Insights and analysis from ‘The Shark Tank’ – season four
Another ferocious season of Shark Tank has come to a close with Season four, which ran from 15 May 2018 to 7 August 2018. The season aired 13 episodes containing 52 proposals that were pitched to the panel of Sharks. Of the 52 proposals, 33 were successful in obtaining one or more offers from the sharks. However, 20 proposals came up empty handed with 1 contestant declining the offer proposed and 19 proposals receiving no offers at all.
The team from the Moore Stephens Corporate Advisory division has gone along for the ride to provide a summary of the key metrics for this season, along with the key insights derived.
Key insights
Valuations – fact or blue sky?
It is widely believed by animal enthusiasts that Sharks will attack humans when they become curious or confused. During Shark Tank Season 4 this belief has been well documented through the reactions of the Sharks when confronted with valuations that are seemly farfetched and too good to be true.
Entrepreneurs are resilient and have a strong will to succeed. However, from a valuation sense, these attributes can misguide business owners into valuing their business at a price more than what a willing market participant would pay.
Blue-sky predictions, unsubstantiated assumptions and a lack of basic financial literacy to explain the valuation process were all areas in which the business owners failed to win over the sharks.
The following are some tips provided by the Sharks when preparing a valuation:
When pitching your business to potential investors, assumptions applied during the valuation process should be supported with evidence. For example, if your organisation is budgeting for large revenue growth because of new sales contracts, ensure these contracts are signed or well documented to support the assumption.
Provided your business is not operating in a Blue Ocean, try to obtain data of the industry (and most importantly, the competitors) in which you operate to get an idea of how similar organisations may be valued. This will allow you to determine whether or not the valuation is ambitious based on the perceived valuation of similar organisations and it will allow you to factor in how your competitors will impact your future growth.
Financial literacy to an investor is like blood in the water for a Shark, it attracts them. A sound understanding of the organisation’s current financial performance and where the business is heading in the future provided a great deal of reassurance to the Sharks, whom would in turn focus less on the valuation of the business and enquire more about the operational side of the business.
Blue ocean or no ocean at all?
Entrepreneurs are generally first to the market with a great idea and feel a sense of urgency to get the idea out. However, during the hype and excitement of launching a new product, testing the market is often an afterthought.
Low traction of sales, product faults/redesigning or not meeting market demands are all consequences of not testing the market in the early stages, which can be detrimental to the future of the business.
Product testing also provides validation over the assumptions applied in a valuation developed by a company in its pre-revenue stage. As observed on Shark Tank, a number of organisations were in the pre-revenue stage, however the companies that attracted the bites from the Sharks were those whom had tested the market and proven that their target market is a viable source.
Savvy entrepreneurs from the season targeted sample sizes (of more than 100) to test the ‘try and buy’ rates of their product (or if operating in the services industry their customer retention rates) on their target market. Mentioning these results when asked about how they got to their business valuation was an effective ploy to provide reassurance that the valuation is accurate.
Well executed presentation manifests reassurance
Aforementioned, presentation is key! During the season, strategic entrepreneurs whom had an idea of what questions and concerns the Sharks were going to have addressed these early in their pitch. This was advantageous to the presenter as the Sharks focused less on the risks within the business and more on what entrepreneurs love talking about - where the business is heading.
So what are some of the key questions a Shark might ask?
Key questions that an entrepreneur should have prepared answer for when pitching their business to potential investors include:
- What is the business’ current turnover and net profit?
- What is the ultimate cash flow within the business (EBITDA)?
- What is the business’ gross margin?
- Does the organisation hold a patent over its products?
- How is the business going to scale?
- What is the next budgeted three years looking like and are these assumptions supported by adequate historical data?
- How much have you as the owner invested in the business?
If the industry or business is inherently risky, these risks should also be raised within the presentation to avoid having to combat a flurry of queries during question time. Knowing your business risks and advising how the organisation has planned to address them is beneficial when it comes to the negotiation table. Organisations perceived by the Sharks to be risky will require greater reward before the Sharks are ready to invest. If the pitch is not properly prepared the result will be a significant discount to your desired business valuation.
Analysis –season four v previous seasons
The key metrics from the last four seasons of Shark Tank are outlined below:
Based on the above, the main observations regarding trends between each of the seasons include:
1. This season has seen the highest average asking amounts from entrepreneurs being $363,269. This is caused by a combination of aggressive valuations as well as a number of tech and large capital based organisation participating in the series. Such companies have asking valuations of up to $10 million, which is the cause of this season having also the largest average asking valuation of $2.27 million;
2. The average amount received (debt and equity) has decreased significantly from the previous two series, which suggests that the average proposal that was successful had a lower valuation than successful proposals in previous seasons. As shown in the graph below, this is evidenced through Janine’s investments in particular, who invested in five organisations at a cost of only $460,000. Further, lines of workings capital appeared to be less popular this series with only $230,000 offered as part of negotiations; and
3. The discount on original valuation percentage has increased significantly from season three, which suggests that the Sharks did not agree that the valuation was a true reflection of the current state of the business. This percentage is however lower than previous seasons (Season one: 68%, S2: 47% and S4: 40.8%). This outcome suggests that where the valuation was deemed too aggressive by the Sharks the tendency was to walk away from the deal as opposed to negotiating for a more realistic valuation.
Season four – diagrammatical snapshot