12 Common Shark Tank Mistakes that Botches Deals

Sharks from TV show Shark Tank

This post veers from the usual fodder on this site.

I’m watching Shark Tank on Netflix.  I’m at episode 18 in season 8.  It’s what I watch trodding along on the treadmill a few times per week.  Don’t get me wrong, I don’t run the treadmill.  I just walk.  When I’m particularly energetic I bump the incline to a whopping 7%.

These days my gym visits are about staying healthy enough to stay alive. Aspirations of a terrific physique are long gone.

Amazingly, after watching over 100 episodes of Shark Tank, I’m not bored of it.  Each pitch is a self-contained story with drama.  I’m not surprised it’s been a hit show for as long as it has.

Overall, I’m impressed by the quality of the pitch presentations.  Nearly every deal-seeker is very well prepared.  I guess I’m so impressed because I’m not a performer and appreciate all the work that goes into the pitch.

Seldom do things go off the rails as a result of the pitch presentation.

The mistakes are made during Q&A, which is when the sharks ask questions for clarification and to get the necessary information to assess the business.

I get it that people would not be fully prepared for questions during seasons 1 and 2.  However, now that the show has been around so long, you don’t have to watch many episodes to figure out what the Sharks want to know and hear in order to make an offer.

Interestingly, the many of the same mistakes are made over and over.  They can generally be avoided unless the business is not in good shape.

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Yes, I’m going to play armchair quarterback.  It’s easy for me to sit at my computer and tell you what people do wrong.

I’ve never gone on the Shark Tank. I do not aspire to pitch the sharks (not that I have anything to pitch).  I realize it’s not easy pitching to and fielding questions from the Sharks.

Here’s what I observe to be the biggest Shark Tank mistakes.

Value their business too high

In the most recent seasons, many deal-seekers are coming in with astronomical valuations such as $3 million or more.  While some of the businesses are worth that, many aren’t.

The problem is that too often valuation is based on projected revenue and/or net income, not current revenue and net income.  While some sharks may pay a premium valuation if they believe growth is a sure thing or there’s synergy with their other businesses, more often than not an over-inflated valuation makes getting a deal very difficult.

Don’t offer enough equity

Some deal-seekers arrive in the Shark Tank offering only 3 to 5% equity.  It’s too little.  The Sharks repeatedly say they need “skin in the game” to get involved.  I don’t blame them.  10% to 20% equity is a sweet spot.

Not enough sales

This kills deals fast.

The pitch goes well.  The Sharks like the product.

Then the dreaded questions:  “what are your sales last year, year-to-date and expected sales for the year”?

If the answer is under $100K, it’s not good.  That either means the product doesn’t sell well or it’s far too early for a Shark investment.

Another problem sales scenario is slow or no growth if the business has been around for a few years.

For example, if the business is 5 years old with $1.5 million in revenue, that sounds impressive.  But if sales last year are less than three years ago, that’s a problem.

Sharks like growth.

Don’t know the numbers

Most deal-seekers know the numbers reasonably well.  However, some have failed to secure a deal for not knowing the important numbers which include:

  • Sales: Last year, year-to-date, expected sales this year and expected sales next year.
  • Cost of goods sold: You need to know exactly how much the product/service costs per sale.
  • Potential cost savings with more orders:  A big opportunity for the Sharks is being able to cut costs with more volume.  Deal-seekers should have a very good idea how much lower COGS could be by ordering in larger volumes.
  • Customer acquisition cost: This is particularly important for businesses that primarily sell online such as subscription-based businesses and digital products.

I’m not saying it’s easy for everyone to recall numbers while getting grilled on TV, but failing to do so can be fatal.

Fail to communicate the business

Some pitches and follow-up Q&A fail to succinctly explain the business and the business model.  Sharks like simplicity and need to know exactly what’s being sold and the business model used to sell it.

Some Shark Tank entrepreneurs go on tangents or get off track talking about “ideas” for growth instead of sticking to the main concept.  That’s not to say that Sharks won’t suggest methods to improve the business, but it’s important to communicate the business, the model and future plans.

Don’t jump on a good offer fast enough

I can’t count how many times a Shark made a good offer, sometimes offering exactly what’s being sought, when the deal-seeker says “I’d like to hear from all the sharks”.  That’s a very dangerous maneuver because on many occasions, that good offer disappears by the dreaded “I’m out.”

It’s a very difficult position to be in.  I understand why someone would want to hear all offers.  I would too.

I’d prefer it if there was a rule where Sharks couldn’t issue time-sensitive offers like that because I do like to hear all the offers, but the Sharks call the shots.

Leave the Shark Tank to discuss offer(s) with partner(s)

Many deal-seekers when two or more are involved, leave the room to discuss an offer(s).

I get that they’d like privacy to discuss the offer(s), but many times while outside the room, the Sharks change their offer (to the Shark’s benefit of course).

O’Leary then chimes in saying to the effect, bad things happen when you leave the Shark Tank.

Nickel and dime negotiation

This isn’t too common, but it’s sunk more than one deal.  This is when the deal-seekers start haggling over very small amounts of equity such as 5% or less. Sharks don’t like that.

On the flip side, 1% to 5% equity could amount to a lot of money one day.

But then again, getting a deal on the Shark Tank can really sky-rocket your business.  I’d rather own 75% of a $20 million business than 100% of a $1 million business.

While I don’t know what the success rate is for businesses that make a deal, there’s no doubt that getting a deal with a Shark can result in phenomenal success.

Spread too thin

Some entrepreneurs are spread too thin.  A common scenario is when they’re doing really well selling direct to consumers online and it’s growing fast, but then they want to get into retail as well.

There is nothing sweeter than selling direct to consumer. The margins are good.  Your money is tied for shorter time-periods (unless you buy way too much inventory).  As long as online sales grow, that should be the focus.

Retail is difficult because your margins are much lower and your cash is tied up in inventory for a long time.  It’s not uncommon to run out of money despite solid retail sales.

I’m not saying retail is bad.  For many products, it’s the only option.  However, if you are doing well by selling direct-to-consumer and there’s huge growth, stick with that. Fill your coffers with cash and then pursue retail.

Another way entrepreneurs spread themselves too thin is expanding the product line too quickly.  An example is they have a hot-selling product and then they ramp up into all kinds of related products too early which can consume too much cash.

Again, expanding the product line isn’t necessarily bad, but it needs to be done at the right time.

Can’t scale

This is when an entrepreneur enters the Tank too early in the life of the business.  An example is product production is still being done in the garage.

While there have been exceptions, Sharks typically don’t want to jump in at the “garage” stage because it’s a ton of work to ramp up manufacturing.

Sharks prefer that the business can scale fast.  That way the focus is on getting orders (i.e. selling).

Don’t have a plan for the money

While the sharks don’t always ask “what do you plan to do with the money”, it’s common enough.  Deal-seekers need a good response for this because it demonstrates focus and a clear plan on where the business is going.

It’s a $50 billion industry (so success is assured)

Deal-seekers are routinely raked over the coals for suggesting success is assured because it’s a huge market.

Sharks don’t like this reasoning.  I don’t either.  There’s no guarantee that entering a big market that success will follow.  The business needs some sort of competitive advantage such as a patent, first-to-market (not the strongest advantage, but Sharks will bite), effective marketing or some other advantage.

Is it worth going on the Shark Tank?

Yes, if your business is at the right stage.  It needs to be investible, which means it can scale now and has big growth potential.

It’s a shame to go on too early in the life of the business because it’s a wasted opportunity.

That said, the exposure alone can help a business generate a huge amount of sales quickly.  If you go on the show, you need to be ready to handle a ton of new business.

One thing to keep in mind, and Sharks have stated this on more than one occasion, bringing on investors changes the nature of the business.  It’s one thing to only being answerable to yourself, but once investors are involved, you are answerable to them.  You lose some control, even if a minority equity stake was sold.

Losing that control would be the one thing that would keep me from going on the show (hypothetically speaking because it’s doubtful whether a niche blogging business would get on the show, let alone net a deal).  Even if I had the type of business that does net deals on the show, I’d be reluctant to give away control and impose obligations on myself.  I like to do what I like to do. Taking orders takes the fun out of it for me.

The question is whether potentially earning millions of dollars compensates for that loss of control.

 

Fat Stacks quote from Breaking Bad by Jesse Pinkman
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