What the show got wrong
The hosts of this TV show live up to their name—they are sharks. The negotiation dynamics and terms presented to founders during the pitch sessions are often not founder-friendly. As an example, most angel investors do not ask for royalties on each unit until they recoup their initial investment. Similarly, it is uncommon for an angel investor to get over 10 percent ownership in a company raising less than $2 million.
As another example, it may sound like a good deal to invest $250,000 in exchange for 30 percent equity, but the reality doesn’t quite work out that way. The terms of this deal are what the industry would call “predatory terms” and are neither friendly to founders nor investors in the long run. With that much equity given up for one angel, founders may have insufficient equity to incentivize their team or future hires. It also may be difficult to raise additional rounds of capital and may reduce motivation for the founders to continue building the company.
As for pitches, the style and content are much different off-camera. It is unlikely that angel investors will see a fully rehearsed skit filled with a live demo, paid actors, and taste testing. A pitch as an angel investor will look like a coffee meetup, lunch, and maybe a formal presentation with a slide deck filled with critical information, such as market size, financial predictions, and team background. While not as entertaining as TV, understanding these metrics and getting to know the founder are vital to forming an investment decision.
Thanks to the increased popularity of Shark Tank over the years, Sharks are now asking whether featured companies actually want to give up equity and are not just in the Tank to demo a product that will reach the show's audience. It is not uncommon for sales to increase for a product following the release of the founder's episode regardless if they receive an investment from the Sharks.
Many of the pitches in the tank are within an industry known as Consumer Packaged Goods (CPG). CPG products include packaged food, clothes, skincare, and other household items. As an angel investor, it is rare that most of the pitches you hear will be CPGs, especially in Minnesota. You are more likely to be pitched businesses that fall into medical devices, food tech, health sciences, SaaS, and other more technological-heavy industries. Beyond CPG, plenty of other industries also seek out angel investors.
In the real world of angel investing, you are unlikely to be in a bidding war with other angel investors on a deal. In fact, the opposite holds true: investing should take on more of a collaborative approach. It is encouraged that you reach out to your network to share the investment opportunity. This will not only broaden the investor pool, but it will also present founders with more expertise, resources, and networks to support the company’s further growth.
Unlike Shark Tank, there are no time limits on asking questions. Take advantage of the absence of producers and dive deep into who the founders are and what they are building. You may also schedule follow-up conversations with founders and consult subject matter experts for their opinion on the business. You do not have to make an immediate investment decision in front of the founders. Take your time to truly understand the business and evaluate the risks and rewards of the investment.
We’ve seen scenarios where the Sharks have said no to a founder too quickly; however, it is equally important not to drag out a rejection for too long. No one, including founders, enjoys being strung along. Founders move incredibly fast, and they will also expect the angels to move quickly to make a decision. As an angel, you might have a lot of questions for the founder and need to complete due diligence. However, sometimes you just know this isn’t the right company or deal for you—and that is okay! Just let the founders know you have passed on the deal and offer any constructive feedback you may have.
What in the show got right
While Shark Tank pitches may appear more extreme than the average angel-investment opportunity, it does provide a realistic portrayal of the diverse stages of companies that angel investors may be pitched. Each season showcases founders at various stages of development, seeking various amounts of capital. For angel investors, this is an accurate experience; companies seeking investment range from early stages with minimal revenue to large-scale profitable operations.
“For that reason, I’m out” is a quip that the Sharks use when they decide not to invest in a company, leaving the remaining Sharks to fight it out. Sometimes it is because of the deal terms, or because they do not know enough about the industry. As an angel, it is important to invest in companies that you believe in, feel like you know enough about, and could become a consumer of. It is also important to diversify your investment portfolio, similar to how one would diversify a stock portfolio. It is unrealistic to only invest in industries in which you have direct experience or sufficient awareness of. The advantage to investing in early-stage companies is that founders are at the cutting edge of new technologies. It is vital that your portfolio contain multiple industries, business models, and founder backgrounds. Learn more about building your investment thesis here.
These Sharks ask about the team's background—and so should you! The Sharks inquire about the founders’ motivations behind the ideas, their ability to scale the business, and the overall vision of the company. These questions are vital to ask of founders. During a pitch, do not simply focus on the company and the idea; pay attention to the team behind it.
Key learnings from the sharks
Whether you’re an avid watcher or have never seen the show before, an angel investor can learn key takeaways from these Sharks:
- You do not have to take every deal: It is okay to say no to a founder. It’s even better to say, “Come back to me when you hit a certain benchmark or metric.”
- You will pass on good companies: Yes, it may sting when you do the math on what your investment could have been worth, but you can always tell the story of the one that got away.
- Give founders feedback: Shark Tank hosts are not on the show simply because they have a high net worth. These Sharks are great business leaders with deep experience in investing and scaling businesses. Like the Sharks, angel investors should give founders honest and constructive feedback and advice.
Shark Tank did not get it all wrong when it comes to angel investing. By propelling angel investing into the cultural zeitgeist, the show has brought new products to the market, invested in founders, and sparked conversations. Whether you identify as a shark or an angel, we are all on a mission to invest in founders shaping our tomorrow.