Ten Lessons I Learned From Shark Tank

Email Print
FacebookTwitterShare

Recently
by James Altucher: How
To Increase Your Productivity 500%

 

 
 

I just gave
up all parenting responsibilities this weekend to Mark Cuban. Meaning,
my kids and I watched eight straight episodes of Shark Tank.

For the past
two years, people have been begging me to watch Shark Tank.
One friend of mine, who has co-invested with me on two deals, has
given me two pieces of advice in life. One is: “you never know
what someone is worth until they declare bankruptcy”. The point
is, we all speculate that someone is worth $100 million or a billion
or whatever, and the next day you read in the newspaper that they
declare bankruptcy. Now you know.

The second
thing my friend and co-investor was always telling me was that “James,
you need to watch Shark Tank”. Now, after watching every
episode, I can say I agree with him.

For those of
you who don’t know what Shark Tank is, it’s the
best reality TV show I’ve seen. 5 investors sit on a stage,
keeping them slightly higher than the supplicants who come in asking
for money. Then, one by one, aspiring entrepreneurs are led into
the “Shark Tank” where they pitch their products and the
Sharks, right then and there, decide whether or not to give them
money. The entrepreneurs are often humiliated, laughed at, insulted,
ask the stupidest questions I’ve ever heard, but occasionally
get some good advice and even better, walk away with a check if
one or more of the “Sharks” think their business is a
good idea.

(A Shark
Tank Pitch)

“The Sharks”
as the show describes them, “are filthy rich” and invest
their own money. It’s not always the same sharks each show.
Mark Cuban is often a shark. (See also, “How
I Helped Mark Cuban Make a Billion Dollars
“) And the rest
of the often rotating cast includes Barbara Corcoran, of real estate
fame, Kevin O’Leary, who started and sold “The Learning
Company” for $3.2 billion to Mattel. Robert Herjavec, who I
had never heard of but he’s sold “companies worth $350
million”, Daymond John who started Fubu and “has sold
$6 billion worth of products” and Jeff Foxworthy, the comedian
who has created an empire out of making fun of rednecks. Power to
him. God bless them all.

I’m never
jealous of any of these people. Money doesn’t buy happiness
but it certainly solves your money problems. It’s up to you
after that to be happy or not. To not self sabotage at every opportunity.
I can tell you this: I am very good at making money but have often
had a talent for self sabotage. A talent I have been hoping these
past few years to suppress.

So I think
highly of the people who have learned through experience not to
sabotage their successes.

So what have
I learned from the show. Some items are good for investors, some
for entrepreneurs, some for me, and some for my kids.

First,

Math:
The first thing that happens when an entrepreneur enters is: “Hi,
my name is ABC and I’m asking for a $100,000 for 10% stake
in my company.” At this point we would pause the show and I’d
ask my kids how much the company is worth. Any trader, investor,
entrepreneur, does this math instantly and I wanted my kids to get
good at it.

And they did.
At first the answers (from either kid) would be a nervous “I
don’t know”. Then they’d start to figure it out but
still be nervous “one ….million?” And then finally,
by the last episode, they were doing it in their head and blurting
it out before I even hit pause.

But sometimes
the entrepreneurs would present confusing numbers like, “I’m
asking for $85,000 for 15% of my company.” And then they’d
launch straight into their story. To be honest, I can’t even
do this accurately and quickly in my head. I always wondered if
these entrepreneurs did this on purpose, so that the sharks would
focus more on the product than the specific valuation.

Second,

Not everything
is as it appears.
This is a TV show. Not a venture capital firm
(where, also, by the way, not everything is as it appears. In fact,
in all of life, nothing is as it appears but this is never more
true than a “reality” TV show.) For instance, in the beginning
intro the show says “Barbara Corcoran took a $1,000 loan and
turned it into a real estate empire worth hundreds of millions.”
Except she sold her “hundreds of millions” company for
“60 million”, which they don’t say.

I’m not
saying she’s poor. She’s incredibly smart and successful.
But the TV show hypes it up. There’s subterfuge like that throughout
the show. Kevin O’Leary, who plays it up as the most obnoxious
member of the Sharks, is described as someone who “built a
software company in his garage and sold it for $3.7 billion”.
That’s true. He built The Learning Company and sold it to Mattel.
What they don’t say is how much he owned of it (so we can estimate
his worth). He clearly made some money on it. But he bought hundreds
of companies first. So each company, assuming it was bought in part
for stock, diluted his share. So his stake might have been tiny.

And then, Mattel
repeatedly missed their earnings estimates because of the acquisition
of his company. In fact, the acquisition has been described as “one
of the worst acquisitions in history” in various articles about
it. But, fair enough. Kevin turned this “success” into
having a role at a venture capital firm. I am guessing it’s
his firm’s money (rather than his personal money) which he
uses when writing checks on the show.

I went through
this exercise with each “Shark” and in every case it was
not how they described it on the show (except in the case of Mark
Cuban).

My only guidance
for the people who are going on the show, or for anyone who pitches
any investor, is to carefully study every aspect of the background
of the people you are pitching. There are many ways you can use
that to your advantage in the actual pitch. And because these guys,
in particular, have very public personas, there are a lot of venues
you can research their net worth, their successes, their failures,
their interests, their distastes, and so on.

Third,

Sell
the Dream, not the Sales.
Many of the entrepreneurs go in there
and say, “I sold $11,000 of this product last year from my
garage.” These are the people that get either the worst deals
or no deal at all. Nobody cares about $11,000 in sales. Sometimes
the Sharks didn’t even care about close to $1 million in sales
over the last year. (A great example was games2u.com
which I thought was an excellent company but walked away with no
deal).

And yet some
companies with no sales walked away with a great deal. Here’s
what the Sharks, or any investor, want to really understand: Do
you have a great product? Do you know what the size of your market
is? Do you have some sense of a business model? And, in some cases,
do you have big breasts?

How do they
know if you have a great product? They can tell by your background,
they can tell by the technical expertise you needed to make the
product, they can tell if you have a patent, and they can tell if
you say, “I have 3 distributors about to send me purchase orders
for the product.” You might not have a dime of sales but if
you show that people are interested and that your product is special,
you’ll get an offer. If you also say, “and for the last
three years I’ve had a total of $53,000 in sales even though
I’ve had a full time job” then you will definitely
not get a deal.

Sell the dream.
Better not to have sales unless you are going to blow them away
with your sales numbers.

Fourth,

Don’t
Nickel and Dime.
It’s not so bad to “nickel plus dime”
and I’ll explain that in a moment. But if you went in there
and said, “I’d like $100 for 25% of my company” and
you have no sales and one of the Sharks says, “I’ll give
you $100 for 40% of your company” then just say yes. What do
you care about the percentage? As Cuban said in one of the episodes,
“better to have 20% of a $100 million company than 100% of
nothing.”

With
one successful company I sold
I wanted my partner to take 10%.
Instead they asked for 50%. I gave it to them and sold the company
4 months later. To them! Because with 50% they had to care. With
10% maybe they would not have cared.

However, you
should nickel plus dime. If Mark Cuban offers you $100k
for 30% of your company push forward and ask for a few more nickels.
Price is often the least important part of a negotiation. Ask him:
can you introduce me to Netflix, can you get me a promotional deal
with the Dallas Mavericks, are there any distributors you can help
me license my product to?

Get value out
of every deal aside from the money. Money won’t save or help
your business for more than a short time. But the right deal and
connections will make or break you. So while they are playing around
with the dimes, make sure you collect as many nickels that they
may have left lying on the floor.

If you want
a deal, then take a deal. Unless…

Read
the rest of the article

February
28, 2012

The
Best of James Altucher

Email Print
FacebookTwitterShare