Shark Tank: Entertainment and Reality

Quick Summary: What television viewers see is only a fraction of the investor-entrepreneur interaction.

Abstract:

The television show Shark Tank is very popular and provides a glimpse into the reality of an entrepreneur’s attempt to raise money. This article maps many of the issues and questions discussed on the show with twenty-seven of the articles in this collection. The goal of this article is to provide entrepreneurs with an understanding of what is behind many of the show’s investor-entrepreneur interactions and a dose of reality.

There is no question that the television show Shark Tank is very popular and has developed a loyal following.  It would not be surprising that next to college basketball’s March Madness and the college football bowl game series, it is the most hotly discussed subject around water coolers and any gathering of entrepreneurs.  Aside from its pure entertainment value, the show does provide funding for some of the entrepreneurs that impress one or more of the sharks.  Like every other television reality show, there is far more action and interaction that takes place between all of the participants that is never broadcasted.  In fact, some segments are edited down to eight to ten minutes after nearly two hours of actual, non-stop dialogue between the sharks and the entrepreneur on the hot seat (who is actually standing throughout the continuous filming session).

 

The purpose of this article is certainly not to promote or criticize the show.  Instead, its purpose is to provide some background and insight regarding the show’s focus and the shark’s questions.  It may help entrepreneurs who may not be familiar with the fundraising process better understand it and position themselves for success.  This article is broken down into specific issues or questions that are commonly discussed on the show.  Many of the topics reference other articles in this collection that provide more detail on the issue being discussed.  References are identified with endnotes.  Each endnote contains the title of the relevant article and its abstract.  It is not necessary to review the endnotes or the corresponding articles.

Venue

In most major cities, various organizations sponsor venues that are similar to the Shark Tank stage.  In these sessions, a number of investors listen to one company pitch after another.  Meetings can involve a few investors or as many as two hundred or more. Some of the meetings are structured similar to the Shark Tank where the entrepreneur makes a five to ten minute verbal presentation.  In other arrangements, the entrepreneur may use presentation slides or even show a demonstration of the product.  Rarely do presentations last more than fifteen minutes.  Some sessions allow a brief question and answer period; some do not.  Typically, there are far more entrepreneurs that apply to present than there is time to accommodate them.  Like Shark Tank, companies are selected through a screening process.  Unlike Shark Tank, the investors do not make offers and negotiate deals with the entrepreneurs.  Instead, these sessions are a vetting process in which investors make decisions to either consider spending more time with a company or not.  In the majority of cases, investors opt to not move forward.  Investors have very limited time resources and may have capital investment constraints or may find a company is not in their specific area of interest.  In any event, during the presentations they are focused on de-selecting companies.  Effectively, they want to get to a “NO” decision before investing time to get to “KNOW” more about the opportunity.[i]  The time spent with companies on the Shark Tank show are considerably longer and, with only five investors, the interaction can be far more direct and interactive.  Finally, in recent seasons, the Shark Tank staff (not the five sharks)  have spent a considerable amount of time in due diligence activities to help qualify a company for appearance on the show.  In other venues, due diligence activities only occur after an investor meets with the company and then decides to explore an investment opportunity.

Shark Tank Investors

At the beginning of the Shark Tank show, when the five sharks are introduced, emphasis is placed on the fact the all of them are/were entrepreneurs and are considering investing their own money.  These facts plus the level of investment, which rarely exceeds $500,000, place the sharks in the “Angel Investor” category.  Although they are certainly “venture capitalists”, the term venture capitalist is more normally applied to professional investors that may or may not have ever started or run a company.  They work for firms that invest other people’s money who are referred to as their “limited partners”.  Limited partners can be pension or trust funds, college endowments, high net worth individuals, corporations, or virtually any other group that is willing to accept a much higher risk/reward investment strategy.  Angel investors and venture capitalists (using the description from above) do share one thing in common:  Their goal is to make money either for themselves (Angels) or their limited partners (VCs).  That goal does not necessarily equate to the same long-term goal of most entrepreneurs, who want to build a company for the long-term.  This is not a judgmental statement, it is just a clear statement of the general goals of both parties.[ii]

Most venture capitalists take a very active role with the companies they have invested in, communicating at least weekly.  Many venture firms limit the number of active investments that a general partner can make to two or three per year with the goal of having a maximum of ten to fifteen active companies at any one time.  Considering the number of investments made by each shark and the low level of investment, each shark must have a number of colleagues or assistants that help them with their investments or the time they spend with each company must be extremely limited.

Besides Angels and Venture Capitalists, there are a number of other investor categories that an entrepreneur could consider approaching.[iii]  On the show, the sharks regularly mention their relationships with other companies or groups that they could “bring to the table” to help the company.  These potential partners or investors may offer specific resources or capabilities in addition to cash.  For example, they may have material sourcing, manufacturing, inventory, marketing, or distribution capabilities that could significantly jump-start a company.[iv] The relationships that the various sharks have with these other entities are probably the most important consideration that an entrepreneur should take into account; it is even more important than the terms of the investment deal.  After they have received some funding and begin to ramp up revenue, many startups fail due to their inability to raise working capital to fund the various aspects of their business.  The difference between company success and failure is often based on the expertise and resources provided by these other outside relationships.  Without a doubt, bringing investors or business partners into the business has some downsides. There are also the obvious upsides associated with their resource commitment.  An entrepreneur, used to calling all the shots for their business, will now have to take into consideration the wants and needs of these other parties[v].  These relationships will change the company.

Valuation

After approaching the sharks and introducing themselves, the first subject mentioned by the entrepreneur or the announcer is the investment dollar amount they are seeking and the percent “ownership” of the company they are willing to give up in exchange for the financial investment.  In real investment presentations, quite often those numbers are the last items discussed since no meaningful dialogue can take place about them until the investors understand the basics of the business and its potential.  The amount invested and the percent ownership, when combined, is used to determine the “valuation” of the company.  For example, a $200,000 funding request for 25% of the company implies a valuation of $800,000 ($200,000 divided by 25%) for the whole company.  The valuation of a non-public company is nothing more than a person’s opinion that can widely vary from one person to another.  Entrepreneurs, with their long-term vision of what the company could become, will naturally place a high value on the company.  Investors know that the odds of any venture, independent of what the entrepreneur says, have a high likelihood of failure.  Consequentially, they will consider past results and value the company for what they feel it is worth today.  In the final analysis, the value of the company is only as much as an investor is willing to pay and the entrepreneur is willing to accept.[vi]  In some show segments, entrepreneurs place such an unrealistic value of the company or offer such low equity (~5%) that the sharks are noticeably turned off and totally discount the opportunity.

Not mentioned on the show is that the “commitment” or the acceptance of a deal between the entrepreneur and one or more sharks is only a good faith commitment to begin negotiations.[vii]  The sharks will want to learn more about the company and perform their own due diligence to verify the entrepreneur’s claims.  Additionally, there are many other terms that are associated with an investment agreement.  These terms have a major impact on the overall finances of the investment and can also cause an entrepreneur to lose some or all control of their company independent of the shark’s percent ownership agreed to on the show.  Those terms can easily cause either the investor or the entrepreneur to walk away from the deal during the negotiation process.  In fact, it has been reported that only about half of the agreements reached on the show end up with an actual investment.  Deal terms, due diligence issues, or differences on tactics or strategy can cause the negotiations to fail.

The Business Focus

With few exceptions, entrepreneurs featured on Shark Tank offer products targeted at domestic U.S. consumers, the target television viewing audience.  Also, most products are very easy to explain and are low-cost consumable items.  This focus, of course, was not done by chance.  With segments lasting only eight to ten minutes, there is no time to explain more complex products and risk turning off the viewing audience.  This broad-based appeal benefits virtually every company that appears on the show by providing national exposure.  Most companies with available products experience a significant increase in sales immediately after the show, whether they receive an investment from a shark or not.

A crucial question either asked by the sharks or is revealed during the entrepreneur’s overview of the investment opportunity is the characterization of the offering:  Is it a feature, a standalone product, or the basis of a company?[viii]  The implication for opportunities that are best characterized as an add-on or incremental feature improvement to an existing product is that the current supplier could duplicate the effort.  If the opportunity is only a non-extendable product, the long-term value of the company is risky due to the fact that the market could become saturated or the product may become obsolete for any number of reasons.  If the product can be extended or form the basis for a series of related products sold to the same customers, the company may have a much higher likelihood of long-term survival.  Historically, less than half of all private companies survive to celebrate their fifth year anniversary.[ix]  Unlike venture firms that make much larger investments (> $5 million) with the hopes of an Initial Public Offering or a significant acquisition (> $100 million), the sharks seem to have an appetite for fast, high growth products that require no future investments that can be quickly sold to a larger consumer-focused company.  This “quick flip”, low future investment approach protects the shark’s investment and minimizes their time commitment.  Quite often the sharks will show no interest or criticize any discussions about future products.  They prefer the company to focus all of their attention on the initial product and its sales.  This is another example of the difference between an investor’s goal, return on their current investment, and the entrepreneur’s goal of building a long-term sustainable company.

Directly related to the short-term versus long-term difference in focus is the entrepreneur’s long-term vision of the company. Are they interested in running the company as a life style business that generates a personal, comfortable income stream or are they interested in selling the business at some future point[x]?  Although investors could recoup their investment through long-term royalties or dividends or profit sharing, most are interested in a singular liquidity event such as the sale of the company.

In many instances, an entrepreneur will have created a unique business that, due to their approach or skill sets, requires them to remain personally involved in the business, something that they thoroughly enjoy[xi].  Unfortunately, they usually become the bottleneck for growth and limit the opportunities for an acquisition of the company and, therefore, an opportunity for an investor to realize their gains through a liquidity event.  Many entrepreneurs have a difficult time in making the transition from entrepreneur to effective business manager[xii].  The sharks will probe to determine if the entrepreneur is so committed to their idea that the thought of selling it is not a consideration.  If the sharks sense this, they will most likely walk away from the deal.

Entrepreneur’s Focus

Many veteran investors commonly state that they invest in the CEO/entrepreneur more than in their product or plan.  Further, it has more to do with passion and commitment than experience or capability. Investors know that every business will face many difficult challenges[xiii].  The CEO/entrepreneur must have the personal commitment to press on and face those challenges.  Investors will expect an entrepreneur’s full time, “all-in” commitment to the business[xiv].  Their logic is simple: If the entrepreneur will not show their full-time commitment, why should they commit their financial resources knowing that even the most dedicated individuals have a tough time being successful.  There is also a fundamental difference between passionate commitment and emotional commitment.  Overly emotional entrepreneurs may have a difficult time making tough business decisions, which occur in every business.

Revenue

If the entrepreneur does not clearly state their current and past sales (revenue) during their initial description of the business, one of the sharks will quickly ask.  If there is no revenue or it is very low, the show’s background music makes a dramatic sound and the cameras quickly focuses on one or more of the sharks showing their disappointment.  With very few exceptions, the sharks focus on making early stage investments.  The generally accepted definition of an early stage company is one that has revenue and, therefore, some external validation.  Sales to customers indicate that the product or service is addressing an issue that customers recognize needs to be addressed and they are willing to pay for it.  Seed round investors, on the other hand, are willing to invest in pre-revenue companies that have an exceedingly attractive plan and are well on their way to commercializing it.  Rarely, except in the case of a serial entrepreneur who has a proven track record of success, can an entrepreneur raise money with just an idea.[xv] Based on the show’s history, it is advisable that entrepreneurs only appear on the show when they have sufficient revenue that will impress the sharks.[xvi]

Revenue can be divided into three categories:  Referenceable Revenue, Scalable Revenue, and Profitable Revenue[xvii].  By asking about current and past sales, the sharks are clearly focused on the first category.  They want to be assured that the company has received external validation.  This is the biggest risk factor that a new company faces.  Other factors such as financial resources, recruiting people, building the product, marketing, and order fulfillment can be solved with additional resources.  But, if customers do not embrace the product or service, nothing else matters.[xviii]  In most cases, the entrepreneurs that appear on the show have modest revenues, typically in local or regional markets and commonly through their web sites.  They are seeking the involvement of the sharks for an investment in both cash and the shark’s relationships to help them expand their ability to make prospects aware of their offering and fulfill orders.  Many contestants are in the frustrating position of having purchase commitments, but not being able to fulfill them due to lack of funds for manufacturing or order fulfillment.  All of the sharks claim to have access to multiple partners that can provide the operational support and access to existing distribution channels that can address the scalability issue (second category of revenue) that many of the entrepreneurs face.

Market Size and Access

Entrepreneurs always face the challenging question of describing the targeted available market.  If they claim they can dominate a small market or only need a small percentage of a very large market, they will be criticized.[xix] Whatever the forecasted penetration is, the entrepreneur needs to be able to back up their numbers with something more than their opinion, which, of course, will be optimistic.[xx]

Probably more than half of the companies that appear on Shark Tank request investments for one of two reasons.  To purchase inventory to fulfill current backlog or to expand distribution.  Funding inventory does not require investors of the caliber of the sharks.  It only requires that some deep-pocketed individual or group have faith in them and their product.  Distribution, on the other hand, is entirely different[xxi].  It requires far more than money.  Awareness campaigns through effective advertising, promotion, and securing retail shelf space or mind-share of the channel are very difficult because of the many competing new entrants and the power of the incumbents.  Today, in retail, for the entrepreneur’s product to obtain shelf space, another product must be removed.  That product may be totally different than theirs, but is still a competitor.

Competition

Answering the question of “Who is your competition?” by saying “no one” is probably the fastest way to turn off potential investors[xxii].  The implications of that answer are: 1) you are very naive or 2) there is no market for what you are offering or 3) you are going to have to create demand that is very expensive and time-consuming.  After the “who is your competition” question, the entrepreneur must convincingly explain why they will win[xxiii].  Equally important to explaining why they will win, the entrepreneur must consider what others, who will lose, will do.  It is a zero-sum game for shelf space, mindshare, and customer dollars.  If the entrepreneur does not have crisp answers, the sharks may reach the logical conclusion that the entrepreneur has not done their homework or has blinders on about the superiority of their product.

Patent “Protection”

Many companies fall into the trap of thinking they will win because of their Design (what it looks like) or Utility (what is does) patents.  There is no question that an issued patent can provide protection, but the process to actually stop someone else from infringing on it can be long and costly.  Patents are most useful when the company is negotiating a licensing agreement or are being acquired by a large company that can monitor competitors and has the legal resources to enforce the patent.  It is interesting to note that most consumer products, the focus of the Shark Tank investors, are not patented.  Entrepreneurs need to carefully weigh the cost and time commitment associated with applying for and, perhaps, defending a patent infringement case, versus other potential uses of their time and cash.[xxiv]  Mentioning that a patent is pending is a throwaway comment.  Anyone can apply for a patent on anything.

Margins

After asking about current sales and competition, the sharks typically ask about current product margins (selling price minus product cost).  It is not clear what the value of this question and any answer that is given is.  In early stages, due to limited volume production, the product margin could be very low.  With increased volume and perhaps offshore production, margins could be improved considerably.  On the other hand, if the entrepreneur is building products in their basement or garage with the help of their family, the actual costs could be distorted by the use of “free” labor and no overhead facilities.  A more appropriate question would be to focus on the potential long-term profitability of the business taking into account the product cost (margin) and all other costs including manufacturing, inventory, order fulfillment, warranty, and customer support[xxv].  Perhaps those issues are discussed off camera.  Surely they are covered in the due diligence process before an actual investment agreement is executed.

Land Mines

Any time during the presentation, an entrepreneur can step on a land mine with one simple comment that becomes an instant red flag for the sharks.  Quite often they occur when the entrepreneur responds to the question of the planned use of the investment funds.[xxvi]  Answers such as “to pay my back salary”, “pay off loans to other investors”, or “settle legal/business issues with former partners” are giant red flags.  Another area that seems quite logical for the entrepreneur is to explain different products or business opportunities that they could also pursue[xxvii].  Investors want their funds to be totally focused on increasing market traction and revenue, not covering past expenses or funding future products.  They do not want any deviation or presumed distraction from the singular goal of making money with the product being presented.  As previously mentioned, they want the entrepreneur’s full-time commitment to the business as well.  Of paramount importance, the sharks want to quickly develop a feeling of trust.  If they sense the entrepreneur is not being straightforward or not revealing some core issues, they will quickly walk away from the deal.

Not Covered

It is interesting to note that the most important consideration for an investor is rarely specifically discussed on the show.  It involves how the sharks will realize a return on their investment.  For the typical Shark Tank company, an IPO is highly unlikely due to their single product focus and overall sustainable revenue potential.  So, other than paying a dividend forever, the only other way for a shark to receive repayment of their investment and, hopefully, a sizable return is through an acquisition of the company.  Perhaps the sharks plan on this type of exit and simply do not discuss it on the show.  It seems strange that the entrepreneurs do not bring up this issue.  As previously discussed, the shark’s goal is to make money while the entrepreneur’s goal is to build a company.  Gauging an entrepreneur’s willingness to sell their company at some not too distant future would seem to be critical issue that the sharks should probe.  Perhaps that issue is discussed during the due diligence period before an actual investment is made.  
 

Obviously, each segment of each episode of the Shark Tank broadcast is different.  What happens during the entire live session and is omitted in the final broadcast cut could address any or all of the points discussed in this article.  Not only are the entrepreneurs different, but the sharks are quite different as well.  The observations made in this article are just that, general observations.

 

[i] Getting To NO Before Getting To KNOW

       People want to simplify their lives by removing clutter before they invest their time.  Investors are exposed to opportunities constantly and need to be very selective about which ones to pursue.  Out of self-preservation, their first reaction is to say “no”.  You have to appeal to them quickly and succinctly to get past the “no filter” before they spend timing getting to “know” you. 

[ii]Company Success Versus Realized Investor Return

                It is easy to make assumptions that the company and investor goals are the same - the long-term success of the company.  However, at different times through the relationship, goals may significantly miss-align. Understanding why and when this occurs is critical to maintaining a long-term positive relationship.

[iii] Investor Categories - A Baker's Dozen

       Quite often when the term investor is used, entrepreneurs think of venture capital firms or angels.  Indeed, both groups do invest in entrepreneurs and private companies.  There are a number of other different types of investors.  They differ in their primary motive for investing, their risk tolerance, and their focus.  Understanding these differences will help you select investors in the most appropriate category for you and help align your interactions with them accordingly.

[iv] All Money Is Not Equal

       Different categories of investors provide different levels of tangible and intangible assets besides their capital infusion into a company. Understanding their expectations and capabilities is critical to attracting capital and managing the ongoing investor relationship.

[v] David or Goliath Partners

     The size and capability of a potential business partner must be carefully considered.  There are certainly advantages and disadvantages to working with other new and smaller companies as well as with large, well-established organizations.  Carefully and realistically reviewing the pros and cons is crucial before considering entering into a long-term relationship.

[vi]The Valuation Trap

       The value of a company, referred to as its valuation, is very difficult to calculate for a privately held company.  It actually is only an opinion and generally represents what an investor is willing to pay for an equity stake in the company.  But, it is only one factor in determining the ownership and control of the company. Other terms could have a much more significant impact.

[vii]The Term Sheet: The Beginning Not the End

       Throughout the fundraising process, the entrepreneur focuses on securing a term sheet from an investor.  In the moment that one is received, there is a natural feeling of a sense of accomplishment.  That feeling is warranted; an investor has shown confidence in you and your plan.  However, the term sheet is not the end; it is only the beginning of the commitment.

[viii] Is it a Feature, Product or Company

       Independent of the uniqueness or value of the idea, an entrepreneur needs to objectively determine the best approach to transitioning from the idea stage to a deliverable reality.  Should it be a feature than enhanced something else, a standalone product that has long-term staying power, or is it the basis for an on-going company.  

[ix] Someone Will Put You Out of Business

     The odds are that someone will put you out of business.  Business failure is more common than success.  You must constantly look for who or what it will be that puts you out of business and what you can do to avoid it and flourish.

[x] What Is Your Goal For The Business

       A simple question that can have a major impact on your plans is “what is your goal for your business?” Do you want to have a lifestyle business that generates a comfortable income stream for you or do you envision your business being acquired or going public?

[xi] Can The Business Ever Scale, Should It

       Many highly successful individuals feel that the next logical step for them is to expand their business.  However, instead of being able to do more of the same, they quickly realize that they will have to be involved in an entirely different set of tasks which they may or may not want to do or may not even be equipped to do.  

[xii] Are You the Right Person

                On the surface it doesn’t seem to make sense to ask yourself if you are the right person to run your newly planned company.  However, as the business starts and grows, the number and variety of tasks that must be performed increases at an incredible rate.  Carefully thinking through what you can do and do well and what areas in which you will need help will allow you to plant the seeds for a successful organization.

[xiii] Passion: The Fuel for you Business Engine

       A business can be thought of a generator that produces revenue, jobs, and customers.  Passion is the fuel for the generator, but the generator requires many other elements to start and keep running smoothly. Without passion, the business is probably a non-starter.

[xiv] Show Your Commitment First

       Having an idea and expecting others to jump on board with you before you show your total commitment is a non-starter.  Investors, including financial investors, employees, and partners, need to see that you are all-in before they agree to commit their resources.  Can you blame them?

[xv]You Can't Raise Money With An Idea

       Ideas do not sell, well thought out solutions to recognized problems do. Vet your idea with individuals that will provide honest, objective feedback.  Move past the idea stage as far as possible to provide meaningful information about the potential risks and rewards. Find external sources that will validate your plan. 

[xvi] Wait As Long As You Can To Raise Money

       The more you can externally validate facts that your opportunity is practical and serves a need that customers are willing to pay for now, the greater your chances of obtaining funding with reasonable terms.  Hold off approaching financial investors as long as you can to show that you have reduced the investment risk.

[xvii] Three Kinds of Revenue

       Pursing revenue is a universal activity for all companies.  However, understanding what revenue really means and its implications is often not considered and can lead to missed expectations or even disastrous results. Knowing the different types of revenue, their timing, and their implications is critical.

[xviii]Revenue: The Wonder Drug

       Revenue is the lifeblood of every organization.  Without it, a company simply cannot survive.  Think of it as a drug that must be taken forever and will result in a healthy, long-lasting organization.

[xix] Forecasting Market Share: Too Big Or Too Little

       Market Share as a single number can be distracting and not even indicative of a company’s underlying value.  Understanding what drives the number and the well-defined target market are far more important than the number itself.  Over or under forecasting can be an immediate turn off for potential investors.  It is hard to get it “right”.

[xx] Hand Waving: A Smile or a Frown

       Hand waving and making sweeping generalizations may result in initial enthusiastic support, but may not hold up under close scrutiny.  We all see this during political speeches and have grown to accept it as part of the process.  It might work in politics, but it does not work with investors.  Unsupported sweeping generalizations most likely will result in frowns, not smiles.

[xxi] Distribution is the Only Thing That Matters

       Products sitting on the shelf or application servers with no users do not generate any revenue.  Getting the right product or service to the customer is critical. Invariably, it takes longer that one thinks to place products or begin services.  Business plans must take this reality into consideration.

[xxii] No Competition?  Really? Hmmm

       There is always competition for everything.  You have to think well beyond the direct alternatives to your product or service.  Understanding who and what you are competing with is crucial to building confidence with potential investors as well as customers.   Never, never say “none”.

[xxiii] Why You Will Win

       It is easy to discount competition and to think of all of the reasons why you are better than they are.  Unfortunately, most likely, your competitors are thinking the exact same thing.  Both of you cannot be correct.  You must objectively examine why you think you will win and, equally important, objectively think why your competitors will lose.  You need to do this before the customer acquisition battle begins.

[xxiv] Patents: The Reality

       The thought of protecting your idea with a patent is natural.  A patent can indeed offer a level of protection, but with it comes a significant commitment of time and money. In the end, an entrepreneur must carefully weigh the business value of a patent versus the alternative use of resources.

[xxv] Profitable Revenue: More Than Margin

       Determining if revenue received from a customer is profitable just starts with its gross margin contribution - the difference between what the customer pays and the cost of the associated goods or services. To that number, many other costs will be incurred that can have a major impact on the overall profitability associated with the transaction.

[xxvi] Use or Misuse of Funds

       Investors will naturally want to know what the intended use of their cash will be and how long it will last.  The more definitive you can be about your plans, the more confident they will be in you and your plan, but be aware of some hot buttons to avoid.  

[xxvii] Staying in Business by Staying Out of Some Businesses

       Initial success in one business or with one product can boost the confidence of a company and encourage them to expand.  Although growth is key to long-term success, understanding why the growth has occurred and the impacts on proposed future businesses is critical.  The grass on the other side may be greener, but it may also contain landmines.  So, proceed thoughtfully and carefully.
 

Endnotes

The following are the endnotes referenced in the discussion.  Each endnote consists of the title and associated abstract of an article in the collection contained in the book Easy to Start, Hard to Run: Operational Guidance for Startups and Private Companies.
 

[1] Getting To NO Before Getting To KNOW

       People want to simplify their lives by removing clutter before they invest their time.  Investors are exposed to opportunities constantly and need to be very selective about which ones to pursue.  Out of self-preservation, their first reaction is to say “no”.  You have to appeal to them quickly and succinctly to get past the “no filter” before they spend timing getting to “know” you. 

[1]Company Success Versus Realized Investor Return

                It is easy to make assumptions that the company and investor goals are the same - the long-term success of the company.  However, at different times through the relationship, goals may significantly miss-align. Understanding why and when this occurs is critical to maintaining a long-term positive relationship.

[1] Investor Categories - A Baker's Dozen

       Quite often when the term investor is used, entrepreneurs think of venture capital firms or angels.  Indeed, both groups do invest in entrepreneurs and private companies.  There are a number of other different types of investors.  They differ in their primary motive for investing, their risk tolerance, and their focus.  Understanding these differences will help you select investors in the most appropriate category for you and help align your interactions with them accordingly.

[1] All Money Is Not Equal

       Different categories of investors provide different levels of tangible and intangible assets besides their capital infusion into a company. Understanding their expectations and capabilities is critical to attracting capital and managing the ongoing investor relationship.

[1] David or Goliath Partners

     The size and capability of a potential business partner must be carefully considered.  There are certainly advantages and disadvantages to working with other new and smaller companies as well as with large, well-established organizations.  Carefully and realistically reviewing the pros and cons is crucial before considering entering into a long-term relationship.

[1]The Valuation Trap

       The value of a company, referred to as its valuation, is very difficult to calculate for a privately held company.  It actually is only an opinion and generally represents what an investor is willing to pay for an equity stake in the company.  But, it is only one factor in determining the ownership and control of the company. Other terms could have a much more significant impact.

[1]The Term Sheet: The Beginning Not the End

       Throughout the fundraising process, the entrepreneur focuses on securing a term sheet from an investor.  In the moment that one is received, there is a natural feeling of a sense of accomplishment.  That feeling is warranted; an investor has shown confidence in you and your plan.  However, the term sheet is not the end; it is only the beginning of the commitment.

[1] Is it a Feature, Product or Company

       Independent of the uniqueness or value of the idea, an entrepreneur needs to objectively determine the best approach to transitioning from the idea stage to a deliverable reality.  Should it be a feature than enhanced something else, a standalone product that has long-term staying power, or is it the basis for an on-going company.  

[1] Someone Will Put You Out of Business

     The odds are that someone will put you out of business.  Business failure is more common than success.  You must constantly look for who or what it will be that puts you out of business and what you can do to avoid it and flourish.

 

[1] What Is Your Goal For The Business

       A simple question that can have a major impact on your plans is “what is your goal for your business?” Do you want to have a lifestyle business that generates a comfortable income stream for you or do you envision your business being acquired or going public?

[1] Can The Business Ever Scale, Should It

       Many highly successful individuals feel that the next logical step for them is to expand their business.  However, instead of being able to do more of the same, they quickly realize that they will have to be involved in an entirely different set of tasks which they may or may not want to do or may not even be equipped to do.  

[1] Are You the Right Person

                On the surface it doesn’t seem to make sense to ask yourself if you are the right person to run your newly planned company.  However, as the business starts and grows, the number and variety of tasks that must be performed increases at an incredible rate.  Carefully thinking through what you can do and do well and what areas in which you will need help will allow you to plant the seeds for a successful organization.

[1] Passion: The Fuel for you Business Engine

       A business can be thought of a generator that produces revenue, jobs, and customers.  Passion is the fuel for the generator, but the generator requires many other elements to start and keep running smoothly. Without passion, the business is probably a non-starter.

[1] Show Your Commitment First

       Having an idea and expecting others to jump on board with you before you show your total commitment is a non-starter.  Investors, including financial investors, employees, and partners, need to see that you are all-in before they agree to commit their resources.  Can you blame them?

[1]You Can't Raise Money With An Idea

       Ideas do not sell, well thought out solutions to recognized problems do. Vet your idea with individuals that will provide honest, objective feedback.  Move past the idea stage as far as possible to provide meaningful information about the potential risks and rewards. Find external sources that will validate your plan. 

 [1] Wait As Long As You Can To Raise Money

       The more you can externally validate facts that your opportunity is practical and serves a need that customers are willing to pay for now, the greater your chances of obtaining funding with reasonable terms.  Hold off approaching financial investors as long as you can to show that you have reduced the investment risk.

[1] Three Kinds of Revenue

       Pursing revenue is a universal activity for all companies.  However, understanding what revenue really means and its implications is often not considered and can lead to missed expectations or even disastrous results. Knowing the different types of revenue, their timing, and their implications is critical.

[1]Revenue: The Wonder Drug

       Revenue is the lifeblood of every organization.  Without it, a company simply cannot survive.  Think of it as a drug that must be taken forever and will result in a healthy, long-lasting organization.

 [1] Forecasting Market Share: Too Big Or Too Little

       Market Share as a single number can be distracting and not even indicative of a company’s underlying value.  Understanding what drives the number and the well-defined target market are far more important than the number itself.  Over or under forecasting can be an immediate turn off for potential investors.  It is hard to get it “right”.

[1] Hand Waving: A Smile or a Frown

       Hand waving and making sweeping generalizations may result in initial enthusiastic support, but may not hold up under close scrutiny.  We all see this during political speeches and have grown to accept it as part of the process.  It might work in politics, but it does not work with investors.  Unsupported sweeping generalizations most likely will result in frowns, not smiles.

[1] Distribution is the Only Thing That Matters

       Products sitting on the shelf or application servers with no users do not generate any revenue.  Getting the right product or service to the customer is critical. Invariably, it takes longer that one thinks to place products or begin services.  Business plans must take this reality into consideration.

[1] No Competition?  Really? Hmmm

       There is always competition for everything.  You have to think well beyond the direct alternatives to your product or service.  Understanding who and what you are competing with is crucial to building confidence with potential investors as well as customers.   Never, never say “none”.

[1] Why You Will Win

       It is easy to discount competition and to think of all of the reasons why you are better than they are.  Unfortunately, most likely, your competitors are thinking the exact same thing.  Both of you cannot be correct.  You must objectively examine why you think you will win and, equally important, objectively think why your competitors will lose.  You need to do this before the customer acquisition battle begins.

[1] Patents: The Reality

       The thought of protecting your idea with a patent is natural.  A patent can indeed offer a level of protection, but with it comes a significant commitment of time and money. In the end, an entrepreneur must carefully weigh the business value of a patent versus the alternative use of resources.

[1] Profitable Revenue: More Than Margin

       Determining if revenue received from a customer is profitable just starts with its gross margin contribution - the difference between what the customer pays and the cost of the associated goods or services. To that number, many other costs will be incurred that can have a major impact on the overall profitability associated with the transaction.

[1] Use or Misuse of Funds

       Investors will naturally want to know what the intended use of their cash will be and how long it will last.  The more definitive you can be about your plans, the more confident they will be in you and your plan, but be aware of some hot buttons to avoid.  

[1] Staying in Business by Staying Out of Some Businesses

       Initial success in one business or with one product can boost the confidence of a company and encourage them to expand.  Although growth is key to long-term success, understanding why the growth has occurred and the impacts on proposed future businesses is critical.  The grass on the other side may be greener, but it may also contain landmines.  So, proceed thoughtfully and carefully.
 

Article Number : 3.020503   

A Handy Reference Guide for Executives and Managers at All Levels.

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