by Guest Author on April 22, 2014
As you might know, Shark Tank is a show on ABC where entrepreneurs pitch their product to investors in front of a live audience. While most of us will never pitch to investors on television, the pressure we feel in the investment “shark tank” can feel just as intense.
While some entrepreneurs can get things off the ground without investors, many can’t. They need to persuade investors to take them seriously in order to get their endeavor going. Unfortunately, all too often, stupid mistakes prevent that from happening.
Let’s look at 3 mistakes wannabe entrepreneurs made while presenting their case to the investors, and how you can avoid making these with the judicious use of common sense, paperwork, tools and partners.
1. Have Clear Plans (and Present Them Clearly)
During episode 24 of season 4, a stuntman named James LaVitola, along with his friend Brian Pitt, pitched the Shark Tank investors on a movie they had planned, called Track Days. They were asking for just $5 million: not much at all as far as movies go, really.
They didn’t get very far either.
In fact, they set a record nobody would ever want to have: the fastest “I’m out,” ever. Mark Cuban simply couldn’t convince himself to put up any cash for the movie.
Simple. James and Brian had barely introduced themselves before it became clear that the “movie” had no script, no producer, and no actors signed. With nothing more than stuntman James to bring any kind of expertise to the table, the Sharks had absolutely no reason to open up their wallets for a single dollar.
The logic behind their pitch was laughable. James and Brian were asking for $5 million so that they could get the talent they would need in order to get a good script and actors involved to make the movie.
Here’s the thing: James and Brian probably didn’t need to be filmmakers or have a script in hand in order to get money from investors. All they needed was a clear plan. Even if it’s all for fun, sticking to the basics helps give direction and legitimacy to the project (all the more because of the investment involved).
For example, they could have:
- Spoken with several screenwriters who had written profitable movies in the past.
- Got in touch with independent directors who had directed at least one profitable movie.
- Contacted several independent actors who had played parts in profitable movies.
- Spoken with a producer who could get involved and who could estimate the cost of the special effects, equipment, taxes, and other unexpected costs.
- Negotiate signed payment agreements with the parties discussed above.
- Add another 50% or so for good measure.
- Design an in-depth project plan using a multi-device collaboration app like WorkZone or Asana that all parties involved can actively put to use until project completion.
Then they could have approached the Sharks with a clear plan regarding what the money was going to be used for, who it was going to, and why the talent that they had on the books was going to turn a profit.
These lessons aren’t limited to Shark Tank. They’re valuable insights that you can carry with you when you approach investors, talk to banks, or even launch a crowdfunding initiative on a platform like Kickstarter.
As the entrepreneur, you don’t necessarily need to be the “product expert” or have a specific skill relevant to the product you’re producing. In fact, sometimes product experts make the worst entrepreneurs.
What you do need to have is a clear plan and proven talent. When you ask for money, you need to be extremely unambiguous about what it’s going to be used for, preferably with written agreements backing up where the money is going to be spent, and a track record of profitability.
2. If You Are the Product Expert, Find a Business Expert
This lesson doesn’t necessarily apply to everybody, but the uncomfortable truth is that most product experts are not business experts, and haven’t learned the skills to lead a team, market a product, talk to investors, or turn a profit. And while you certainly can learn those skills, it’s generally not worth the effort.
The division of labor is the hallmark of capitalism’s success, allowing us to focus our efforts on the skills we’re good at, and contract out the ones we aren’t so great with.
This is a lesson that Donna McCue of “Fat Ass Fudge” could have used when she went on Shark Tank.
Donna is a former comedian who has been making gluten-free fudge based on her grandmother’s recipe since 2008. She’s had experience making it in several restaurant kitchens in her area. Made with organic goat’s milk and butter, the fudge is a good choice for people with both gluten and lactose intolerances, and those who have a preference for organic foods.
She’s also been selling the fudge from her “Fudgemobile” as well as online, and she seems to be making a profit.
But when she asked the Sharks for $250k in order to get a 5% share in Fat Ass Fudge, she fell flat on her face.
The Sharks loved her fudge, it was apparent that she is making a good product; it was obvious that it had a market, and with $60,000 in sales, she was profitable. Why would the investors turn her down?
Her personality was just a little bit too colorful.
Donna’s background as a comedian shines through during her presentation in front of the Sharks. The Sharks liked Donna. Mark Cuban was the last to say he was out, and said he felt she would probably do fine without his investment. But, at the end of the day, the investors simply weren’t willing to trust their money with somebody who had so little business experience, and such an outrageous, if enjoyable, personality.
Her appearance on the show has helped business, and as Cuban said, she probably will do just fine. But if she ever wants to scale, she’s going to need to partner up with somebody who isn’t a product expert. Somebody who can talk to investors, market a product, and grow a business.
3. Patent Your Tech (and Have Some Humility)
Ben Wood pitched his apparel company called Viewsport to the Sharks during Season 3. His company sells shirts with sweat-activated technology. When the wearer sweats in the shirt, a motivational saying like “No one has ever drowned in their own sweat” appears on the shirt.
While Barbara Corcoran found the idea of the shirt disgusting, the guys were interested at first. Unfortunately, Ben made two decisions that killed it for the investors.
For starters, the technology was not patented.
This is a big problem for products whose primary selling point is innovation. Obviously, not every product idea should be patented and many can’t. But when the idea can be patented, and it’s your product’s entire unique selling proposition, you obviously need to just get it done.
At bare minimum, you need to be in patent-pending status.
In Ben’s case, he was patent-pending. This was a good step and it might have been enough for the Sharks if he hadn’t made another crucial error that left them skeptical.
He asked for too much.
Way too much! Ben asked for a $500k investment in exchange for a 20% stake in the company. In other words, we was valuing his company at $2.5 million. When he went on Shark Tank, he only had $140k in sales. While most of the sales had taken place in just the 3 months prior, this was simply asking for the moon from the investors.
Both errors were fundamentally the same. Ben Wood was asking for too much, too soon. If he had given himself the time to reach a fully patented status, and demonstrated enough revenue to justify his asking price, he probably would have succeeded.
Like “Fat Ass Fudge,” Viewsport will probably be a successful company, but it will struggle with scaling until Ben can get his tech patented and his asking price under control.
Master the Basics
While all three of these mistakes might seem obvious in retrospect, it’s surprisingly common for entrepreneurs to make them when they talk to investors (or try to run a business in general). Most entrepreneurs fail not because they failed to learn some crucial piece of expert advice, but because they failed to master the basics.
- Know exactly where the money is going to go, preferably with written agreements in place, and present those plans clearly.
- If you’re a product expert, you’re probably not a business expert, and you need to partner up with somebody who is.
- Don’t pitch too much too soon. If you’re in an innovative space, get your product patented. Ask for reasonable investments and value your company based on existing revenue or conservative projections.
So there you have it. Stick to the fundamentals and you will put yourself ahead of many of the entrepreneurs competing for attention in the investment shark tank.
About the Author
Rohan Ayyar works at E2M, a premium digital marketing firm specializing in creative content strategy, web analytics and conversion rate optimization for startups. He is an avid blogger and his posts have been featured on Duct Tape Marketing, Business Insider India and Ventureburn, among other places. Rohan hangs out round the clock on Twitter @searchrook – hit him up any time for a quick Q&A.