Shark Tank Valuation Observations
I like ABC’s Shark Tank. Especially now that Mark Cuban is a permanent member! I enjoy listening to the entrepreneurs’ ideas while speculating as to the investment and stake I would make in the company. Moreover, I think it is great seeing the people’s hustle and dedication to their companies. As Steve Jobs said, “Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do.”
The show is also relevant to me personally since the startup I am involved with recently went through the process of raising an additional $125,000 in seed funds. However, just as in the show, negotiating a fair valuation for the company can be a subjective issue. While there are many variables that influence a startup’s valuation, I personally believe the offers on Shark Tank are too low. There are several reasons the Sharks get better deals. All of them have to do with the way the show is organized.
First, there are only five investors (six with Cuban). At first glance, the viewer and entrepreneur would think this would facilitate competition in favor of the entrepreneur. However, this is rarely the case since each of the investors specialize towards a certain type of investment. Additionally, the investors have the option to collude on deals, and this always puts extra pressure on the business owner, while limiting their options.
Secondly, there is a steady steam of deals coming into the Tank. I know the executive producers of the show choose the contestants, but the qualifications are consistent and the applicants almost endless. Since the Sharks aren’t worried about deal flow, they can be more selective and demand a longer track record.
These are the reasons I believe cause entrepreneurs to, on average, receive below market level valuations. To clarify, all of the deals made by the Sharks aren’t cheap. Many of the deals made are with entrepreneurs in the manufacturing and retail space who haven’t run successful startups in the past. These owners might not have the opportunities to grow and build their businesses if it wasn’t for the investors’ money, advice, and connections.
I am looking forward to the next season since the permanent addition of Cuban to the team will be a good thing for the entrepreneurs. Cuban has larger pockets than the other Sharks and has been more generous with his offers (i.e. the firefighter who invented interchangeable hoses). Also he is less prone to collude since he can afford the increased risk.
Finally, if you like this show, then you’ll definitely enjoy U.K.’s Dragon Den. The investors are more successful and far more blunt. This combination makes the show educational and funny.