5 Lessons to Learn From Shark Tank About Pitching

5 Lessons From “Shark Tank” About Pitching

I’m a member of an angel investment group based in Oregon. And I watch Shark Tank, the TV show where seasoned investors (the sharks) pick investments from business pitches. It has a lot in common with angel investment. If you’re seeking investment for your business, watch enough Shark Tank episodes to understand these five key concepts:

1. Valuation

Pay attention to how the sharks deal with valuation. Every Shark Tank pitch starts with contestants asking for money in exchange for ownership in their business. This establishes their proposed valuation. For example, if they want to give 10 percent of the company for $100,000, that’s a valuation of $1 million; and 30 percent for $150,000 is a valuation of $500,000. It’s simple math.

Investors like valuation to relate to actual business numbers, such as sales, gross margin, and burn rate. On the show, the sharks object to high valuations and often make their own offers based on lower valuations. Sometimes they’ll accept a valuation based on proprietary technology or brand impact, aside from actual business numbers.

Angel investors use flexible options like convertible notes, which are temporary loans to be converted to equity based on future valuation. But the importance of valuation is always there. Every startup should understand the basics when dealing with potential investors.

2. Market size

The sharks want businesses that appeal to large numbers of possible buyers. They want niches that can grow, not niches that remain small forever. For example, they rejected a $500 gaming device because they thought it would appeal to a small percentage of gamers.

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3. Defensibility

The sharks often ask: “What do you have that I can’t just do myself?” They want to invest in a company that won’t be blown away by competition in the near future.

Defensibility comes in different ways for different businesses. It can be a strong patent, secret formulas, trade secrets, relationships with channels of distribution, or progress in branding. Without defensibility, the investment is not attractive.

In a recent episode, the sharks rejected a doorbell connected to smartphones because they thought it would be too easy to duplicate.

4. Scalability or leverage

Products businesses are scalable because they can make more products when sales grow. Some service businesses, like web services, are also scalable. But a service delivered by humans that requires adding payroll and fixed costs in proportion to sales increases is not scalable.

Not many Shark Tank contestants sell services because they are not a great opportunity for investors. In a recent episode, the sharks turned down a gift box for children business because it didn’t seem easy to scale up.

5. Industry bias

The sharks prefer industries and businesses that match their experience and previous investments. Shark Lorie Grenier likes businesses that would work on the QVC channel. Shark Daymond John knows retail and clothing business. Sharks are more likely to invest in types of business they know, and the contestants value certain sharks more for certain kinds of businesses.

The same phenomenon is seen in angel groups. Investors are more comfortable investing in businesses they know.

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