Repelling Shark Attacks
Bill Warner Wednesday, August 12, 2009
The new television show, Shark Tank, portrayed investors as vicious animals and was kind of over the top with respect to how they deal with entrepreneurs. Quite frankly, I was ashamed of the way investors were made out to be the bad guys.
The truth about investors
Although the people who played the investor roles had many of the characteristics of real investors in an initial meeting with an entrepreneur, much of what we say was fiction and just plain overstated.
- Investors are much more curious about the entrepreneur’s business model, starting with an understanding of the market and the buyer they are trying to satisfy. A substantial amount of time is spent on this alone in an initial meeting. Most investors need to establish this base of knowledge before they can evaluate anything about the business idea. We saw very little of this kind of inquiry on the show. Entrepreneurs need to really know their market and business model and be prepared to defend it before they engage with any investors.
- Most investors are actually the biggest friend of the entrepreneur, when it comes down to it. It is rare to see entrepreneurs attacked and ridiculed as we saw on this program. Good investors, when confronted by lack of clarity by the entrepreneur, turn the moment into a coaching session; especially if they are seeing the formation of what appears to be a good idea. Insulting and laughing at entrepreneurs is not a typical way they conduct themselves. If you do run into a bull shark like we saw on the show, I suggest you just move on. You would not want them on your team.
- Investors don’t immediately leap into a deal discussion in the first meeting. The first meeting is all about getting to know the entrepreneur and the business idea. These meetings last anywhere from thirty minutes to a few hours, as the investor performs initial due diligence on the plan for the business. Lots of questions get asked in an effort to determine if it is worth any more of their time to seriously consider making an investment in the company. The successful result of an initial meeting is an agreement to enter formal due diligence that could ultimately lead to a term sheet negotiation. Investors don’t write checks after a five minute discussion. This program leads people to think that investors make snap decisions in just a few minutes of consideration. That is ridiculous.
- The entrepreneurs were not prepared very well to give a thoughtful business presentation, and even more unprepared to negotiate a deal. A real negotiation is much more thoughtful and reasoned. Entrepreneurs should explain the basis for the value they place on their company by describing its recent accomplishments and reflecting what the market is right now. They need to be prepared with a reasonable ownership offer, and know what their walk-away point is. Investors normally explain the reasoning behind their offer or counter-offer in order to convince the entrepreneur to accept it. It rarely gets into the shouting matches and insult slinging we saw on the program. Before any negotiation starts, investors carefully think through the numbers and determine the potential future returns, based on what they think the revenue, cost and expense requirements are going to be and how much money is going to have to be raised. We saw none of this.
Meet a real investor
I have no idea why it is good entertainment to publically humiliate an entrepreneur in front of millions of people. If you want to really understand what this process is all about, take the time to meet a real investor. I guarantee you will not find the kind of arrogance and be humiliated and berated like you saw on the Shark Tank. Most will take the time to give you some pointers and guide you to what your next step should be.
Filed Under: Angel Investment, Financing a Company, Starting a Business
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
