11 Mistakes That You Should Avoid on Shark Tank to Get a Deal
What mistakes should entrepreneurs avoid on Shark Tank to secure a deal? Avoiding mistakes like presenting unreasonably high valuations, lacking clear business communication, and hesitating on good offers are crucial. Successful pitches require realistic valuations, concise communication, and prompt decision-making to impress the Sharks.
Securing a deal on Shark Tank can be a transformative moment for any entrepreneur. However, there Pitching your business on Shark Tank is a dream for many entrepreneurs.
The opportunity to secure funding, mentorship, and exposure from seasoned investors can catapult a small business into success.
However, even the most promising ideas can falter due to avoidable mistakes. Understanding these pitfalls and how to navigate them is crucial for anyone looking to make a deal with the Sharks.
Unreasonably High Valuation
Presenting an unreasonably high valuation can quickly derail your chances of securing a deal. Many entrepreneurs come to Shark Tank with valuations based on projected rather than current revenue, which can be problematic.
This approach can make sharks wary unless they see a clear path to growth or a strategic synergy with their other ventures. Over-inflated valuations can significantly hinder your chances of securing a deal.
Realistic Valuation Tips:
- Base on Current Figures: Ensure your valuation is grounded in current revenue and net income.
- Growth Potential: While some Sharks might consider growth potential, make sure it is realistically achievable.
- Comparable Businesses: Look at valuations of similar businesses in your industry for a more accurate assessment.
Low Sales/Revenue
Nothing kills a deal faster than poor sales figures. Even if the pitch goes well and the sharks like the product, they need to see solid sales numbers to justify their investment.
If your sales are under $100K, it suggests the product might not sell well or it’s too early for a significant investment. Additionally, if a business shows no growth over a few years, it raises red flags. Sharks are looking for businesses that demonstrate upward momentum.
Strategies to Compensate for Low Sales:
- Showcase Potential: Highlight the growth potential and market opportunity for your business.
- Relevant Experience: Emphasize your industry experience and past successes to build credibility.
- Sales Projections: Present strong sales projections based on market research and trends.
Not Knowing the Numbers
Knowing your numbers is crucial. While most entrepreneurs on Shark Tank are prepared, some fail to secure a deal because they don’t have a firm grasp of key metrics
Key Financial Metrics to Master:
- Sales Figures: Know your sales numbers, including last month’s, last year’s, year-to-date, and projected future sales.
- Cost of Goods Sold (COGS): Understand the financial complexities of your business and how profitability can be affected.
- Scalability: Be ready to discuss how your business can grow and potential cost savings with increased volume.
- Customer Acquisition Cost (CAC): Demonstrate your marketing and customer acquisition strategies.
Knowing these numbers not only instills confidence in the Sharks but also shows that you are prepared and capable of managing your business effectively.
Offering Too Little Equity
Some deal-seekers offer only 3 to 5% equity, which is generally too low for sharks who want a meaningful stake in the business. Sharks often state they need “skin in the game” to get involved.
The sweet spot for equity offerings tends to be between 10% and 20%, providing enough incentive for the sharks to commit their time and resources.
Equity Offering Best Practices:
- Meaningful Stake: Offer a significant equity stake to show commitment.
- Investor Expectations: Understand that investors seek substantial returns and control to ensure business success.
- Balanced Approach: Find a balance between retaining control and providing enough equity to attract investors.
Failing to Communicate the Business Clearly
Your pitch and subsequent Q&A should clearly explain your business and its model. Sharks appreciate simplicity and need to understand exactly what you’re selling and how you plan to sell it. Avoid going off on tangents or discussing too many ideas for growth.
Focusing on the main concept and future plans without getting sidetracked by ideas for growth is vital. Simplicity and clarity are your allies in making the Sharks understand and invest in your business.
Key Communication Tips:
- Concise Pitch: Keep your pitch straightforward and to the point.
- Focus on Core Business: Stick to the primary business model and explain it clearly.
- Future Plans: Outline your vision for growth in a structured manner.
Not Acting Fast Enough on a Good Offer
When a shark makes a good offer, it’s tempting to wait and hear from all the sharks. However, this can be a risky maneuver as the initial offer might be withdrawn.
While it’s natural to want to consider all options, quick decisions are sometimes necessary. Sharks often control the flow, and missing out on a good offer can be a costly mistake.
Nickel-and-Diming Negotiations
Haggling over small amounts of equity, such as 1% to 5%, can irritate the sharks. While small percentages can represent significant value in the future, securing a deal that propels your business forward is more important.
Remember, owning a smaller percentage of a much larger business is more lucrative than retaining full ownership of a stagnant one.
Effective Negotiation Strategies:
- Know Your Limits: Understand your bottom line but be flexible within reason.
- Respect the Sharks: Value their time and expertise; avoid dragging negotiations unnecessarily.
- Seize Good Offers: Recognize and accept a good deal when it’s presented to you.
Relying on Market Size for Success
Claiming that success is assured because you’re entering a large market is a common mistake. Sharks look for businesses with a competitive advantage, such as patents, first-to-market positioning, or effective marketing strategies. Simply entering a big market does not guarantee success.
Lack of a Clear Plan for the Money
When the Sharks ask what you plan to do with the investment, having a clear and focused response is essential. This demonstrates that you have a strategic plan and know where your business is headed.
Lack of clarity here can raise doubts about your preparedness and vision.
Developing a Solid Financial Plan:
- Specific Goals: Detail how the funds will be allocated to achieve specific business goals.
- Growth Strategy: Explain how the investment will drive business growth and profitability.
- Milestones: Outline key milestones and timelines for using the investment.
Spread Too Thin
Entrepreneurs often make the mistake of spreading themselves too thin, trying to expand too quickly or into too many areas. Focusing on your core strengths and gradually expanding is a more sustainable approach.
For instance, if you’re successful in direct-to-consumer sales, concentrating on that before moving into retail can be a wiser strategy.
Focused Growth Approach:
- Core Strengths: Focus on what you do best and build on it.
- Gradual Expansion: Expand product lines or markets incrementally to avoid overextension.
- Sustainable Growth: Ensure your growth strategy is sustainable and manageable.
Scalability Problem
The Sharks are interested in businesses that can scale quickly. If your business is still in its early stages, such as producing in a garage, it may be too soon to seek investment.
Ensuring that your business can handle rapid growth and increased production is crucial for attracting investment.
Scalability Considerations:
- Production Capacity: Ensure your production process can scale to meet increased demand.
- Operational Efficiency: Streamline operations to handle larger volumes efficiently.
- Market Readiness: Prepare your business to enter new markets effectively.
FAQs
What numbers should I know before pitching on Shark Tank?
You should know your sales figures, cost of goods sold, customer acquisition cost, and scalability potential.
How important are sales figures in securing a deal on Shark Tank?
Sales figures are critical as they indicate the viability and growth potential of your business.
Why should I avoid offering minimal equity on Shark Tank?
Offering minimal equity can signal a lack of commitment and undervalue the investors’ contribution and expertise.
How can I improve my business valuation before pitching?
Base your valuation on current revenue and net income, consider comparable businesses, and ensure growth projections are realistic.
What should I include in my financial plan for the Sharks?
Your financial plan should include specific goals, a detailed growth strategy, and key milestones for using the investment.
Conclusion
Avoiding these common mistakes can significantly improve your chances of securing a deal on Shark Tank. Knowing your numbers, having realistic valuations, offering meaningful equity, and communicating clearly are key elements that can make or break your pitch.
Again, having a clear plan for the investment and focusing on scalable, sustainable growth will resonate with the Sharks. By addressing these pitfalls, you can present your business confidently and increase the likelihood of walking away with a successful deal.
