There's a new reality television series on ABC called "Shark Tank".
In the series, entrepreneurs pitch their inventions and ideas to five multi-millionaire investors in the hopes of getting the investors to buy into their ideas.
What strikes me about the show is how many of the entrepreneurs don't really have any business sense.
There are 3 things that stand out almost every episode.
1.
The entrepreneurs expect a large investment of money, with no track record.
2.
The entrepreneurs expect a large investment of money, while giving very little stake in the control of the venture.
3.
The entrepreneurs are blinded by their personal emotions to the risks in the deal.
Let me explain what I mean.
The first point is often brought to the forefront when the investors ask the question of the entrepreneur, "How many units have you sold so far?" Often the answer is one or two, sometimes the answer is several hundred, but the profits are still so small the entrepreneur hasn't broken even.
Some entrepreneurs have mortgaged their home, their credit cards and are broke because they have poured all of their time and money into their idea.
I commend the entrepreneurs for their tenacity and vision, but there's a common saying in business that you should let your "income lead your expenses, not the other way around".
Now, put yourself in the shoes of someone who has earned their money the old fashioned way and someone comes to you wanting to borrow money from you for some new idea they have.
They tell you that together you can make lots of money using their idea and your money.
But you find out that they haven't even been able to sell their product on a small scale yet.
Makes you really comfortable giving them cash doesn't it? The second issue, very quickly follows the first.
The entrepreneur states that they are willing to give up a 10% share in the company (rarely do they offer more) for a $250,000 investment from the investors.
Now it's time to do some quick calculations.
If you are selling an investor a 10% equity share for $250,000 you are basically saying you believe your product is worth $2,500,000 and that with having little or no sales.
You don't need a financial calculator for this! Often the entrepreneurs don't see a problem with this math, so when the investor turns around and offers them the $250,000 for a 51% stake in the company the entrepreneur is insulted.
Let me let you in on a little secret about borrowing private investment money.
It's not uncommon for private money investors to receive 50% or more of the profit when investing in private start-ups.
Furthermore, if the entrepreneur doesn't have any cash in the deal and the investor only sees the entrepreneur risking their idea and sweat equity, they don't see that entrepreneur has anything to really lose.
I know, the entrepreneur doesn't see it that way, but without any cash in the deal, what's the keep the entrepreneur focused when things aren't going well? What's to keep them motivated to make a profit on the investor's money when the entrepreneur makes a bad decision? If the entrepreneur was honest with themselves, they would have to say, "Not much".
As a result, the investor is asking themselves, what can I do to mitigate my risks and to be able to get my money back should things go south? From the investor's perspective, the 51% stake isn't as much about the profits as it is about making sure good business decisions are being made, protecting their investment and reducing their risk.
This leads me to the last point, the entrepreneur is blinded by personal emotions.
They are so emotionally connected to their idea or their invention, they cannot see the investor's side of the equation.
The entrepreneur believes in their product and believe it is the greatest thing since sliced bread, but they lack the knowledge and experience to take their ideas to the next level.
This is often visible when the investors will only buy in if they get 51% of the deal.
The entrepreneurs get offended that the person with the money wants control of the joint venture.
The entrepreneur sees the venture through their own emotional lenses because they created the idea.
Unfortunately, those lenses often cause the inventor to be blind to risks.
An entrepreneur has to be able to step back from the scene and evaluate with a clear mind the business idea they are pitching.
As entrepreneurs we need to always be thinking about these issues when we are considering bringing in private money.
Long before we think about yields, and internal rate of returns or how much money we are going to make, we need to ask ourselves -- What's my track record? Have I done this before? Can I reproduce my idea even on a small scale and make more than just enough to break even? -- Besides my ideas and sweat equity, what do I have at stake in this deal? If I don't have any money, am I ready to give up 50% or more of the control and/or profits in my idea in exchange for someone else's money? -- Who can I talk to about my idea that will be frank and honest with me about the potential as well as the problem areas that I might encounter? Do I have someone I can trust to keep my ideas confidential as well as who can help me see things without being blinded by personal emotion? As one of the sharks on the show is fond of saying, "money doesn't have any emotion".
In the series, entrepreneurs pitch their inventions and ideas to five multi-millionaire investors in the hopes of getting the investors to buy into their ideas.
What strikes me about the show is how many of the entrepreneurs don't really have any business sense.
There are 3 things that stand out almost every episode.
1.
The entrepreneurs expect a large investment of money, with no track record.
2.
The entrepreneurs expect a large investment of money, while giving very little stake in the control of the venture.
3.
The entrepreneurs are blinded by their personal emotions to the risks in the deal.
Let me explain what I mean.
The first point is often brought to the forefront when the investors ask the question of the entrepreneur, "How many units have you sold so far?" Often the answer is one or two, sometimes the answer is several hundred, but the profits are still so small the entrepreneur hasn't broken even.
Some entrepreneurs have mortgaged their home, their credit cards and are broke because they have poured all of their time and money into their idea.
I commend the entrepreneurs for their tenacity and vision, but there's a common saying in business that you should let your "income lead your expenses, not the other way around".
Now, put yourself in the shoes of someone who has earned their money the old fashioned way and someone comes to you wanting to borrow money from you for some new idea they have.
They tell you that together you can make lots of money using their idea and your money.
But you find out that they haven't even been able to sell their product on a small scale yet.
Makes you really comfortable giving them cash doesn't it? The second issue, very quickly follows the first.
The entrepreneur states that they are willing to give up a 10% share in the company (rarely do they offer more) for a $250,000 investment from the investors.
Now it's time to do some quick calculations.
If you are selling an investor a 10% equity share for $250,000 you are basically saying you believe your product is worth $2,500,000 and that with having little or no sales.
You don't need a financial calculator for this! Often the entrepreneurs don't see a problem with this math, so when the investor turns around and offers them the $250,000 for a 51% stake in the company the entrepreneur is insulted.
Let me let you in on a little secret about borrowing private investment money.
It's not uncommon for private money investors to receive 50% or more of the profit when investing in private start-ups.
Furthermore, if the entrepreneur doesn't have any cash in the deal and the investor only sees the entrepreneur risking their idea and sweat equity, they don't see that entrepreneur has anything to really lose.
I know, the entrepreneur doesn't see it that way, but without any cash in the deal, what's the keep the entrepreneur focused when things aren't going well? What's to keep them motivated to make a profit on the investor's money when the entrepreneur makes a bad decision? If the entrepreneur was honest with themselves, they would have to say, "Not much".
As a result, the investor is asking themselves, what can I do to mitigate my risks and to be able to get my money back should things go south? From the investor's perspective, the 51% stake isn't as much about the profits as it is about making sure good business decisions are being made, protecting their investment and reducing their risk.
This leads me to the last point, the entrepreneur is blinded by personal emotions.
They are so emotionally connected to their idea or their invention, they cannot see the investor's side of the equation.
The entrepreneur believes in their product and believe it is the greatest thing since sliced bread, but they lack the knowledge and experience to take their ideas to the next level.
This is often visible when the investors will only buy in if they get 51% of the deal.
The entrepreneurs get offended that the person with the money wants control of the joint venture.
The entrepreneur sees the venture through their own emotional lenses because they created the idea.
Unfortunately, those lenses often cause the inventor to be blind to risks.
An entrepreneur has to be able to step back from the scene and evaluate with a clear mind the business idea they are pitching.
As entrepreneurs we need to always be thinking about these issues when we are considering bringing in private money.
Long before we think about yields, and internal rate of returns or how much money we are going to make, we need to ask ourselves -- What's my track record? Have I done this before? Can I reproduce my idea even on a small scale and make more than just enough to break even? -- Besides my ideas and sweat equity, what do I have at stake in this deal? If I don't have any money, am I ready to give up 50% or more of the control and/or profits in my idea in exchange for someone else's money? -- Who can I talk to about my idea that will be frank and honest with me about the potential as well as the problem areas that I might encounter? Do I have someone I can trust to keep my ideas confidential as well as who can help me see things without being blinded by personal emotion? As one of the sharks on the show is fond of saying, "money doesn't have any emotion".
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