Kevin O’Leary Reveals Why ‘Shark Tank’ Deals Have A Better Chance Of Success Than Traditional VC Investments

It is well known that all financial investment bears some measure of risk. Venture capitalists, it is often assumed, are willing to take a greater risk than everyday investors, because of the potential for a much greater return. Shark Tank may not be an exact replica of real-life venture capitalism — as Inquisitr reported earlier this year — but it does showcase dozens of small business owners and start up entrepreneurs on an annual basis, giving many a presumed boost in sales because of free advertising.

At least most of the time. In a new interview with Detroit Free Press, Kevin O’Leary said it is that publicity boost that changes the amount of returns enjoyed by a Shark Tank investor, compared to how the math of a traditional VC portfolio might play out. While the one investment that brings in extraordinary returns may be rare — think Scrub Daddy in the Shark Tank world — there are numerous companies that may survive long enough to prove themselves worthwhile, especially if they have the boost of a Shark Tank episode.

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“If you look at venture investing since the late ’50s, the typical model is you make 10 investments, two of them are phenomenally successful; 10, 100, 200 times on your money. Six of them are what are called the living dead where they stay alive but they make no money. And two of them go bankrupt within a year.

“It’s the six living dead. The biggest challenge the living dead have is customer acquisition.

“So what happens in ‘Shark Tank’ is some percentage of the living dead, the marginal companies, the ones that weren’t going to make it in the normal world, get free advertising each year because they’re in the ‘Shark Tank’ family. The ones that do fail generally it’s because execution skills aren’t there.”

In a piece of CNBC commentary, O’Leary said he recommends a diversified portfolio for everyday investors. That means diversity not only in type of investment but in economic sector. He also pushed some of his own favorite areas of investment which can prove profitable if done right: wine and art. He gave the extraordinary example of a case of Château Latour bought for $400 in 1982 fetching $33,000 last year.

O’Leary has shown himself willing to take on unusual investments on Shark Tank as well. This season, he invested in the oddly-successful company, Potato Parcel, whose proprietors pitched the investors, as Dallas Observer recalled, in full-length potato suits. O’Leary offered a combination equity and royalty deal which was accepted over a straight equity deal at a lower evaluation from Robert Herjavec.

O’Leary discussed taking a chance on Potato Parcel to Detroit Free Press, comparing it to other successful deals he’s done on the Shark Tank stage, including Wicked Good Cupcakes (cupcakes in a mason jar); IllumiBowl (motion-sensor toilet light); and Groovebook, which sold to Shutterfly for $14.5 million.

“Think about how ridiculous that is: somebody writes your name on a potato and mails it to you. I invested in that because I know what’s going to happen. It’s going to explode.”

Potato Parcel, by the way, not only offers the chance to send a message scrawled in black marker on a potato. There is also the “potato pal,” which includes a personalized photo, and an optional burlap sack add-on. Dallas Observer reported that the founder of Potato Parcel, which sold the entity to his friend for $42,000 — the men appeared together to pitch Shark Tank — used his pre-Shark Tank exit proceeds to buy a house.

Despite his affection for potatoes, cupcakes, wine, and art, O’Leary wouldn’t bite when the Detroit Free Press journalist, Susan Tompor, floated her idea of selling her homemade cookies, even though she had a unique recipe and everyone loves the finished product.

“It doesn’t matter how good they are. The competition is unbelievable. Every year we get somebody who has a ‘bright light’ dream of breaking into the cookie market. It’s next to impossible.”

Shark Tank airs in reruns on CNBC. New episodes air Friday nights on ABC.

[Featured Image by Aaron Davidson/Getty Images]