Have you seen the show on ABC called Shark Tank? If you haven’t here is the quick and dirty… it’s a show where entrepreneurs have the opportunity to raise money for their company in exchange for giving up a share (normally a large share) of their company.
There are 5 “sharks”, each is a business mogul who at one point sold their company or currently owns a very large company. The sharks are an interesting bunch rejecting investments, undercutting each other, or working together to get a piece of the action. They are a fairly well rounded group with backgrounds varying from real estate to clothing to computer software. They are fun and entertaining to watch and certainly are on top of their game.
Many times entrepreneurs come on the show having no idea what their business is worth. One may come on the show with $10,000 in sales and want to sell 10% of their company for $50,000. The pre-money valuation (what the company is worth before investment) is $450,000! I can understand going in low to get the valuation you really want but that is 45X sales! (Normally you will get around 4-6x sales, though that can change up or down depending on many variables).
If the entrepreneur can start a feeding frenzy they normally trade a much smaller portion of their company. However, if only one shark is interested in their company and the entrepreneur is not prepared they may walk out having just sold 100% of their company.
Watching the show one can’t help but wonder a few things. Do the entrepreneurs do any research into what their company might be worth? Are the sharks taking advantage of them? Considering many of these sharks are so wealthy, will they even spend significant time on a $50,000 investment that could potentially return them $500,000 (a home run 10X your investment)?
Here is a few tips for anyone going on that show, trying to raise money or negotiating deals with their company.
- Understand what a Pre-Money valuation is and have a reasonable estimate of your companies worth.
- Do not low ball, provide good reasoning for your companies valuation. It will make you look more professional and give an added dimension of respectability to your investors.
- If you don’t like the deal, counter by stating your rationale in #2 followed by a new proposal. DO NOT ASK IF THEY WILL TAKE A DIFFERENT OFFER! You need to be vested in the company as well so that your goals and any investor goals are alligned.
- Do not be afraid to sell the company and walk away. If you are going to get an outstanding return on your investment (3x-10x depending on your investment amount). You may want to cash out and enjoy life or do something new. This is one area where a royalty for life is wonderful!
- Say NO. If you don’t like the deal just say NO. You brought the company this far are you prepared to take it even further? A bad investor is a bad deal and keeping all your equity and moving forward while tough can be a good choice for you.
- Have an exit strategy, know what your long term goals are and what you want from life.
Spending your time to know some basics about what your getting yourself into and how to leverage it will give you the potential to make the most of your capital and give you the best shot at success.