Sharks are dangerous, especially on TV!
Why Shark Tank Skews Reality for Nascent Entrepreneurs
Written by Dr. Dan Cohen, Executive Director, The Center for Entrepreneurship
First, reality doesn’t matter as much as the perception of reality. If you are like most people, your exposure to entrepreneurship and investors may be limited to watching Shark Tank on TV. While entertaining, the show can have some negative impact on the realities of entrepreneurship in my opinion. Second, I am not out to bash Shark Tank—I just would like to point out some obvious differences between the show and entrepreneurial reality. Here goes:
- The nature of the relationship between entrepreneurs and investors is really very different in reality that it is on the show. First, the whole nature of the show is based on an exploding offer. In other words, the deal is only on the table for a few seconds and it is a take it or leave it deal for the entrepreneurs. As I advise my students, always walk from an exploding offer. If you have a compelling value proposition—that is, if you bring something to the world that it really needs and have developed a business model that can yield higher customer willingness to pay than overall costs, then you do NOT need to make a decision on the spot. Nor should you. If you create value, you should be able to attract multiple investors. In selecting an investor, fit matters a great deal. Just as an investor will vet an entrepreneur, an entrepreneur should vet an investor. What else do they bring to the relationship other than financial capital? How strong is their network? How much expertise do they have investing in your particular space? What is their track record of making investments in your space? These are vital decisions and should not be made impulsively or on a take it or leave it basis.
- The show leads people to believe that after the deal is made, they go off and build companies together. According to a Forbes article that analyzed seven seasons of Shark Tank data, 73% of the deals made on the show changed significantly after the show aired. And 43% never came to fruition at all. This is not a criticism of Shark Tank—things change and terms change. However, the Hollywood nature of the show leads people to believe that they go on to riches together when, in reality, almost half of these deals fail to materialize.
- The terms typically are quite skewed in favor of the investors. This is damaging to nascent entrepreneurs that often tend to undervalue their ownership stakes to begin with. The show does help startups get exposure and PR, and that is really valuable, however, it also comes at too steep a price of giving up too much equity. Early on, it is really hard to determine the value of early stage startups. We advise the use of Y Combinator’s SAFE (simple agreement for future equity) approach to raising capital in early stages when real valuations are hard to predict accurately.
- Sometimes the best stories and not the best ideas/opportunities win favor on Shark Tank. Someone with a hard luck story often gets the sympathy (and a deal) from one of the sharks, while a better idea sometimes does not get the attention it deserves. In entrepreneurship, the most valuable opportunities rise to the top.
- Shark Tank can be very intimidating for nascent entrepreneurs to watch and this is not reflective of actual investor/entrepreneurial relationships. If you have watched even one episode of the show, you have no doubt seen Mr. Wonderful or another Shark denigrate an idea or insult an entrepreneur resulting in an Internet meme that brings even more unwanted attention to the situation. Investors and entrepreneurs are partners and treat each other with a great deal more dignity and respect.
To close, I think Shark Tank is entertaining and it seems to get good ratings. It also brings significant exposure to startups that really can use help building a brand. And I’m sure they have had some success stories. On the whole, though, it is really not at all based in reality. Unfortunately, perception is reality and many people believe what they see on Shark Tank as reflective of the entrepreneurial experience. It really is much better in reality and certainly more dignified for the entrepreneur.