This article has been written by Deepak Parashar pursuing Diploma in Corporate Law & Practice: Transactions, Governance and Disputes and edited by Shashwat Kaushik.

This article has been published by Sneha Mahawar.

Introduction

Shark Tank is a TV show that needs no introduction. We have all seen those business negotiations that go on between the Sharks and the pitchers. These negotiations are easy to understand for someone who has a commerce background or has studied how businesses are built and performed, but for someone who doesn’t hold any degree in commerce or accounting and is a layman in the business world, the concepts and terminologies that are being used in the show become difficult to understand most of the time, and this is where this article comes into play. It is an effort from my side to break down the nits and bits of this show so that it becomes easy to understand even for an average viewer.  

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History and background of Shark Tank

Let’s begin by talking about the history and background of this show. “Shark Tank” made its debut in the United States in 2009, and it quickly became a very popular show. This show is originally based on an international show called “Dragon’s Den,” which aired in 2005 in Britain and is again based on a Japanese show launched in 2001, “The Tigers of Money.” If we talk about the global reach of “Shark Tank,” then this show’s format has been successfully adopted in numerous nations, including Canada, the United Kingdom, Australia, and even India. 

Concept of Shark Tank

It is the concept of this show that makes it so popular. It’s a reality TV show where aspiring entrepreneurs, often referred to as “pitchers,” take chances to make money by creating something new or providing a service that people want. They’re often seen as people who come up with fresh ideas and take risks to turn those ideas into reality and these are different from a businessman in the sense that a businessman is generally more focused on managing existing businesses and optimising established processes. In the show, they present their business ideas or products to a panel of wealthy investors, the “sharks.” There are five sharks in the show who are successful businessmen. These entrepreneurs are seeking investments in exchange for a percentage of equity in their companies. The show provides a platform for aspiring entrepreneurs to seek investment funds and expertise to help grow their businesses. 

The pitchers usually get about 2-3 minutes to present their ideas or business models before the sharks and it is only during this pitching time that the pitchers need to tell them how much money/investment are looking to raise from the sharks and what equity stakes they are willing to give to the sharks in return for that investment. This gives sharks an idea about the valuation of the company.

Let’s understand the various terms used in the above paragraph

  • Equity: the ownership stake in a company.
  • Equity stake: the percentage of ownership offered to an investor.
  • Valuation: The estimated worth of a business.

Let’s understand this with the help of an example.

Mr. X comes to the show and delivers a very beautiful pitch about his company, ABC, which manufactures breathable fabric shoes. Mr. X tells the sharks he’s looking to raise INR 50,00,000/- for a 20% equity stake in his company. 

Now if we consider that Mr. X has 100% equity in his company, meaning he is the 100% owner of the company’s shares or stocks, he’s asking the sharks to invest fifty lakh rupees in his company, and in return for that investment, he’ll give them a 20% equity stake, which means the shark who’ll invest 50 lakh rupees in ABC will become the 20% owner of the company’s shares or stocks. and therefore, after the deal gets finalised, Mr. X will lose 20% of his ownership and he’ll remain with 80% of the shares or stocks. Now if the value of giving 20% shares of Mr. X’s company is 50 lakh, then by basic multiplication, the value of 100% shares of ABC’s company would be 2.5 crore and this is what is called the current valuation of the company. 

When the pitcher completes his pitching, sharks start putting up questions from the pitchers, and the importance of these questions cannot be overstated. These questions help the sharks assess the risks and potential rewards of an investment. Sharks invest their hard-earned money, so it becomes really important to make informed decisions. These questions look like this: 

What are your sales and profit margins? 

Sharks often want to know about the financial performance of the business. They ask about current sales figures and profit margins to measure the company’s revenue and profitability.

What is your plan for scaling the business with this investment?

If entrepreneurs are seeking funding, sharks want to understand how the investment will be used to grow the company. They ask about the specific strategies and initiatives that will be funded with their capital.

Tell me about your background

Sharks often want to know about the entrepreneur’s experience and qualifications, as well as their personal connection to the business idea

Sharks pay a lot of attention to the background of the pitcher because they want to know who they’re partnering with. It’s not always just about the business; sometimes it’s also about the entrepreneur behind it. They want to ensure that the pitcher is committed and capable of taking the business to the next level. Many times we have seen on the show that the sharks were not  moved by the pitch; they were not interested in the business either, but then they asked about the background of the entrepreneur and got so impressed by the qualifications, the life history of the entrepreneur or the future and vision of the entrepreneur that they got convinced of the fact that although the business of the pitcher is not profitable now, it is not big enough, but the pitcher has the potential to take this business to new heights, and based on this fact, the sharks close the deal. In the same way, many times we have seen that the pitch was delivered brilliantly by the pitcher but when sharks began grilling the pitcher he was not able to give a satisfactory answer and just because of this reason, he couldn’t make a deal. There is this saying, “Until and unless there is a skilled rider on the back of the horse even the fastest horse couldn’t win the race,” and these lines fit perfectly for this show. 

Finalising a deal on Shark Tank

Once the sharks have listened to the pitch, they have grilled the pitcher, and they are satisfied. They make an offer to the pitcher. This offer can be the same as what was asked for by the pitcher or a different one. 

Let’s understand this with the help of an example:

Mr. X is asking 50 lakh rupees for 20% stakes in his company ABC, in response to that invitation to offer:

  • A shark can agree on the terms of Mr. X and can give 50 lakh rupees for 20% stakes, by which the valuation of the company will remain unchanged at 2.5 crore.
  • A shark can also offer differently to Mr. X and this can be in three ways:
  1. It could have a lower valuation. The pitcher has the option to decline the offer or to counter-offer the shark and now it is up to the shark to agree with the counteroffer, decline it and stay with their original offer or give a new offer with a different valuation. Mr. X invited Sharks to invest in his company ABC for 50 lakh rupees for a 20% equity stake, according to which the company was valued at 2.5 crore rupees. After the pitch, the sharks asked some questions and found out that sales and scalability did not match the company valuation; hence, the company has been overvalued. Sharks say, Okay, I’ll give you 50 lakh rupees but for 33% of the equity stakes. This offer brings the valuation of the company to a lower amount because, as per Sharks’ offer, the company is now valued at 1.51 crore. Upon this, the pitcher can say 33% is a lot to give, how about 50 lakh at 25% stake and now by this counter offer, the pitcher tries to negotiate at a higher valuation of 2 crore, and this is how negotiations happen in the show and once the negotiations are over, a deal may/may not happen.
  2. Sharks can offer some amount in equity and some amount in credit. Shark offered 30 lakh rupees at 20% stake and gave the rest 20 lakh as credit for a period of 5 years at 10% interest p.a., which means not only the company is now undervalued by Shark at 1.5 crore, but Mr. X also has to return 20 lakh after 5 years along with the interest amount so he has to return 30 lakh rupees. There can now be a lot of permutations and combinations of this type of offer. Again, it is up to the pitcher to agree to this offer or to counteroffer it.
  3. The shark can agree to the valuation of the pitcher or undervalue it with his offer and at the same time, he can charge a royalty fee. Shark agrees to invest 50 lakh at a 20% stake in ABC but imposes a royalty fee of Rs. 20 on every shoe sale. This means whenever a shoe is to be sold by ABC, 20 rupees of that sale amount will belong to the shark. This royalty fee can be for perpetuity, meaning until the time ABC sells shoes. Rs. 20 will be credited to Shark on every sale or it can be for a fixed period of time, let’s say for 5 years, which means after five years ABC will not be liable to pay a royalty fee to the shark or it could be till the time a certain agreed amount is repaid. Let’s say Shark proposes Rs. 20 as a royalty on each pair of shoe sales until 20 lakh rupees are credited to me. Now, once 20 lakh rupees are paid to the shark, ABC will not be liable to pay any royalty to the shark. There can be a lot of permutations and combinations of this, too. Again, the pitcher can agree to this or make a counteroffer.  

The show is all about how well you can negotiate a deal. On the one hand, sharks see a scalable business and want as many stakes as they can in the business because the more stakes they have, the more profit they are going to earn, while on the other hand, pitchers look for big investments and the expertise of the sharks but they do not want to lose too many stakes in their company so in a way, this show teaches us a lot about negotiations and the power of negotiations.

A handshake deal is no deal

As we all know, a handshake deal is no deal until and unless formalised by paperwork deciding the rights and liabilities of the parties. The same is also the case with this show. After the handshake deal, there comes the task of doing paperwork, and for that, the Sharks perform due diligence on the pitcher’s company. Before the beginning of the show, the sharks have no idea who’s going to come to pitch them or what that business is going to be about. It is during the pitch that only sharks get to know about the company and their business and it is upon the beautifully presented pitch and after looking at the numbers of sales and scalability that sharks decide to invest in the business but there might be a possibility that the pitcher might have lied or might have disclosed some facts that can harm the business so sharks need to perform due diligence to check if all the facts that were told by the pitcher align perfectly or not and once the sharks perform it and find nothing fishy, they agree on the paperwork and it is only after that the deal is actually closed or finalised. 

It is the concept of this show that makes it so popular. It’s a reality TV show where aspiring entrepreneurs, often referred to as “pitchers,” take chances to make money by creating something new or providing a service that people want. They’re often seen as people who come up with fresh ideas and take risks to turn those ideas into reality and they are different from a businessman in the sense that a businessman is generally more focused on managing existing businesses and optimising established processes. In the show, they present their business ideas or products to a panel of wealthy investors, the “sharks.” There are five sharks in the show who are successful businessmen. These entrepreneurs are seeking investments in exchange for a percentage of equity in their companies. The show provides a platform for aspiring entrepreneurs to seek investment funds and expertise to help grow their businesses. 

The pitchers usually get about 2-3 minutes to present their ideas or business models before the sharks and it is only during this pitching time that the pitchers need to tell them how much money/investment are looking to raise from the sharks and what equity stake they will be offering to the sharks in return for that investment. This gives sharks an idea about the valuation of the company.

Let’s understand this with the help of an example:

Mr. X presented the valuation of his company at Rs. 2.5 crore. When Shark asked about last year’s and present year’s sales, they found out that the company had been presented as overvalued and asked the same question to the pitcher If the sales numbers did not align with the valuation, why have you presented your company in the overvalued figure to this Mr. X says that he has received an order to manufacture 1 lakh shoes from DMart as they want to sell my shoes in their store and this order can take the valuation of ABC to the figures I presented. Based on this fact, one of the sharks closed the deal via handshake but during the time of due diligence, it was found that the order of manufacturing was just for 25,000 shoes. Now this fact and other facts like this can hugely impact the future venture of the shark and pitcher together so due diligence is performed and it is only after that that the deal gets closed or not.

Common terms used in Shark Tank and their meaning

Some common terms used in the show and their meanings are:

  • Gross margin: The difference between revenue and cost of goods sold.
  • Patent: legal Protection for an invention.
  • Crowdfunding: Raising funds from a large group of people.
  • Angel investors: High-net-worth individuals who invest in startups.
  • Venture capitalist: Professional investors who manage pooled funds from others.
  • Royalty: Payment for the use of a product or idea.
  • Dilution: Reduction in ownership percentage due to new investments.
  • B2B: Business-to-business.
  • B2C: Business-to-consumer.
  • D2C: Direct-to-consumer.

Purpose of Shark Tank show

Shark Tank” benefits both investors (the “sharks”) and entrepreneurs in several ways:

Benefits for investors (sharks)

Diverse investment opportunities

The show presents in front of  investors a wide range of business ideas and industries they may not have encountered otherwise, which often leads to profitable investments.

Brand visibility

Being a shark on the show can enhance an investor’s public profile and personal brand. It can lead to increased visibility, speaking engagements, and opportunities for networking. Before Shark Tank India, there were very few people who knew about Anupam Mittal (Shadi.com), Aman Gupta (Boat), and Ashneer Grover (BharatPe), but after this show, these successful businessmen appeared on so many talk shows and podcasts, and they went viral all over the internet through YouTube shorts or Instagram reels. 

Access to innovative ideas

Investors get access to innovative products and concepts, which can be appealing for those looking to stay ahead in their industries or expand their investment portfolios. We see this many times when all the other sharks call themselves out of the offer but one shark believes in the product or idea and invests in it. 

Expertise and mentorship

By investing in entrepreneurs, sharks can offer their expertise and guidance, helping these businesses grow and succeed. This mentorship role can be personally fulfilling and financially rewarding.

Benefits for entrepreneurs

Access to capital

Entrepreneurs often need funding to start or scale their businesses, and “Shark Tank” provides a platform to secure investment capital from experienced investors.

Exposure and marketing

Appearing on the show can give entrepreneurs significant exposure to a large audience, which can lead to increased sales, brand recognition, and marketing opportunities.

Expertise and mentorship

Beyond the investment, entrepreneurs can benefit from the business acumen and industry knowledge of the sharks. This mentorship can help them make better decisions and navigate challenges. This is the reason why the pitchers sometimes settle for a lower valuation offered by the shark, because it’s not only the investment that the shark is offering but he’s also sharing his expertise. 

Validation

Securing an investment from one or more sharks can serve as validation for an entrepreneur’s business idea, making it more attractive to other potential investors and partners.

Negotiation practise

The negotiation process on the show can be a valuable learning experience for entrepreneurs, helping them sharpen their negotiation skills for future business dealings.

Entertainment and publicity

Even if entrepreneurs don’t secure a deal, their appearance on “Shark Tank” can generate interest from the public and other investors, leading to potential opportunities outside of the show. We saw many times that a product or idea didn’t inspire the sharks to invest in it but after coming out of the show, the product or idea became so popular and eventually turned into a good business. 

Some Shark Tank’s success stories

Simple Sugar  

Lani Lazarri was just 18 years old when she entered the tank in season four of Shark Tank America to pitch her skincare company, Simple Sugars. She ended up making a deal with Cuban for $100,000 in return for 33% equity. Within just 24 hours of her episode’s premiere, Lazarri’s sales jumped from $50,000 to $220,000, and she hit $1 million six weeks later. Today, Simple Sugars products are in over 700 retail locations and ship internationally. This year, the company has already brought in over $3 million in revenue.

Scrub Daddy 

In 2012, Aaron Krause went on Shark Tank America to pitch his durable, reusable, smiley-faced sponge that he called the Scrub Daddy. Lori Greiner invested $200,000 for a 20% stake after saying, “I know a hero from a zero. This is a hero.” By 2019, the company was valued at $170 million after selling 25 million sponges. In December 2020, Krause told the Philadelphia Business Journal that the company’s sales were up 25 to 30 percent year over year.

Skippi Ice Pops

Skippi Ice Pops was the first startup to get an all-sharks deal on the Shark Tank India show. The ice popsicle brand got a deal for Rs. 1 crore for 15 percent equity. Before appearing on the show, the company used to register sales of Rs 4-5 lakhs per month and only had regional distribution. But now, the numbers have skyrocketed. Their monthly sales stand at Rs 70 lakh. From 150 visitors per day to 8,000 visitors per day, their website has seen immense growth in traffic. They have also started international exports in Uganda, Nepal, Kuwait, Hong Kong, and Dubai.

Hammer Lifestyles

The Athleisure Electronics wearable brand was one of the favourites when it appeared on Shark Tank India Season 1. Offering electronics like grooming accessories, headphones and smartwatches, the company had a revenue of Rs 70 lakh per month before coming to the show. After the show, the company increased its revenue to Rs 2 crore each month. The company also managed to increase website traffic by 5x after the show.

Unstop

Unstop is an early talent engagement and hiring platform that connects talented individuals from untapped corners of the country with the right employers. On the other hand, employers leverage Unstop to brand, source, engage, assess, and hire the right candidates. The startup has a community of 4.5 million students, freshmen, and professionals with 0-5 years of experience. The company pitched Shark Tank Season 2 and asked for Rs 1 crore in exchange for 1% equity, but the final investment was Rs 2 crore in exchange for 4% equity from sharks Aman Gupta, Namita Thapar, Amit Jain, and Anupam Mittal. 

Conclusion

In conclusion, “Shark Tank” serves as an iconic platform that entertains while offering a genuine chance for entrepreneurs to secure vital investments. For entrepreneurs, it’s a unique opportunity to learn, secure funds, and gain exposure. For investors, it provides a diverse range of investment prospects and a mentoring role. “Shark Tank” is a stage where dreams become reality, emphasising that with the right idea and determination, anyone can dive into the business world and emerge successful. 

References

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