Shark Tank Notes
How to win on ABC's Shark Tank
by Joseph Anthony Wozniak
Note: This is an ever-expanding document. I am currently in Season 5, so all of this information is only valid through Season 4 so far.
Your safest bet is to value the company exactly 1.5x last years sales. Use this number when calculating what you think a certain percentage is worth. This is the first thing they check every time. You are most likely to get an offer and even have a bidding war over you if you get this one thing right. On the other hand, this is the one thing that makes sharks go out more than anything. If you get this wrong and overvalue your company, even sharks that are really interested will go out. You can’t talk them into investing in you as a person if you are valuing your company too high. They insist upon paying what your company is worth today, not what it’s worth tomorrow.
Keep in mind, when you say you want $100k for 10% you are immediately telling the sharks you think your company is worth a million dollars. You better be ready to show them sales of around six to seven hundred thousand last year. (Or you have purchase orders, offers to licence, or some other sure-money coming equaling at least $600k)
They want to see their money back as soon as possible, these are not people that are in it for the long-haul. Even if they make you a deal where they take over your marketing, manufacturing and distribution, even if you make a horrible deal where the shark collects royalties forever, they are only going to work hard on your company for a year or so. After that, they will want to pursue other things and just let your money come in. Often they want to cash-out and sell you off to a larger company a.s.a.p.. Fortunately they will grow your equity first, or at least negotiate a killer deal for you.
If your brand is strong, it will survive whoever owns it, and you will collect money from it for a long time. On that note, be prepared to give up majority share and not be the owner of your company if you need a deal to survive. Sometimes that’s what it takes to get a deal.
Be ready to explain how you protect your intellectual property from getting knocked-off or copied. First-mover advantage is not often enough.
Know everything about your competition.
Confidence is obviously essential. You can get a shark that’s on the fence to come to your side just by being pleadingly desperately obsessively devoted to your product.
Be prepared to discuss licensing your idea to a bigger brand if you have an improvement on an existing product. This is much more lucrative than trying to compete with Nike on shoes with a new feature, or competing with Playdoh by selling a patented allergy-safe alternative. Sometimes you have to let your brand name go, and let the leaders sell it under the brands that sell. Using established channels to your customer means more people get to benefit from the idea and you make more money. They say if you can’t beat em, join em.
Always bundle everything. never sell stake in a new company/product while not including an existing successful parent company as part of the deal.
Don’t try to sell a company without including the patents, or vice versa.
Don’t have another job, not even school. Entrepreneurs were required to drop out of college as part of a deal before. If you have another company, you have to include it. You must be spending 100% of your time on the specific company they are investing in, only.
Don’t admit to taking a salary from the company unless you are ready to have that number used against you in valuing your company. A shark may insist that you cannot take another salary unless they can withdraw the same amount at the same time. Include your salary in your profit number.
The above two things mean it’s ok to admit to enduring extreme poverty to grow your company, especially if you worked up from homelessness.
It’s ok to admit mistakes, as long as you learned something. Even if they set you back overall, it’s helpful if previous mistakes didn’t hurt this or last years sales, or leave you stuck with another mystery investor the sharks don’t want to deal with.
If you walk away to think about it, discuss it, or make a phone call, they will conspire behind you and your situation could get worse.
If one or more sharks recommend you go with a specific shark and even go out so that they don’t compete with a clearly better offer, take that into account.
Don’t forget to let every shark speak, after respectfully thanking each shark that has spoken. One entrepreneur once left after 4 sharks went out because he forgot about one of them that was silent the whole time.
Always be grateful and thank a shark for any offer, no matter how bad it is, before asking around for any other offers. If you offend a shark by seeming to ignore their offer, they may retract their offer, and any other offers would have no competition.
At any point, any offer could become your only offer.
Be patient with the negativity of the first sharks that tear you down. This could sell you to the sharks that are silent at first. It you defend yourself well, even to sharks that have gone out, and are respectful to even the sharks that insult you, it greatly improves your odds with remaining sharks.
That said, still don’t focus too much on sharks that are out if you still have a shark or two in. Focus mainly on the sharks that are in when defending yourself against things said by sharks that went out. If a shark that is still in feels ignored while you defend yourself to sharks that are out, they will get offended and not make an offer.
Don’t decline an offer outright without immediately and respectfully offering a counter-offer or at least thanking the offering shark thoroughly before soliciting the other sharks.
If you get nervous and freeze, have another person there with you to join in and throw out some numbers to rescue you. Have a pile of numbers that look good to spit out, that’s what they’re waiting for, try not to repeat the same number because you are nervous.
Know all your numbers (all applicable)
– sales each year
– profit each year
– units sold each year
– cost/wholesale/retail prices per unit
– cost of acquiring each customer/advertising budget
– total amount of money put into the company so far
– how much money your market makes/what your competitors make
– projections for next year
– percentage of online vs retail sales
– percentage of free trials that lead to subscriptions
– percentage of subscriptions that get cancelled each year
– at what cost and how many units will you have to manufacture to lower the price per unit and by how much
– every statistic you can find regarding your industry and target market.
Your cost per unit should be no more than half your wholesale price.
Your wholesale price should be no more than half the retail price.
Be prepared to entertain ideas on how to lower manufacturing costs.
It’s helpful to have your next customers lined-up. Have unfulfilled sales, purchase orders or agreements in writing by buyers that you don’t have the inventory to handle. If you don’t have the inventory to meet your demand, this gets a deal almost every time.
Know exactly how you are going to spend the money you are asking for. Keep in mind it has to make more money.
Have a timeline for the future. Know who you are going to attack next, what stores/brands/markets/locations you plan to involve. Know what you are going to make next and why.
Your product must be unique. Sharks look for proprietary content. Formulas and processes must be difficult to replicate at your cost. If someone can see you on TV and copy your idea, especially if they can make it cheaper, you’re screwed.
Have a patent or be impossible to knock-off, unless you have a huge first-mover advantage or enough market share to be hard to compete with. Regardless, be prepared to licence.
If you have something that can be licenced to an existing giant company that already does something similar, you will be talked into doing that rather than making it and taking it to market yourself.
If you don’t want to make it overseas, you better be able to make it cheap in the US.
You can create more jobs in your struggling recession-stricken town by manufacturing overseas and making more money. You can use the money to hire more people and start more businesses, rather than making less money trying to just employ factory workers.
Deals where you owe Royalties on your products are usually not your best bet, they take from your profits immediately when you need them most. Especially bad are deals where you pay a percentage on each unit in perpetuity (forever.)
Deals where you licence a product and collect Royalties can be very good however. Especially if you don’t want to do any work, you just want to sell it off and know the shark is going to be motivated because it’s theirs.
You want the shark to have enough equity to be motivated to make you both money right away, before some viewer knocks you off somehow. Many entrepreneurs are reluctant to make even fair compromises on equity.
No medical claims without independent studies and/or FDA approval. Even for pet products. Be prepared to hear the words “snake oil.” Herjavec especially won’t tolerate any marketing toward cancer victims unless the benefit is obvious.
If you are selling a franchise company, have a couple franchisees already, or at least have a franchise attorney and prepare all your numbers. Prepare the sales pitch you would give to a potential franchisee. The franchisee should be able to buy the franchise for no more than 1.5x the amount they expect to make the first year.
No matter how much the world needs it, it has to make money
Non-working prototypes rarely fly. You better have a good patent, something very useful, and still be prepared to sell 100% and take a royalty, at best.
No prototypes without clear numbers for manufacturing, or plans to licence a patent. Even better, purchase orders or a firm agreement from a major company to licence it.
If you don’t have a lot of sales, have Purchase Orders.
Don’t bother presenting a company you don’t own at least 51% of, unless your spouse and you together own >51% or you somehow have the authority to decide to make a worse deal than you expected. They do not want to deal with someone that doesn’t have control over what they are buying.
Don’t expect them to buy into your company if you previously made a deal with someone that is forever collecting royalties on your idea. Owing royalties makes a company hard to sell.
Almost no one gets a deal as good as their original offer, nearly everyone gets talked into at least giving up more equity. But then again, most people grossly overvalue their companies by asking too much for too little stake.
You have to be making a lot of money to get the sharks excited about an offer of less than 20%.
If it’s a gamble, meaning it’s not proven by decent sales, you better be asking a low amount of money.
Beware niche markets unless they are untapped and you can prove them with sales.
Seasonal markets, and products with too many variations and skus always make the infomercial people go out right away.
If it’s a niche of a niche market, such as pregnant women, or gay videogamers, expect aversion from the sharks unless your sales are proven.
Never show anything that can be eaten or drank, even human-grade dog food, without offering samples right away. You better pass out beer even if you’re just selling an arcade game with a tap. Selling a legal-aid store themed like a coffee shop? Coffee-culture merchandise or little things that keep coffee warm? In all of those cases, you better have some coffee for the sharks.
You can’t lie and keep a deal. The sharks will do ‘due diligence’ after the show, and anything you misrepresented is grounds for them to cancel.
If you make up numbers on the spot, especially the ones listed above, they will do their shark math and catch you, every time.
At least two sharks will probably not like the flavor of your product if it is gluten-free, high-protein, fitness, weightloss, supplemental, diabetic-safe, or any other food that is usually only eaten by bodybuilders or people that can’t eat certain normal foods.
Foods and clothes are immensely competitive. You will have to prove you can get shelf space or be prepared to talk licensing with a big name.
Be nice and you will be criticized less.
If they don't seem to be offering enough money, they will often agree to give you more in the future every time you have a big order to fill.
Don't forget how valuable it is to have a partner with built-in manufactuing or distribution channels. Daymond may include his whole back office for order fullfillment.
Admit to greed, but always insist on how specifically the shark will make money too.
You have to make it look like it’s worth what you are asking using actual numbers, at least statistics.
Prove it makes money. Nothing else matters even half as much.
If you don’t get a deal, just the publicity from being on TV will likely give you a ton of business, maybe even other investors. Don’t waste the wave.
In conclusion, watch the dang show and don’t do the same common things you see people do wrong every season.