Shark Tank – How to be a great investor?

BF introduced me to a US reality TV show. Therefore now, I have a new addiction.

Wickedly Good Cupcakes! One of the most successful companies after Shark Tank. Even Christopher’s Chicken Rice Stall didn’t do this well :p

Breath analyzers made sharks go into frenzy, vying to get a piece of his business!

The concept of the show is simple. The tank usually contains five to six sharks, all mult-millionaires. They are like a panel of judges to individuals or groups of people who are new start-ups or budding entrepreneurs with a business model that could be a good investment for the sharks. Some of them come from crowdfunding sources like Kickstarter and Indiegogo.

After making their pitch, the sharks will then decide if they are willing to invest in their company. Mind you, they really use money out of their own pockets.

Every time I watch the show, I observe it from both perspectives – the entrepreneurs, and the Sharks.

The Entrepreneurs

There are a ton of ideas being presented. Some great, some not so great. Some were even asked to leave the scene without even finishing there pitch. The successful ones are easy to identify. They are the ones who have the focus, great as salesman, and they know their business inside and out. They believe in their product, and they believe their company is gonna make millions. They have a vision for tomorrow.

Unfortunately, most of them have reached a road block. They need more money. Maybe for building inventory, or expansion. But they all need money.

They are looking for a business partner who share the same vision and drive as them to want to succeed. Someone who has made loads of money doing what the entrepreneurs are doing. Often times, I also notice that some of them already have a specific shark in mind that they want to catch. That shark has something to offer on the table that can be very valuable to them – be it network, retail, licensing, manufacturing. You name it, you’ve got it.

Here’s where the sharks come in.

The Sharks

I see what each shark does once they hear the entrepreneurs’ pitches. After the entrepreneurs quote the offer of what they are seeking, the sharks jot it down on their notepads in front of them and calculation the valuation of the company.

Example, if the entrepreneurs offer a $100,000 for 10% equity of their company, their company is worth $1 million dollars ($100,000 x 10).

The sharks are looking for a great business, but more importantly, a bargain. Here are some of the things I see them consider before giving an offer:

1) The product

The product doesn’t have to be something that they like (although it may help), but it must be something that can sell. They take note of the market conditions and how large of an audience the product can reach out to. The bigger, the better. If it is too niche, most likely they will withdraw. Margins are also important. Does the product need a high capital to produce? This will affect their balance sheets in terms of capital expenditure, and thus reduce margins.

2) The entrepreneurs

They want to know more about the entrepreneurs’ background and what kind of person they have to work with. Are they honest? Are they wishy washy with their valuation and how do they deal with pressure from the sharks? Do they just want to strike a deal so that they don’t have to work that hard anymore?

3) The business model

Which direction do the entrepreneurs want to take the company into? Is it a branding company? Do they need licensing deals? Or they need a manufacturing line, because they have too many orders on hand that they need to fill? Do they have a patent so that they can eliminate competition? If the business model is different from how the sharks see it, it is obvious that they are in different directions and more often than not, there would not be an offer.

4) Return on investment and Risk mitigation

As an investor, you want to know how fast you are able to get your money back. This then tags to the price that you are willing to pay, and the amount of risk that you are willing to take. The higher the price, the higher the risk. All sharks make careful calculations as to how much they have to put up before making their offer. And sometimes, they can get very good bargains.

5) Their circle of competence

Each shark has their own strengths and they know clearly what they can offer. From there, they tap on their own expertise. For example, Lori Greiner is notably the Queen of QVC on the show. If you need someone to help you get your product into the major big retailers, she’s the shark you should be aiming for, because that’s what she’s good in. For Daymond John, licensing and manufacturing. Mark Cuban? He’s the tech guy.

Key here is, if they don’t understand the product, or if it’s not something that’s within their circle of competency, they don’t offer.

It’s amazing how much I can learn from the show. From all the fights and bidding wars, I have learnt how to step back and see how multimillionaires think, and how they make rational decisions. I recommend any investor anyone to watch Shark Tank. Every pitch is exciting, entertaining and keeps you on the edge of your seat (I mean well, they made it so. It’s a reality TV show).

As for me, I’ll be watching the rest of the episodes after this post is published (they have 8 seasons!!!). :p

Thanks for reading!

Miss Niao xoxo

Author: Miss Niao


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