{"id":340,"date":"2013-05-21T22:10:50","date_gmt":"2013-05-22T05:10:50","guid":{"rendered":"http:\/\/www.danshapiro.com\/blog\/?p=340"},"modified":"2013-05-21T22:10:50","modified_gmt":"2013-05-22T05:10:50","slug":"3-worst-startup-mistakes-made-on-best-reality-show","status":"publish","type":"post","link":"https:\/\/www.danshapiro.com\/blog\/2013\/05\/3-worst-startup-mistakes-made-on-best-reality-show\/","title":{"rendered":"Shark Tank: The 3 worst startup mistakes made on TV\u2019s best reality show"},"content":{"rendered":"

This article first ran as a guest post in Geekwire<\/a>.<\/em><\/p>\n

For a long time I’ve felt like I must be either the first or last entrepreneur to discover the ABC series Shark Tank<\/a>. \u00a0For the uninitiated, it’s pure startup voyeurism: a company stands in front of a panel of 5\u00a0plutocrats, pitches, and either gets an investment or gets laughed off the stage. \u00a0It wasn’t until Jeremy Liew’s great review of the latest episode<\/a> that I realized I wasn’t alone.<\/p>\n

But watching Shark Tank, I find myself grimacing repeatedly. \u00a0It’s like nobody pitching has ever read a half-decent book on negotiation<\/a>. I keep seeing the same mistakes, over and over again. \u00a0Here are the three worst.<\/p>\n

Negotiate<\/h1>\n

By far the most\u00a0embarrassing\u00a0mistake any of these poor companies make is actually failing to negotiate. \u00a0They show up and make their pitch. \u00a0They get asked some questions. \u00a0Suddenly, the sharks are piling on about what’s wrong with the deal. The entrepreneur is visibly flustered.<\/p>\n

Suddenly, one of the sharks floats an offer. \u00a0Maybe a second one joins in.<\/p>\n

You can see the look of gratitude and relief on the entrepreneurs face. \u00a0How gracious of them to offer to invest in their flawed child! \u00a0How generous of them to help.<\/p>\n

Pshaw. \u00a0None of these folks are chumps or charity cases. \u00a0Do you know why they trash your business before making an offer? \u00a0So you’ll take the offer<\/em>. \u00a0It’s not one of the nicest negotiation techniques, but it’s plenty effective.<\/p>\n

Here’s the simple rule. \u00a0If someone makes you an offer, it’s because they’re interested. \u00a0If they’re interested, you should negotiate. \u00a0Not accept; negotiate.<\/p>\n

Of course, there are right ways to do this and wrong ways to do this. \u00a0You’ve seen plenty of entrepreneurs on the show (and in life) start grandstanding about company value, only to have the Shark shake their head and declare themself “Out”. Don’t do that. Don’t be ridiculous.<\/p>\n

Instead, make a reasonable and polite counteroffer. \u00a0 “I’m really excited by the prospect of working with you. \u00a0How about 20%?” \u00a0Even if they appear to be tottering on the edge of leaving the deal (and remember that they have every interest in making you think they’re about to bail for maximum negotiating leverage), a polite response like that won’t hurt anything. \u00a0The worst you’ll get is a “no”, and now they know that you’re not a total pushover.<\/p>\n

And of course, if you’re a hot item – if more than one shark is interested – make them bid! \u00a0Get them each to give you numbers, and don’t let them collude to drive your price down. \u00a0With multiple offers, use a line like this. \u00a0“Each of you would be a huge asset here, but my goal here is one fully-committed partner and the best deal for my shareholders.”<\/p>\n

Know what you want<\/h1>\n

You’re going to come in with something clean and simple, like “$50,000 for 10% of the company”. \u00a0They’re going to counter (because unlike the contestants, the Sharks<\/em> always negotiate) with something like “$100,000 for 8% and a 5% royalty”.<\/p>\n

When this happens, people get this funny look on their face, like Mr. Wonderful just sprouted wings and started handing out gumdrops. \u00a0There’s no excuse for that. \u00a0The Sharks have a limited array of tricks up their sleeve, and you should have considered all of them before setting foot in that room. \u00a0Here’s the exhaustive list (please comment if I’ve missed one):<\/p>\n

Stake size:<\/strong> The most obvious. \u00a0They’ll offer the same money in exchange for more of the company.\u00a0 This is easy to plan for by deciding ahead of time on the worst case dilution you would accept. <\/strong><\/p>\n

Controlling interest:<\/strong> If the ownership is 50%, then no major decisions can happen without both you and the Sharks agreeing. If it’s 51%, then they can fire you the next day and liquidate the company if they think that’s a good idea. \u00a0And don’t fool yourself – if things are going sideways, they probably will. \u00a0Decide what you can live with. \u00a0If it’s 51%, remember the words of Mr. Wonderful: “I can fix you, but you probably wouldn’t like how I would do it.”<\/strong><\/p>\n

Number of Sharks:<\/strong>\u00a0Most entrepreneurs get giddy over multiple investors (or, as they’re known in the startup parlance, “party rounds<\/a>“). \u00a0Truth is, if you have more than one or two Sharks in the deal, you’re getting a lousy deal. \u00a0First, because each of them has a comparatively small stake, and therefore a small incentive to help. \u00a0Second, because if you’re in a bind, each of them reasonably expect one of the others to help out (the Bystander Effect<\/a>). \u00a0Third, because the alternative to being in the same deal is offering competing deals – since that didn’t happen, you almost certainly took it in the shorts on valuation. \u00a0There’s only one situation where multiple sharks in the offer is good: when they are getting a 50% or greater interest. \u00a0That’s because while one person with 51% runs the company, two people who split the round are each just 25.5% owners.\u00a0\u00a0 If I was giving up 51% of my company, I’d want that stake split between as many Sharks as I could get – since my vote, plus any one of theirs, would constitute a majority. <\/strong><\/p>\n

A royalty:<\/strong> \u00a0You should know ahead of time what kind of royalty your business can support, and realize that a never-ending royalty seriously limits the long-term viability of your company by\u00a0permanently\u00a0lowering your margins. \u00a0And realize that once a shark gets their money back, they have a much smaller incentive to see you succeed – people are more motivated by fear of loss than opportunity for gain.<\/p>\n

Help:<\/strong> \u00a0Some of the sharks have specific assets that may be useful. \u00a0Mark’s got stadiums and movie theaters, Damon’s got retail distribution, and so on. \u00a0Many of the deals are done because the entrepreneurs want access to those networks. \u00a0Do your homework before you get on so you know what help you can realistically expect from who.<\/p>\n

Contingencies:<\/strong>\u00a0This is the one that kills me. \u00a0If they say “I will invest contingent on X”, that’s the same as saying “I won’t invest, but might change my mind if you do X”. \u00a0A typical structure is that they will invest contingent on a valuable introduction to Their Friend Abe going well. \u00a0Well, real investors introduce their companies to Abe, and also\u00a0Belinda, and Charlie, and Dolores, and a whole alphabet of partners because they’re committed. \u00a0Contingencies are just shopping around, saying “I’ll see what my friend thinks”. \u00a0Avoid offers with contingencies if you have any other options.<\/p>\n

Don’t ever leave the room<\/h1>\n

“I’ll offer 25%.”<\/p>\n

“I’ll offer 20%!”<\/p>\n

“I’ll do it for just 18%!!!!… wait, could you leave the room for a minute?”<\/p>\n

Pop quiz: when you return, your options will be:<\/p>\n

a) 25%, 20%, and 18% because they just wanted some private time to talk about how much they liked you<\/p>\n

b) 15%, 13%, and 11% because they’ve been negotiating against each other while you were gone<\/p>\n

c) Just 18%, because the other two dropped out<\/p>\n

d) 30%, but good news! \u00a0We’ll all be investing together to help you.<\/p>\n

Don’t let Sharks collude.<\/em> \u00a0There’s a reason the federal government outlaws business collusion: it drives the prices in the wrong direction. \u00a0If the Sharks try any of the “please step out for a moment”\u00a0shenanigans, just let them know you’re on to their tricks. \u00a0Explain that you want one committed partner who doesn’t need to seek the approval of others, and if you walk out the doors you’re not coming back. \u00a0They only do the “step outside” when they really<\/em> want a deal, so all the leverage here is in your court.<\/p>\n

Of course, the most egregious error here is people who actually volunteer to leave the room. \u00a0Don’t call your spouse. \u00a0Don’t call your\u00a0mentor. Don’t call Steve Wozniak<\/a>. And for heavens’ sake, don’t go outside to talk to your cofounder who’s standing right there. Do your homework up front, know where everyone’s bottom line is, and trust your cofounder<\/a> to implement the strategy you discussed without going outside and whinging about it first. \u00a0Then make the deal, or walk out with your head held high.<\/p>\n

Life is Shark Tank<\/h1>\n

I love this show because it’s the only reality TV I’ve ever seen that feels real. \u00a0I’ve had friends sell companies for the original offering price. I’ve stared stupidly at an angel investor, finding myself totally thrown by the suggestion that we add a board member. And I’ve knowingly pitched a room full of angel investors, where the actual printed agenda<\/em> \u00a0calls for me to walk out and sit quietly in the hallway where they collude on price.<\/p>\n

If you haven’t had the pleasure, pull up a comfy chair and watch a few episodes. \u00a0Just remember when you watch Shark Tank: your role models aren’t the entrepreneurs. \u00a0They’re the Sharks.<\/p>\n","protected":false},"excerpt":{"rendered":"

This article first ran as a guest post in Geekwire. For a long time I’ve felt like I must be either the first or last entrepreneur to discover the ABC series Shark…<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[21],"tags":[],"class_list":["post-340","post","type-post","status-publish","format-standard","hentry","category-startups"],"_links":{"self":[{"href":"https:\/\/www.danshapiro.com\/blog\/wp-json\/wp\/v2\/posts\/340","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.danshapiro.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.danshapiro.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.danshapiro.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.danshapiro.com\/blog\/wp-json\/wp\/v2\/comments?post=340"}],"version-history":[{"count":1,"href":"https:\/\/www.danshapiro.com\/blog\/wp-json\/wp\/v2\/posts\/340\/revisions"}],"predecessor-version":[{"id":395,"href":"https:\/\/www.danshapiro.com\/blog\/wp-json\/wp\/v2\/posts\/340\/revisions\/395"}],"wp:attachment":[{"href":"https:\/\/www.danshapiro.com\/blog\/wp-json\/wp\/v2\/media?parent=340"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.danshapiro.com\/blog\/wp-json\/wp\/v2\/categories?post=340"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.danshapiro.com\/blog\/wp-json\/wp\/v2\/tags?post=340"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}