“Shark Tank” is a great deal for entrepreneurs, and other myths about the hit show

Guess who’s the entrepreneur?
Guess who’s the entrepreneur?
Image: Lwp Kommunikáció / Flickr
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America is obsessed with entrepreneurship. HBO’s hit Silicon Valley has spread words like “pivot” and “growth hacking” through the American lexicon. Mattel offers a pink “entrepreneurial Barbie,” complete with iPhone and high heels. And for 7 million Americans, the height of this cultural narrative is every Friday on ABC’s Shark Tank.

Based on the Japanese show Dragon’s Den, the show asks founders to pitch their businesses to investors, and, if they’re among the chosen, sell a percentage of their companies for cash. Of the 40,000 or so people that apply, only about 100 ever make it on air each season, and even fewer walk away with money.

Last week, Shark Tank held tryouts for its eighth season in San Francisco’s NASDAQ Entrepreneurial Center. Organized by Values Partnerships to bring a more diverse set of contestants to the table, it was not the plugged-in, hoodie-wearing dropouts that crowd San Francisco’s coffee shops. A father and daughter team pitched Rachael’s Spaghetti Sauce. Emeka Nwadibia promoted his music and concert app Entusic. Daniel Katz pitched Artisan Ethos, an Etsy for high-end Japanese craftsmen. Hillary Wade of Obe was selling doggie bowls that lit up when the pet food ran out.

Quartz got a behind-the-scenes look at the casting call, which dispelled some myths about Shark Tank, and offered lessons for entrepreneurs in America today. Here’s what we learned:

Shark Tank is not about funding entrepreneurs.
It’s about marketing them. The most valuable thing entrepreneurs on Shark Tank walk away with is exposure to its millions of viewers who may want to buy their product. The second best thing is a distribution deal arranged by one of the investors such as Lori Greiner, a star on the QVC network and backer of Scrub Daddy, which rocketed to $75 million in sales. Money ranks far down the list of what contestants are after. Distribution is everything.

That’s advice investors give founders all the time. The greatest risk most startups face is the “go-to-market” strategy: how does a company profitably distribute and sell its product to a big market? Several entrepreneurs at the casting call seemed to realize this. “I’m here for two reasons,” said Lloyd Vassell, who founded Arawak Farms, which makes Caribbean spices and condiments. “I need to build better distribution for my business and, above all, I’ll get to present in front a few million people who haven’t seen my product. The money is secondary.”

It takes more than 90 seconds to make a pitch.
Pitches on Shark Tank can go as long as two hours. Shark Tank is taped months ahead of time in marathon sessions that go from dawn to 9 pm. The episode that actually airs is a tightly edited fiction to maximize tension and heighten audience suspense. During the taping, contestants consult with lawyers, phone business partners, and negotiate their deal. Producers go online to conduct due diligence on companies, run background checks, and verify contestants’ statements. It would make boring television to air all this. Fundraising in real life is not that different—it just takes longer, usually months and sometimes even years. Entrepreneurs can expect hundreds of difficult meetings with associates and partners before ever presenting to an investment committee.

Shark Tank investments are not a good deal.
Shark Tank being what it is,” says Values Partnerships’ Brandon Andrews, who hosted the casting event, “you aren’t going to get as fair a deal as what you get in the real world.” The show usually asks entrepreneurs to give up large pieces of their company for little money. One of the contestants at Thursday’s tryouts (May 26) planned to ask for $125,000 for 25% of his food company to fund demos (a more typical seed round in Silicon Valley is $500,000 to $2.5 million for 25% of a company—although such deals tend to be for technology companies).

In other words, you’re better off finding financing from sources other than rich people who advertise themselves as sharks on a TV show. You may not even want investor money at all. The Kaufmann Foundation says less than 5% of startups or small businesses ever raise a dime from professional investors. Most startup capital in the US comes from personal savings, friends and family, and loans. Given that about 75% of companies that do raise money from venture capitalists fail (pdf), fundraising itself doesn’t mean much.

Don’t pitch investors with numbers.
This was repeated again and again. Panelists coaching the entrepreneurs told the audience to never lead with hard numbers or build an argument in the first 90 seconds. Lead with a compelling story and a painful problem, said David Nihill, founder of FunnyBizz, who was there mentoring prospective contestants. Investors insisting they wanted numbers were deluding themselves, said Nihill. Numbers come later after people believe and care about your story.

The handshake is not the deal.
Many deals struck on the show actually fall apart. Once the handshake is over, the real negotiating begins. Founders and investors have admitted to backing out of dozens of deals once due diligence revealed something new, or either party felt uncomfortable with the terms. There is no deal until the money is wired into the entrepreneur’s account. In Silicon Valley, backing out of a deal is not common, but it does happen, especially when the agreement is verbal.

Pitching “Uber for X” is not a good idea.
Many of those at the casting call who had listened to enough pitches agreed: don’t pitch Uber-for anything. The idea is unlikely to work for many, many reasons, and will elicit eye rolls from producers. While the format of “X for Y” is a catchy way to convey a concept quickly to investors, it is rarely a business or product description. The secret formula for Shark Tank, however, is clear, says Alex Furmansky, who spent 18 months getting his company Budsies on the show: pitch “products that the average household can understand and appreciate … in a one-sentence pitch.” That’s good advice for most VCs as well.

The image above was taken by Lwp Kommunikáció and shared under a Creative Commons license on Flickr.


Correction: A previous version of this article misstated the relation of the founders of Rachael’s Spaghetti Sauce. It is a father and daughter team.