February 4, 2014

Entrepreneurship, Money & Career

9 Lessons in Entrepreneurship From Shark Tank

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I don’t watch much television — with two small children and a business, I just don’t have time. But there’s one show that I DVR and watch without fail every week: Shark Tank.

For those of you who aren’t familiar with the show, here’s the premise:

Aspiring entrepreneurs get a once-in-a-lifetime opportunity to pitch their business to a panel of “sharks” — five self-made millionaires and billionaires including the likes of Mark Cuban and Daymond John — and ask for funding in exchange for equity in their business.

Basically, it’s the dramatization of one of the most stressful, sweat-inducing, make-or-break moments in capitalism: the business pitch.

On any given episode you’ll see amazing and innovative businesses secure hundreds of thousands (and sometimes millions) of dollars worth of capital, or you’ll get to watch what’s obviously a weird, laughably-bad business be eviscerated by the sharks.

This is of course a “reality” show, with those quotes firmly in place; while the businesses are real and the entrepreneurs really do spend an hour or two with the sharks getting feedback on their products or ideas, that footage is then spliced and edited together into 5 minutes of entertaining television. The businesses that are comically bad were clearly handpicked by producers for that very reason.

But while it’s crafted for your viewing pleasure, Shark Tank actually offers a good dose of practical, real-world business advice for would-be entrepreneurs. You won’t get an MBA equivalent education just from watching the show, but you’d be surprised by the amount of actionable business tips you can pick up just from tuning in each week.

Below I highlight nine of the recurring lessons in entrepreneurship I’ve gleaned from Shark Tank:

1. Learn how to pitch. If there’s one lesson you take from Shark Tank and this post, let it be this: master the art of the pitch.

Even if you don’t think you’ll ever find yourself standing in front of a bunch of venture capitalists, every entrepreneur needs to know how to effectively sell himself and his idea to his potential partners, employees, and clients/customers.

You’d think on a show like Shark Tank — in which people know they’ll be asking for tens or even hundreds of thousands of dollars on national television – the entrepreneurs would prepare for their pitch like crazy.

But you’d be wrong.

I’d venture that 50% of the pitches on Shark Tank are absolutely horrible, 40% are so-so, and 10% are stellar. Some of the folks on Shark Tank just seem like they’re winging it, which makes for some awkward, yet entertaining moments.

“You have to learn how to communicate your vision. You have to practice in a mirror every morning. It’s the most important thing you can do because you only get a chance to make a first impression once. And when you stand up in front of sharks or any other investors you’ve got to be able to communicate why the idea works and why you’re the right person to do it.

I always tell young kids that I teach now in business school, ‘Look all this stuff you’re learning about numbers is great, but if you can’t stand up in front of your classmates and explain why you’re a winner and how you can be a leader, and how you can inform that business plan, you’re nothing… You’re just a nothing burger ’til that happens.’” –Kevin O’Leary, aka Mr. Wonderful

So how do you avoid being like the cringe-inducing pitchers on Shark Tank? Well, following the guidelines in our post on how to give an effective pitch (as well as what not to do) will put you leaps and bounds ahead of many folks. The gist of the advice in those posts is this: be poised, make your pitch sticky or memorable, know your business (and industry) inside and out so you can answer any question that comes your way, and play to the investor’s self-interest (show them the money!).

The best pitch I’ve seen on the show was from an 18-year-old girl who owns a skincare company called Simple Sugars. She was super poised (more so than many of the much older entrepreneurs who’ve been in the tank), she had a great story for her product (started the company when she was 11 to create an all-natural skincare product that was suited for someone who had eczema, like herself), she knew her business inside and out, answered the sharks’ questions and resolved doubts like a boss, and she clearly demonstrated how the sharks would make money investing with her. Her awesome pitch scored her a $100,000 deal with Mark Cuban. If you want to learn how to pitch like a pro, you’d do well to watch this young woman in action.

2. Hustle is necessary, but not sufficient. A common refrain entrepreneurs on the show resort to when they’re about to get the nix from all five sharks is:  “But I’m such a hard worker! I will toil night and day to make this business a success!” And every time, one of the sharks — usually Mark Cuban — will respond with something to the effect of: “You and everyone else on this show!”

We’ve argued that the world belongs to those who hustle. And it does. If you’re lazy, you’re not going anywhere in life. But in business, hustle is a given. You have to work hard to be a success, but working hard doesn’t guarantee you’ll be successful. If your business sucks and your product is a complete lemon, it doesn’t matter how hard you work. You’re going to fail.

Hustle, but make sure you’re hustling in the right direction.

3. Don’t be blinded by passion. Here’s another recurring theme on the show: the overly-passionate entrepreneur who’s poured their heart and soul into their product and is absolutely convinced that their business is the next big thing/will change the world…even though everyone else can plainly see that their idea is an utter dud.

“I think passion is overrated. Everyone has a lot of passions. I have a passion for sports – a passion for music. That doesn’t make it a business, and that doesn’t make you qualified to run the business.” –Mark Cuban

It’s hard to knock these folks. Their passion and emotion is well-intended and is frankly admirable in our day of “overwhelming meh” aloofness. Ideally, you should love doing the thing you’re trying to make money at. But passion isn’t enough. Just like hustling can’t transform a sow’s ear into a purse, if nobody wants your product or service, passion in spades won’t magically turn your business into a success. In fact, that unchecked passion can blind you to warning signs that you’re on a sinking ship — before you know it, you’ve invested years of your life and thousands of dollars into an emotionally and financially costly failure. It’s truly sad when the entrepreneurs on the show admit they’ve taken out a second mortgage or emptied their children’s college fund to pursue a dream that all the sharks end up turning down. Had they led with their head instead of their heart, such a devastating anagnorisis could have been avoided.

4. Just because your friends and family love your idea, doesn’t mean it’s a good idea. I can’t count the number of times I’ve seen people pitch what is obviously a stinker of a business, only to be stunned when Mr. Wonderful declares, “This is insanity! I forbid you to continue!” How do these incredulous would-be entrepreneurs invariably respond? “But all my friends and family think it’s a great idea!”

Of course they do. They’re your friends and family. They think you’re awesome, so they think everything you do is awesome; it’s the halo effect! Even if your friends and family do realize your business idea is a bad one, they probably wouldn’t say so. They’re worried you’ll shoot the messenger and so they’ll simply tell you what you want to hear.

Take the husband/wife creators of  “Elephant Chat.” They invested $100,000 of their own money into developing their product – a little plush elephant stuffed inside an acrylic “communication cube” that a spouse could place out on the counter to let their partner know they wanted to talk about an issue in the relationship (“the elephant in the room”). It retailed for $60. They swore everyone they talked to thought it was an amazing idea. None of the sharks took the bait.

Besides being blinded by your passion, beware the family and friends filter. Always, always get an outside, unbiased opinion. Better yet, test out your idea on the unforgiving public to see if there’s even a demand for it.

5. Know your business. Above we mentioned that in order to pitch effectively, you gotta know your business. But what does that mean exactly?

“Know your business and industry better than anyone else in the world.” –Mark Cuban

First, you need to know your numbers — sales, cash flow, debt, margin, and so on. The sharks often hesitate to make a deal with entrepreneurs who don’t know important data points like their customer acquisition cost.

But knowing your business extends far beyond having a handle on your numbers; it requires a deep understanding and grasp of the industry you’re competing in. Lots of entrepreneurs come on the show pitching a product or service they think is truly unique, only to be informed by one of the sharks that a very similar product or service already exists. If they had done just a bit of due diligence, they could have avoided that embarrassing “surprise.”

There are also plenty of entrepreneurs who come on the show with dreams of conquering certain industries (food, clothing, apps, etc.), but have no idea how those industries actually work; for example, they have a food item they want national grocery stores to stock, yet they aren’t aware of the huge amounts of money big corporations spend to secure that shelf space and what an uphill battle breaking into the market will require. Consequently, their plans to succeed are naive at best — completely misguided at worst.

A perfect example of entrepreneurs who came on Shark Tank without really understanding their industry (or even business) was a pair of doctors pitching a social network for their fellow MDs called Rolodoc. The docs had no clue how social media worked, or even what it was, despite the fact that their business idea would supposedly revolve round it. Consequently, they stumbled over even very basic questions about how their idea would be executed and how it would actually make money. Mark Cuban called it the worst pitch in Shark Tank history.

Before you start your business, research the heck out of the industry you’ll be competing in by reading industry journals and blogs and talking to folks who are already doing business in that market. Heck, even pick up a Dummies guide – there’s one for just about any industry you can think of. This research phase could take months, but it will save you major headaches down the road.

6. Concentrate on your core competency. Sometimes an already successful business will enter the tank seeking more capital to expand and grow. Nothing wrong with that. The problem arises when one of these companies wants to use that money to expand into a somewhat related product line or service that detracts from their original core competency. Most of the sharks are leery of these businesses and will often tell the entrepreneur that they’ll only invest if they drop their plans for the expanded product line. Why would they want their money funneled into an untested product or service instead of being used to boost a proven winner?

It’s good to experiment and try different things in business, but never lose sight of your core competency. Getting sidetracked has been the downfall of many a business. This is especially true with the volume and ease with which you can get feedback on social media these days; you might hear from a bunch of folks who say, “I wish you guys would make this too!” leading you to believe there’s a popular demand for a new expansion in your business. Then it turns out that those commenters actually represented a very small but disproportionately vocal minority.

Know what you’re good at and stick close to it.

7. The best businesses solve real problems. The entrepreneurs that succeed in landing a deal usually have one thing in common: their business solves a real problem. Typically the problem the entrepreneur sets out to solve was one they experienced themselves.

The businesses that typically fail at securing funding don’t solve an actual problem. They’re either novelty products or products that solve a problem that doesn’t actually exist. Every now and then you’ll see a shark invest in a novelty item because they see the opportunity to make a lot of money really fast by riding a trend or fad, but for every one of those, you have something like Man Medals – novelty items that are as a dumb as a rock, not the next Pet Rock.

8. If you’re not making money, it’s just a hobby. Kevin O’Leary has a saying, “Any business that after three years isn’t profitable isn’t a business, it’s a hobby.” There’s nothing wrong with hobbies. They’re fun and provide a creative outlet. But don’t fool yourself into thinking that your little manly-scented artisanal soapmaking experiment is a promising biz just because you’ve sold 8 bars on Etsy. If you’re plowing lots of money into your project, but seeing little return on your investment, embrace your endeavor for what it is – a pleasant pastime.

9. Not every business needs investors. Some entrepreneurs come on Shark Tank looking for an investment to expand an already successful business, only to be told by the sharks that they don’t need an investor and should actually continue to bootstrap the business. I think this is an important, but often overlooked point. In a business culture that glorifies million dollar venture capital deals, lots of aspiring entrepreneurs have the mistaken belief that if you want to succeed in business, you have to have investors.

Not so.

Plenty of successful businesses bootstrap their way to success without the assistance of investors; with a good idea, hard work, and proper money and resource management, they’re able to fund continued growth with the cash flow they have coming in. Bringing in an investor wouldn’t do much for these businesses except add another cook in the kitchen – and another hand in the pie.

“Banks are not forgiving, and the last thing you want to do is build your business with a priority placed on having to pay back the bank before you invest further in your business. Equity is far better and sweat equity is the best.” -Mark Cuban

Besides, some businesses just aren’t well suited for investment. Investors typically want businesses that they can scale and aggressively expand. You can’t scale a business that specializes in handcrafted wooden chests made by you, unless of course you’re willing to license your design to a factory in China. But managing the mass-production of wooden chests may not be what you envision as your vocation and you’d rather keep things small – making less money, but staying hands-on with the work.

Taking venture capital ultimately means giving up control. We ourselves have been approached a few times with VC offers but have never seriously considered them. Once you bring in people who are only concerned about the bottom line, they’re going to start pushing you to do things that may not jive with your values and vision. “We need to blow the Art of Manliness up and increase traffic faster! Why don’t you publish more often and do like, oh, I don’t know, some posts on the ‘hot girl of the month?’” Um, no thanks.

Before seeking investment, ask yourself: Do we really need outside funding? Have we reached a point where we can’t continue to grow without it? Are we the type of business an investor would even want to invest in?  If so, what would we do with the extra capital? Do I really want to give up control of my business?

Also, if you’re looking for a great bootstrapping success story, look no farther than our friends at Huckberry. I’m so impressed with their success – they keep growing and growing – and they’ve done it without VC. For an inside look at the benefits and challenges of taking this path, check out this great article on them at 37Signals.

If you’re an aspiring entrepreneur, I hope you’ll take all this advice under consideration, or in the words of Mr. Wonderful, “You’re dead to me!”

What business lessons have you learned from Shark Tank? Share them with us in the comments!

 


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