30 West 3rd

Very Early Stage Technology Investing

Shark Tank – How not to raise money…

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I had heard about the show “Shark Tank” from someone last week, and my kids were also badgering me to watch it.

The premise is would-be entrepreneurs pitching their ideas to a panel of five “Sharks”, successful entrepreneurs who will evaluate the idea and possibly offer to fund the company.  During the two segments I watched it has the usual “acting out” problems of most reality shows.  The Sharks try to act cool and heartless, the entrepreneurs act coy and play hard-to-get.

In the most interesting segment two women with a patented slip-cover for porta-cribs agreed verbally to give up 40% of their company to a real estate entrepreneur in exchange for $350,000.  That puts the pre-money at $525,000 without considering any options.  Forgetting the absurdity of focusing entirely on the valuation (we don’t know whether they are selling preferred, etc.), I thought they got a raw deal.  They had 200k in revenue, plus distribution through Target and a handful of hotel chains.  And, as an analyst in my office pointed out today, they have now had free exposure to boatloads of prospective buyers and investors.  They’ll get a much better offer now that everyone knows how little it would take to get them to play ball.  And they might get it from someone with more experience in pushing out such a product than the real estate Shark.

Which made me wonder if these poor souls had signed any restrictive contracts in exchange for appearing on the show.  The reality TV world is famous for driving hard term on contestants at the beginning, before they make them famous.  Would they really be able to just walk away, or would the panelists have the right to match any offer they received based on the exposure they received on the show.  Let’s hope not, because the co-founders of the porta-crib slip cover company deserve a better term sheet and board members.

I have to give the show credit for at least having a credible panel.  They were also willing to discuss the issue of patent assignment in this instance, which made me wonder what other rather technical issues they would delve into on other episodes.  Could next week bring a dispute over liquidation preferences?  Ratchets?  Redemption rights?

What’s bad about the show?  That they imply that investment decisions among people like the Sharks – professional investors – can be boiled down into a few minutes of product presentation and chit chat.  TV oversimplified the process.  Imagine that.

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Written by Mike Venerable

September 1, 2009 at 9:00 am

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