Shark Tank’s Naomi Simson on the uncertain world of startup investing
Originally published on Smart Company, 17 May 2018
With the new season of Shark Tank on air, it brings with it the same old questions about investing in business. How many deals actually come off?
Shark Tank is a global franchise owned by Sony, produced in 28 countries. Interestingly, every show experiences the same level of success when it comes to investing. Across the board, more than 30% of deals made on air will simply not happen. For various reasons, a third will turn into ongoing mentoring and assistance, and a third will involve a financial outcome.
Each entrepreneur is different and comes on Shark Tank for different reasons. Mark Cuban on the US version often ‘attacks’ entrepreneurs when it is clear they are only there for publicity. This is all taken into account as we get to know them after the show.
Here’s the thing: a lot of people lose a lot of money in the startup world. I’ve lost plenty myself over the years. So while we’re choosing to invest after a five-minute spiel on a prime-time TV show, we simply cannot forget the fundamentals of business.
We have an hour with the entrepreneurs at the most on the day. Then the real work starts in getting to know them. I’ve made offers on the show where the entrepreneur never ever gets back to me after emails and phone calls … let alone go through a thorough due diligence process. I’ve had several say, “if we don’t go ahead with your deal do we still get to go on air?”, and this is absolutely okay. Investment is long. I’d rather know straight up if they don’t think there is a fit either.
Due diligence is a considered process that is much more than just looking at financial performance and projections. Business is hard work — sometimes we win and other times we lose. Owning your own business is even harder. And when we make an offer to invest in a business, our ability to work with the founder and create a shared vision for the future are paramount.
I feel a bit like a broken record on screen sometimes, always going on about the basics. Has the product got traction yet? Are your customers happy? The single best way to get investment in your business is to have your customers invest in the growth of that business. That’s why in the due diligence process after each ‘deal’, I make a point to speak to customers and employees of the businesses I have agreed to work with.
Investing in something without doing the proper leg work and asking the hard questions is, quite frankly, irresponsible. Good investors don’t go blindly into a deal thinking everything is going to be the next Facebook. Even if a business is part of a startup ecosystem, such as those at muru-D, BlueChilli, Fishburners or River City Labs, there is no guarantee of a successful outcome for founders, or investors alike. That’s because the startup reality is hard, despite all the help in the world.
Ultimately, customers and the ability to find and keep them, determine the success of any enterprise. It is not the ability of the founders to raise capital which determines success.
I have people email me their pitch decks on a weekly basis. Decks, including full financial records, on businesses I have no idea about, often not even operating in an industry I know about, and without even so much as a non-disclosure agreement. A founder must be responsible when asking for money. And investors must be equally responsible when handing money over. It’s a two-way street.
It doesn’t always add up. Sometimes, with entrepreneurs under the pressure of pitching his or her passion to a panel of intimidating “sharks”, figures are inflated and details are lost. There’s only so much detail that can be given, and trust established, within the setting of a TV studio under hot lights and time limits. And as we know, in business as in life, detail is where the devil lives.
As Janine Allis commented in a recent interview, “I’ve absolutely invested money and lost all of it, and I have invested money and making quite a good return. At the moment, we’re about even”.
Going on Shark Tank as an investor is not about getting rich and it’s not a license to print money — for the investors or those pitching. However, access to our networks, our time and experience can set a business on a trajectory that they just could not get anywhere else.
Some of the businesses I have worked with took more than a year before the equity deal was made — I worked with them on the business model, cleaning up their balance sheet, and their systems and processes to allow them to scale. And that (while it’s hard work and takes effort) is the true joy in being on the show — seeing my experience and networks support the growth of an Australian business.
The due diligence process can be expensive in both time and money. Some startups do prepare vendor due diligence documents as part of the capital raise process to help speed things up. No matter what, some level of professional accountant, lawyer or advisor is usually engaged (and paid for) by the startup to ensure the business is presented accurately to the investor.
As entrepreneurs, we know that owning a business is a long road; overnight success stories are rare. (I wrote Ready To Soar to assist would-be entrepreneurs determine if this is the life that would suit them). But as I like to say, anything worthwhile is going to take effort; if it was easy, everybody would be doing it.
We have now seen 400 pitches on Shark Tank Australia — how wonderful it is to support the dreams of these founders, in so many different ways.