Credit: CNBC
Highlights
- Numerous Shark Tank deals have inspired a whole generation of global audiences for more than a decade.
- Products like Squatty Potty and BasePaws have brought an unprecedented improvement to the show’s track record.
- From intriguing pitches to fierce negotiations, read about the basics of a Shark Tank deal.
Over the years, Shark Tank has emerged as a revolution and brought significant changes to the entrepreneurial arena. A successful Shark Tank deal has often produced ventures that have positively transformed their respective industries.
Some examples are BasePaws, with its innovative DNA test kits for pets, and Squatty Potty, with its creative footstool for bowel movements. Both companies have brought major developments in their verticals. Want to know how both of them grabbed a Shark Tank deal?
Let us discuss the different steps involving negotiations and finalization of deals between the judges and entrepreneurs.
1. Pitches From Entrepreneurs
The first step of a Shark Tank deal is presenting an intriguing pitch to the panel of business veterans. Every pitcher appearing on the show tries to impress the judges in the first few minutes.
They start by mentioning their name, their product/company’s name and the valuation sought. Then, they highlight different aspects of the business in a detailed format. Many entrepreneurs use video demonstrations, while others bring their friends, family, or acquaintances for a live demonstration.
They then discuss the sales made (if any), the amount generated through fundraising (if any), debts, and (if any).
2. Questions From The Sharks
Based on what they perceive from the pitch, all the investors raise their questions one by one. These questions are primarily focused on the monetary aspects surrounding the business. If they are impressed by the sales or amount raised through fundraising, they ask about it in detail.
This may include things like sales made the previous year and projected sales figures for the coming year. If they feel the figures are low, they either opt out of the deal then and there, or they might go on to learn about the reasons behind it.
The main reason for this is that the judges would only want to invest in companies that are potentially beneficial to them. They would never want their money to go in vain.
Apart from this, the Sharks often ask questions about entrepreneurs’ backgrounds. This helps them learn more about the person behind the business, i.e., the pitcher. They want to ensure that the entrepreneur is committed enough to use the investment in the right cause of the company.
3. Offers From Sharks
The third step in making a Shark Tank deal is receiving proposals from the investors. If they feel the numbers related to the business are convincing enough and may yield desirable results, they make an offer.
There have been other instances on Shark Tank where the panelists may not have liked the pitch, but they made a deal just because they trusted the entrepreneur. The common influential factors have been the entrepreneur’s backstory, qualifications, and vision.
One such Shark Tank deal that happened on the show was ‘Tania Speaks’ by a young entrepreneur named Tania. She sought $400K for 10% equity in her skincare brand. None of the Sharks made an offer owing to the new nature of the business.
But Mark Cuban sealed the deal with her at the last moment for $400K at 15%. He did so only because of her resilient attitude. After being bullied by her schoolmates for her bushy eyebrows, she shaved them on her own and got a major cut.
While looking for natural solutions, she invented an aloe vera gel. Witnessing the impressive results, she decided to turn it into a full-time business venture. This story compelled Mark to make an offer.
4. Final Discussions on Valuation
Once the pitch is done and the Sharks are done with their rounds of questioning, they propose their respective offers. The final value may be the same as requested by the entrepreneur or a different one. It all depends on what the investors assess about the business through the pitch.
If they feel the sales figures do justice to the proposed investment amount and equity, they can agree to offer the same. In contrast, in some cases, the Sharks may propose a lower valuation.
They can do so by keeping the requested investment amount the same but increasing the equity percentage. If this happens, the entrepreneurs have the option of either declining it straightaway or raising a counteroffer.
In another scenario, the Shark may offer some part of the investment amount in equity and the remaining in credit. For example, if a pitcher seeks $50K at 20% equity, the investor may propose the first $30K at 20% equity and the rest $20K as credit, which needs to be paid back at 10% interest before five years.
If this happens, the entrepreneur will not just have to return $20K in five years but also the interest value, which would collectively amount to $30K. The entrepreneur may accept or reject the offer.
There are also cases where the Sharks offer a royalty deal. If we take the previous example, the investor may ask for a $2 royalty per unit of the product sold. This could be in perpetuity, meaning that the entrepreneur will need to pay $2 every time a unit of his product is sold.
The investor may also ask for a fixed royalty, such as three years. In this case, the entrepreneur would need to pay $2 for three years every time a unit is sold. The entrepreneurs have the option to either agree, counter, or reject the royalty deal based on their understanding.
In all the above-explained scenarios, if both parties arrive at a satisfactory conclusion, they shake hands and promise each other to take the deal ahead.
To Conclude
Securing a Shark Tank deal might appear daunting. But if you keep your calm, the intense pitching and negotiation process will become a smooth ride. The most important areas to focus on are awareness about your financials and the ability to communicate with the investors.
In the end, it all depends on how well you align your business vision with the financial expectations of experienced investors.
Reference
1. From pitch to payouts: everything you need to know about Shark Tank, iPleaders, Sneha Mahawar
Entrepreneur, auteur, raconteur. Rob Merlino is a blogger and writer who enjoys the Shark Tank TV show and Hot Dogs. A father of five who freelances in a variety of publications, Rob has a stable of websites including Shark Tank Blog, Hot Dog Stories, Rob Merlino.com and more.
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