks for a reason - they are going to try to squeeze as much as they can from you. Their goal is to maximize their position in any investment they make so they can make lots of money should your business take off. In addition, they also know that some of the businesses they invest in will fail, so they want to be well positioned to make up for those that fail with those that strike gold.
If you think the deal you are being offered is unfair, state your case, in a respectful but firm way, and provide the reasons why your valuation should be higher. In my case, it was actually my negotiation with Mr. Wonderful (Kevin O’Leary) that impressed Robert Herjavec to join the deal and offer me more money for the equity stake they wanted. There is no need to be rude.
Additionally, the sharks are not just investing in your business. They are investing in you as much as your product. Just as you are sizing them up, they are also doing the same. For them, they have to believe in you and your ability to execute on your plan once they give you the money. They also have to like you and want to work with you. The sharks don't necessarily need you to make money, but their money can help you realize your dream, so if they don't feel like you are someone they would like to be around, then forget it. It does not matter how great your product it. Therefore keep this in mind: be nice and be likable.
6. What are you going to do with the money?
If you watch the show frequently, you will notice that almost always, entrepreneurs that tell the sharks they are going to use the money to pay salaries never get a deal.
This is not the time to be cashing out. No matter how long you've been doing this, or how much you have invested in the business, to the sharks, you are about to hit a reset. As a result, they want your skin in the game for the foreseeable future - or at least until they start getting some of their money back. So, any hint you are trying to cash out or use the money to pay yourself or some other debt will be a show stopper. Make them believe you are going to works harder than before and are willing to put in even more of what you have to make this work. That’s what they want to hear and that could be what closes the deal for you.
They also want to see that you have a plan to grow the business quickly and make them a lot of money. You should, therefore, focus on investing the money in sales and marketing, expanding capacity, and product development. If you are going to hire people, it should be in one of these categories. Whatever you do, do not tell them you plan to pay yourself.
7. Tell the truth
Don't embellish your business numbers or situation. That will always come back to bit you. Remember, should you get a deal, the sharks will then have to verify everything you told them about your business and business financials. They have experts working for them that will do all the due diligence before they cut you a check. Your deal will unravel if they find out you misled them on the show.
Additionally, any potential investors, partner, suppliers who saw you on TV and want to do business with you will be relying on the information you provided on air. You will lose credibility if they find out you were misrepresenting facts about your business. It’s not worth it, so don’t do it.
CAUTION - Do you have a business?
For some people, shark tank may actually be the end of the road. As entrepreneurs, one of the biggest things we struggle with is letting go, especially when we've sunk a lot of money, time and effort into a business. In addition, when you look at the opportunity cost (time we missed with family, sacrificed jobs/careers etc), the pressure to make a business work is tremendous. But shark tank has also proven to be a place where some dreams go to die. The sharks are good at giving entrepreneurs a good dose of reality - so be open to constructive feedback. They will tell you stuff your family and friends may have been afraid or unwilling to tell you. The sharks have no such inhibitions and will call it as they see it. So, if you are going to appear on the show, be aware that it may not all be positive news. However, a dose of reality may be what you need to help you to finally let go and move on to the next project or idea.
For some, you may find out that your business is not going to be big enough to warrant an investment. That is not necessarily bad news. You can still continue to run it as a lifestyle business or a side gig but at least you can now have realistic expectations about it. And if you disagree with their assessment of your business, keep pushing forward. It will not be the first time the sharks have been wrong about a business. You just hope they were wrong about yours.