Bob Started

The Shark Tank started this past weekend on ABC.  The show consists of six “sharks” who act as venture capitalists and angel investors.  I think the show is a great learning experience for anyone who has an idea or company to pitch to investors.  There are a few key things to keep in mind when watching the show. 

When Investors Invest

VCs and angel investors never invest in an idea.  Seed capital is the initial money to test an idea.  This money is very hard to find and is very risky for the investor.  This is why most startups begin with money from savings, credit cards, friends, and family.  It is not impossible (but close to impossible), and when you find seed capital, the investors will want an extremely large equity stake in turn for their money.

Angel investors and venture capitalists want to see results.  They want to see sales, profits, and potential for growth.  If I give someone $200,000 or more, I want to make sure the idea works.  Words someone tells you can lie.  Sales, profits, and sales orders don’t lie.  If you have a viable idea and you want money to expand your company, make sure you can prove it with past performance.   

VC & Angel Investing Minimums

Angel investors usually invest anywhere from $100,000 to a million dollars or more.  Venture capitalists usually will not invest in a company unless there is a huge potential for growth and the company is seeking $2,000,000 or more.  Then why are many of these people asking for between $50,000 and $100,000?  The reason is because this is television and not real life.  Often, the only ways to get money if you need this small amount is by using friends & family, Small Business Administration backed bank loans, credit cards, and personal savings. 

Company Valuation

This is the most real aspect of the show.  Remember, if you are asking for $100,000 for a 10% stake in your company, you are telling the investor that you think your company is worth $1,000,000 right now.  This is where debate usually happens in the investment process.  You argue that the company is worth more and they argue the company is worth less.  Remember that this is an investment for them, and they are hoping that the company grows much quicker than the stock marketing and similar investment opportunities.  If you just have an idea, it probably isn’t worth much of anything except the costs of a patent.  A company with existing sales will have a much higher valuation than most patents and ideas.