How does Shark Tank work? It’s a reality show but there are certain rules that it follows. Once you know about them, everything will be simple.
Let’s start from the basics.
Shark Tank is a reality TV series based in America in which entrepreneurs pitch their business ideas to a panel of investors, also known as “sharks.” If the Shark Tank investors are interested, they will invest in the company. The show is based on the Japanese Dragons’ Den format.
In return for an investment, the Shark Tank investors usually want a stake in the company, which gives them partial ownership and a portion of the profits.
Although Shark Tank investors give up some control by agreeing to this deal, the entrepreneur receives financing as well as access to things that money can’t buy: namely, the Sharks themselves along with their networks of contacts and experience.
Meet the Sharks & Guest Sharks
There are always six shark tank investors (Mark Cuban, Barbara Corcoran, Robert Herjavec, Daymond John, Lori Greiner, and Kevin O’Leary), but only five of them appear on every episode of Shark Tank.
Occasionally the show will have special guest investors that will evaluate a potentially successful business.
Who are the entrepreneurs, and what defines them?
If you have a good idea, are starting up your own business, or want to expand an already successful one and could use some investments in your company, Shark Tank is the show for you.
The casting team is searching for entrepreneurs who will pitch their unique business products, concepts, services, and properties to investors in hopes of obtaining investment funds.
If you are selected, five wealthy shark tank investors (the Sharks) could be willing to give you the money you need to start your venture.
However, the Sharks aren’t just there to invest; they certainly want a return on their investments.
Do Shark Tank participants receive monetary compensation?
Although the Shark Tank judges are financially compensated for hosting the show, they invest their own money into promising businesses.
If a panel member likes an entrepreneur’s business idea, they’ll make a handshake deal on air.
However, if all of the tank investors pass on the opportunity, then the entrepreneur goes home without any investment.
Entrepreneurs used to have to give up equity or royalties to appear on the show until Mark Cuban helped end the policy
The saga has had a four-season deadline in which every business whose participation was approved must provide a production company with at least two % of operating income or 5% of equity.
Having served as a casting member for one year, Cuban approached the producers saying he didn’t want to be in the show until he had removed his participation.
He said it discouraged talented entrepreneurs from appearing and possessed an evil nature. The producer’s decision to retroactively remove the clause prompted a frank rumor.
How does the ‘Shark Tank’ show find entrepreneurs?
You can apply to be on Shark Tank from January until mid-September in one of three ways: online on the abc.com website, through 12 open casting calls around the U.S., or if producers visit trade shows or reach out to your company directly.
This last option is called “proactive” casting and usually happens when producers are seeking a specific type of entrepreneur for the show.
Producers will scout the Consumer Electronics Show for products they like on Jan. 11 in Las Vegas, and plan to open auditions in Dallas on Feb. 6., Miami on Feb. 13, and Los Angeles on March 14.
Teams of two persons are assigned by producers to vet the liked products and entrepreneurs through more thorough interviews after narrowing down the field of applicants (U.S citizens or permanent residents only).
Entrepreneurs apply to be on the show but producers also recruit some
Other than applications, Shark Tank has scouts who monitor crowdfunding sites such as Kickstarter and go through trade shows looking for promising companies with interesting business ideas.
xCraft scouts commissioned JD Claridge and Charles Manning to show the Sharks what their Kickstarter company had achieved and the pitch had been successful enough that all five Sharks signed up for a $1.25M investment.
A typical pitch lasts about an hour
The TV program runs for ten minutes but uses footage from a pitch of around an hour. Plate Topper founder Michael Tseng spent 2 1/2 hours in tanks during the fourth season. Contrary to the traditional pitch, investors are unaware of the company before they enter.
Using the video, helps audiences understand the people and companies behind Shark’s activities.
The film editor removes the “unsexy”, the Shark and Entrepreneurs getting involved in financial details the average viewer wouldn’t even understand.
Are you interested in securing a spot on Shark Tank? Then read on!
Before you apply to be on the show, check that you meet these eligibility requirements:
- Unless you are 18 years or older, your guardians must submit the request on your behalf.
- You must either be a U.S. citizen or have legal residency in the United States to qualify for this program
- You cannot have any felony or misdemeanor charges against you, whether they are pending or not.
- You, your family members, and anyone living in your household may not currently be nor have been associated within the last year with any of the following: Sony Pictures Television Inc, Finnmax LLC, UAMG Content, LLC., ABC Inc., any TV station owned or operated by ABC Inc. or any of the shark tank investors.
- You cannot be running for public office, and you must agree to not run for public office until 1 year after the last episode of the show in which you appear
The questions every Shark Tank enthusiast should know before their big pitch
Before you pitch your business to the Shark Tank investors or any other investors, make sure you have answers to the following questions.
- At which stage is your company?
- How much have you invested in the company? What was the time frame for this investment? What did you use the money for?
- When did you begin your venture, and how many years has it been running?
- How much has your business generated in sales since foundation?
- How much money did your business make last year, before taxes and expenses were deducted?
- How much have you sold so far this year?
- What are your sales goals, and how did you come to those conclusions?
- Have you ever attempted to fundraise from external sources? If so, how much money were you able to raise?
- What steps have you taken to grow your professional network? Are you content with the outcome so far?
- What’s the reason behind your wanting to pitch your business?
- What makes your business stand out from the rest? Why should customers come to you instead of someone else?
- How did you come up with the idea for your business? What made you want to start this particular type of business?
- What overwhelm, chaos or hurdles has your business faced and how were they overcome?
- Which social clubs or professional organizations do you belong to?
- Any awards or recognition you’ve gotten, list them.
The Shark Tank Show Premise
“Sharks” are investors on the show who decide if they want to invest in a business after hearing a presentation from the company’s owner.
Oftentimes, these sharks will find faults in the product, proposal, or valuation of the startup.
However, unlike regular cast members, shark tank investors receive compensation for their involvement and any money invested is theirs to keep.
Business forecasting through earnings, sales, and business valuation help entrepreneurs understand how much more to invest in their company as well as what ownership proportions are available.
If the shark tank investors panel is agreeable, then a handshake deal can be negotiated on-air.
Although if all members of the panel deny the offer, any future negotiation will not be possible.
The show is based on the entrepreneurs’ drama-filled pitch meetings with wealthier business people. An edited version of a contestant’s 45-minute pitches is cut down to 11 minutes.
In 2018, it was said that up to 40,000 entrepreneurs apply almost every season.
Of those applicants, only 1,000 make it past the phase while 150 get to pitch their ideas in front of sharks; with less than 100 making it on air.
During every hour-long broadcast, four segments are shown.
When did “Shark Tank” premiere on TV?
The first episode of “Shark Tank” aired on ABC in the USA in July 2009. It is the US version of a television series called Dragon’s Den.
The earliest iteration of the format was Japan’s Money Tigers 2001.
Shark Tank and the process of business valuation
To decide if the offer for an entrepreneur’s company stake is fair, the sharks must do some math.
Business valuation, which takes into account factors like a company’s potential earnings and future growth prospects, plays a role in this process.
More often than not, sharks have a better understanding of how much a company is really worth compared to the business owner’s estimation.
Shark tank investors are experienced and they arrive at their valuations quickly.
But don’t be fooled by their speed thinking that they’re guessing or being greedy; Sharks utilize several methodologies to arrive at their valuation, despite it not being apparent to viewers.
Although the companies on “Shark Tank” don’t have publicly traded equity shares or published earnings multiples, the Sharks can compare a company’s profit to the company’s valuation from sales revenue.
Sharks calculate an earnings multiple by taking the business’ profit and dividing it by its value, which is based on sales revenue.
So, if the business makes $100,000 in profits and is valued at $1 million then the earnings multiple would be 10.
The Sharks will compare the company’s multiple to those of businesses in similar industries. Industries usually have a median income multiple of 12, which would mean that the company being assessed is worth $1.2 million if its revenue is $100,000.
If this is true, then the entrepreneur can reason that taking $100,000 from investors’ 10% ownership stake in return for their investment makes sense.
Some entrepreneurs can ask for a certain amount of money in return to have a percentage of ownership. For example, an entrepreneur might request $100,000 from the Sharks in exchange for 10% equity in the company.
Once they have made this offer, the Sharks then begin to assess whether it is a fair deal.
Typically, the sharks will confirm that the entrepreneur is valuing their company at $1 million by sales.
They reach this conclusion because if ten percent ownership equals $100,000, then it follows that one-tenth of the company would be worth $100,000 too.
Therefore 100% (or ten-tenths) of the company must be valued at $1 million dollars total.
If a company is said to be valued at $1 million in sales, the shark tank investors would ask what the yearly sales were for the last year.
If it takes four years for the company to reach $1 million in sales from an initial investment of $250,000, this would raise questions among the Sharks.
However, if the response was that only $75,000 in sales is needed annually to hit million-dollar valuation milestones over time, then they Shark’s assessment changes dramatically.
Last year’s sales may only be worth $250,000 to the company, but if they recently struck a deal with Walmart for $600,000 worth of product, then their valuation appears much more attractive to potential investors.
In short, the valuation is not simply based on past revenue and sales numbers but also looks at what contracts or agreements are in place for future business.
Future market valuation
The Sharks want to make their money back, and then some. They do this by looking at the Future Market Valuation.
This is where the entrepreneurs project revenue and profit for the next three years.
The sharks compare these figures to similar businesses.
A future valuation is calculated similarly to revenues and earnings multiples. This has no disadvantage because they’re a forecast and therefore may cause errors. Sharkers may be asking if an investor has any predictions about sales over a given three-year window.
They would compare this number with those for the retail apparel industry. Founders can predict profits of $400K over three years resulting in net income by 2013.
If the retail industry averages 14.75 times the forward earnings multiple the value of sales would rise by 5.9M if sales were valued at 14.75×400,000.
The intangibles of valuation
If the Sharks valued the business purely on numbers they could never have a dramatic show. The intangibles in the valuation of Sharks’ tanks are the reason for their popularity.
Similar to other experienced investors the Sharks use numbers to estimate their company’s performance, but usually, focus on the most important aspects. Intangible things can also be of significant significance to us.
The story of the individual or business may influence the decision-making process.
Depending on the company’s compelling story and its dedication they may agree on its price without much discussion.
Conclusion on how does Shark Tank work?
The Shark Tank television show has been a platform for many different types of products, some great and some not-so-great.
However, the countdown of its eight most successful products demonstrates that there is still room for new ideas.
By providing tens of millions of viewers with potential exposure and access to funding from well-known investors, “Shark Tank” will continue to help entrepreneurs launch successful products.
The “Shark Tank effect” is a direct result of the show itself. Just by being on it and receiving exposure, companies have seen a significant rise in sales- some reporting 10 to 20 times their original numbers.
If you liked this article about how Shark Tank works, I have a few more interesting ones for you. Want to know how to get on Shark Tank or where you can watch Shark Tank?
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