Is ‘Shark Tank’ Like Real-Life Venture Capital? Yes And No, But It’s Still Real

Fans of Shark Tank might know only one kind of venture capital: the kind that plays out on prime time television, featuring ambitious millennials, cute kids with big dreams, and baby boomers looking for a second career. Typically, on Shark Tank, the pitch lasts about 10 minutes — each hour-long episode generally includes four pitches — and the investors will ask for a hefty stake in each business, if they choose to make an offer at all.

How does this compare to real-life venture capital? According to VC investor Duncan Davidson, who spoke with Forbes on this very topic, there is much that is different, although some is the same. On Shark Tank, the pitches are short and the panelists have no advance knowledge of the entrepreneur or the business. Even the full pitch is only about an hour long — far less time than VCs take to assess a business, and without the preliminary investigation.

According to Davidson, the types of businesses featured on Shark Tank are not those that interest VCs.

“‘Shark Tank’ deals tend to be small businesses rather than future unicorns – much less ambitious and less capital intensive. The Shark investors offer mentoring and advice; VCs offer that and a longer period of assistance across a broader range of issues.”

Davidson is a general partner at Bullpen Capital, which has invested in Udemy and Zynga, creator of online games like FarmVille and Words With Friends. He said not only would people in his field generally steer clear of the mom-and-pop businesses featured on Shark Tank, but they would invest with an entirely different exit strategy in mind.

“A Silicon Valley venture firm would almost never go for a startup focused on a licensing and royalty strategy. The return profile is not compelling for a VC, even if it would be compelling for an investor with a different return profile.

“A VC wishes to cash out with a big exit that in effect pays for future cash flows in one lump sum. A licensing deal is a stream of cash flows and is attractive to an investor that wants a stream of income.”

That assessment of exit strategy seems to be backed up by recent comments made by shark Kevin O’Leary, who is known for regularly offering royalty or venture-debt deals on Shark Tank that are almost always turned down.

Happy Mother’s Day to all the mompreneurs out there! https://t.co/Eq6hJv0K6t pic.twitter.com/wuvfKrI0Ts

— Shark Tank (@ABCSharkTank) May 8, 2016

During an update segment on Beyond the Tank, O’Leary said he offered a royalty deal to Wicked Good Cupcakes — which they accepted — because he doubted they would ever sell the company and he would never make his money back if he struck an equity deal. In February, 2015, he told Business Insider that one of his Shark Tank investments, GrooveBook, was bought by Shutterfly for $14.5 million. O’Leary called it the biggest exit so far on Shark Tank.

Let’s see what these kids have to offer tonight! #SharkTank #YourselfExpression @yexpression pic.twitter.com/hmDNByWj0Y

— Shark Tank (@ABCSharkTank) May 7, 2016

Davidson says Shark Tank is similar to his venture capital experience in the sense that the sharks ask good questions about the business and size up the entrepreneur as well as the enterprise.

Although those deals appear to happen quickly on Shark Tank, in reality there is a process of due diligence that follows the on-air negotiations and handshake. Barbara Corcoran spoke last year about why some deals may fall apart during that process, including unintentional misrepresentations on the part of the entrepreneurs.

In 2014, another California venture capitalist, Phil Sanderson, blogged about the differences between Shark Tank and real life. He, like Davidson, pointed out similarities and differences — pointing out that many VCs won’t take the sizeable stake in the company that the investors sometimes do on Shark Tank.

“Stripping founders of majority ownership is a recipe for disempowerment. My goal is to let founders do what they know best while providing funding and support to help them succeed.”

Shark Tank airs Friday nights at 9 p.m. on ABC.

[Photo by Mark Davis/Getty Images]