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I watched 50 episodes of Shark Tank. Here are 3 unexpected graphs on what I learned about raising money there

Jun 09, 2015 / by Vitaly Pecherskiy

I_watched_50_episodes_of_Shark_Tank.

Originally, the story appeared on LinkedIn

Before we get started, I wanted to acknowledge that I understand that Shark Tank is a TV show. So some investors’ patterns may not be the same as in the ‘real world.’ But since most people don’t spend their days on CrunchBase, I figured it could be a relatable, fun piece of research that people can build upon.

 

Introduction

It has always been painful to see entrepreneurs getting shut down by the ‘Sharks.’ So, I started this little project of watching 50 random episodes of Shark Tank with a goal in mind: to show entrepreneurs how important having traction (sales) is in raising a seed round of funding, which is typically the financing companies seek from the Shark Tank.

To do that, I have compiled data in an Excel spreadsheet — pre-money valuation, how much a company has asked for, which ones have raised money, at what valuation, and how much have they given up — with the sole intention of drawing parallels between lack of sales to failure to raise money or unfavourable valuations.

 

work in progress

Screen_Shot_2015-06-08_at_3.01.24_PM

I thought I knew the answer and I just needed data to back me up.

 

BUT I WAS WRONG!

  

I tried to get insights from my data to prove my thinking was right over the course of several evenings. No matter what graphs I tried to build, the numbers were not on my side. So, instead of ditching the project altogether, I saw this is a learning opportunity for myself.

To make sense of the data I compiled, I needed to find a common denominator that could be used regardless of the size of the company. The metric that I ended up settling for was sales as percent of valuation, or the inverse of the ‘valuation multiplier.’

 

Graph #1

Out of the 50 companies I studied, 29 have raised money. When I tried to compare the sales they had to the likelihood of their raising money, I was very surprised. Out of these 29 companies, here is how the breakdown looked:

Graph #1

quarter of all companies that had between zero sales and sales of less than 5% of their valuation were able to raise money!

Lesson 1: Sales are important but not everything.

This graph basically proved my thinking right off the bat. Did I even have to go further? I wanted to.

 

Graph #2

The next assumption I wanted to test was whether having sales meant you have more negotiation power. And AGAIN I was proven wrong! In this sample, companies with more sales did not prove to have an upper hand in negotiating a better valuation. In fact, it was the reverse! Companies that had more sales gave up more equity!

Graph #2

Lesson 2: Having sales doesn’t mean having an upper hand in negotiating a better valuation.

 

Graph #3

At this point I was convinced — at least on Shark Tank — that having negligible sales does not mean you aren’t going to raise money. But what I was truly surprised to uncover is the average amount raised. Companies with sales under 25% of their valuation fell only 18% behind!

This is particularly shocking given that companies with more sales (as percent of their valuation) have also given up more equity than companies with a smaller percentage of sales.

Graph #3

Lesson 3: More sales doesn’t mean you will get to significantly more money!

 

Conclusion

Dozens, if not hundreds of factors, go into the valuation of the company: uniqueness of the product, how ready the product is for the market, if the entrepreneurs have exited a company before, market conditions, etc. Of course it would be impossible to map them out. But for the sake of this project, having sales is what I wanted to put to the test.

Although I am still convinced that having sales is super important in raising money, I have changed my opinion about the role it plays in fundraising on Shark Tank. If I were to suggest other entrepreneurs focus on growing their sales, it would be largely because it is a true testament to finding the product-market fit before raising money for growth. After all, dollars from customers are easily 10 times as valuable as money from investors!

Overall, this has been an eye-opening and fun project. Undertakings and unexpected discoveries like this are what excite me about being an entrepreneur!

 


For those who are curious, here are all the companies that I have used in this analysis:

Duality Cosmetics, 5 Minute Furniture, Lifter Hamper, BagBowl, Magic Moments, Spatty, Freeloader, Wired Waffles, Neatcheeks, Cow Wow Cereal Milk, Kookn Kap, Keen Home, Fairytale Wishes, Paper Box Pilots, Rapid Ramen Cooker, Pork Barrel BBQ, Marz Sprays, ReadeREST, Pursecase, Off The Cob, Taaluma Totes, The Cookie Dough Cafe, Garage Door Lock, Fun Cakes Rental, DoorBot, Rugged Races, Crio Bru, Kitchen Safe, Cerebral Success, Reviver Clothing Swipes, Chocomize, The Painted Pretzel, Slawsa, Mo’s Bows, Zomm, Yubo, Earth-log, Magiccook, Back 9 Dips, Revolights, ZinePak, PostureNOW, Table Jack, Liz Lovely Cookies, Rockband, LuminAID, Grace & Lace, Esso Watches, FuzziBunz, Cozy Bug

 

Special thanks to Piktochart for beautiful graphics:

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