Lessons Learned By Ginny Whelan
ginny@araeducation.com
Enter the Shark Tank
’m a member of a small angel invest- ment group that operates where I live in Florida. I’ve also learned a lot watching Shark Tank, a reality TV show in which a select group of seasoned investors (the sharks) pick and choose investments from business pitches. The TV show has a lot in common with the normal flow of angel investment. So much so, in fact, that if you’re thinking about seeking investment for your business, you should watch Shark Tank episodes to better prepare. So what have I learned from the show. Some items are good for investors, some for entrepreneurs; wouldn’t it be fun to pitch auto recycling to the Sharks. Let’s figure out how the sharks would deal with valuation of a business selling recycled auto parts. Every Shark Tank pitch starts with contestants asking for a specific amount of money in exchange for a specific percentage of ownership in their business. That establishes their pro- posed valuation. So for example, if they want to give 10 percent of the company for $100,000, that’s a valuation of $1 mil- lion; and 30 percent for $150,000 is a val- uation of $500,000. It’s simple math. Investors like valuation to relate to actu- al business numbers, such as sales, gross margin (price less direct costs), and burn rate or fixed costs. On the show, the sharks frequently object to unrealistically high val- uations; sometimes they make their own offers based on much lower valuations. That’s a simple matter of making offers and counter offers. Very rarely, they’ll accept a valuation based on the value of proprietary technology, or brand impact, aside from actual business numbers. Because the Shark Tank is about televi- sion entertainment, it keeps valuation simple. Angel investors, on the other hand, frequently use some more flexible options. For example, we’ve several times invested based on what we call convertible notes, which is intended as a temporary loan to be converted to equity (owner-
I 18 Automotive Recycling | January-February 2016
ship) based on a future valuation to be established by transactions with venture capital. But the importance of valuation is also always there. And every startup should understand the basics as it deals with potential investors. The sharks want businesses that appeal to interesting numbers of possible buyers. They are not very focused on niches that look like they’ll remain small forever. In a recent show, for example, they reject- ed a $500 gaming device that gamers climb on to ride because they thought it would appeal to a very small percentage of gamers.
Sharks often ask: “What do you have that I can’t just do myself? I can take the money you want, hire some people, and become your competitor.” That’s about defensibility. The sharks want to invest in a company that isn’t going to be blown away by competition in the near future. Defensibility comes in different ways for different businesses. Occasionally it’s a matter of a strong patent. More often, it’s secret formulas, secret ingredients, trade secrets, and relationships with channels of distribution. Sometimes it’s progress made in branding. Without defensibility, the investment is not attractive. Scalability or leverage is easy to under- stand when you think about products compared to services. If you sell products, it’s easy to imagine gearing up to acquire a whole lot more of them if sales grow. A product business is scalable. Some service businesses – web services are a great example – are also scalable, even though they sell services. But a service delivered by humans, which requires adding payroll and fixed costs in proportion to sales increases, is not scalable.
My only guidance for the people who are going on the show, or for anyone who pitches any investor, is to carefully study every aspect of the background of the
people you are pitching. There are many ways you can use that to your advantage in the actual pitch. And because these guys, in particular, have very public per- sonas, there are a lot of venues you can research their net worth, their successes, their failures, their interests, their dis- tastes, and so on. Sell the dream, not sales. Here’s what the Sharks, or any investor, want to really understand: Do you have a great product? Do you know what the size of your market is? Do you have some sense of a business model?
How do they know if you have a great product? They can tell by your back- ground, your expertise, if you have a patent, and if you say, ‘I have distributors about to send me purchase orders for the product.’
Any deal goes through several stages: sales, initial questions, the accepted offer, and the honeymoon period, due dili- gence, legal contracts, potential buyer/ seller remorse, and then cash getting wired. The TV show only takes us through “the accepted offer” but at any point there’s the chance the deal can fail. This is important to remember about any deal. An entrepreneur takes advantage of
every situation and opportunity. What could an auto recycler do with a million dollars’ worth of free advertising plus great advice from a bunch of insulting bil- lionaires? Okay, who is ready to enter the Shark Tank?
Ginny Whelan, an ARA Past President, is Man- aging Director of the ARA Educational Founda- tion and founder of the ARA University, the leading Web-based training resource in auto re- cycling education. Visit
www.arauniversity.org.
iStock.com/Refluo
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