Shark Tank is many television viewers’ introduction to venture capitalism. The process may or may not resemble what goes on in a private investment negotiation. As The Inquisitr previously reported, the show has been criticized for painting an unrealistic picture of what happens when start up companies seek funding. In any event, the show is a boon to many businesses who make it in front of the panel. For those that do, one economist has advice for landing a good deal.
Writing in Forbes, Adam Ozimek tailors his tips for the television camera world of Shark Tank. Notably, he starts off by telling entrepreneurs to value the deal and not the company, and factor in the added value of partnering with a shark. He says most pitchers flatter the sharks by saying they are interested in their connections, advice, and experience — but fail to factor in that benefit when they offer up a valuation.
Stephan Aarstol, founder of Tower Paddle Boards, appeared on Shark Tank in 2012 and wrote about his experiences in a June, 2014 Linked In post. He also noted the significance of choosing the right shark to close a deal with, and cautioned against choosing cash over personality.
“Go with the best shark for your business, not the best deal. Don’t mortgage potential for 20 percent more cash. The sharks realize they add value to a company, and their offers are based on this fame. Appraise their name value before appearing so you know who fits your business best well before the pitch.”
Ozimek also coaches entrepreneurs to carefully navigate the “shot clock” deal, where a shark will tell a pitcher to take-it-or-leave-it immediately, or else risk losing out on the investment. The author cites game theory to conclude that, in these cases, sharks feel they will lose out on the deal if they don’t give the ultimatum. It perhaps signals the entrepreneur is in a strong bargaining position. However, a shark may also follow through with the threat or else risk loss of credibility in future negotiations.
And the economist’s last tip? It echoes the sentiment expressed last month on Twitter by shark Kevin O’Leary.
Never leave the Shark Tank then try to come back without expecting to find a bloodbath when you return! #SharkTank
— Kevin O’Leary (@kevinolearytv) October 4, 2014
Again using economic theory, Ozimek cautions against the practice of leaving the room to discuss a potential offer.
“When your buyers collude it leads to the possibility of a monopsony where they bid the price down. Instead you want your sharks to compete.”
Shark Tank continues to win the Friday night ratings race. The Hollywood Reporter revealed the program’s 100th episode on Friday, November 14th was the highest-rated show that evening for adults 18-49.
[Image courtesy of ABC]