Lesson 2: Venture Capital Awareness

Venture Capital Awareness: The Shark Tank Effect

Before Shark Tank, the American public didn’t know much about venture capital. The show debuted in 2009, when the country was during a financial crisis. Part of the appeal was seeing mom-and-pop entrepreneurs pull themselves up by the bootstraps, taking charge of their financial success.

The viewing audience, however, didn’t understand how deals work. So, the show dumbed down the nuts-and-bolts of negotiations. Over the next 10 years, producers have increasingly slipped in terms like “equity,” “royalty,” and “preferred shares,” as the deals became more complex, and the viewer knowledge increased.

For Shark Tank fans, it has meant getting a basic education about investing in companies. This was new for many people who used to think owning part of a company was out of reach or reserved for the very wealthy.

As the show became more popular, the media spent more time covering business. The drama of reality television had made entrepreneurship exciting and compelling. No longer confined to dry commentary by established business leaders, the world of venture capital was now a source of inspiration and opportunity.

Key Impact of Shark Tank

The key impact of Shark Tank has been twofold: increased awareness about different investment opportunities on a positive note and lowering expectations of start-ups for raising capital on a less than optimal note. 

On the positive side, perhaps for the first time, everyday people thought about putting money in a start-up, whether it was their own venture or someone else’s. They no longer had to rely on a banker to tell them the best place to put their funds.

This change did not happen overnight. Money was still tight for many folks. There were still legal barriers to widespread investment until new laws opened the market. Nevertheless, the Shark Tank effect opened possibilities for investors and entrepreneurs, who saw new ways to harness financial opportunities and achieve financial security.

On the more negative side, Shark Tank inadvertently (or perhaps subconsciously) has conveyed the sense that entrepreneurs will inevitably fall short of raising capital for their businesses or they must give away too much of their companies to “shark” investors.

On the television show, the entrepreneurs were talked into higher levels of dilution than they wanted because of the “now or never “heat of the moment on television.

Shark Tank should not be a guide on what the normal venture capital fundraising process looks like or what a normal valuation ends up being. You do not need to make decisions in a 10-minute span as done on television.  

Observers of the show have reported that entrepreneurs have given away almost twice as much equity stake than they originally wanted to sell to the “sharks.” About 85% of the money was raised at valuations that have been over 50% lower than the entrepreneurs originally hoped for.  

Done right, raising money for your start-up can deliver better results than what the trend has been on Shark Tank for years. You don’t have to fall short on your capital raise. While being on Shark Tank may have good promotional value for your product, continuing to educate yourself on raising capital is a better strategy for bolstering your chances at success. It may be a good thing for you that you don’t have to be in the heat of the “now or never” television spotlight.  

Shark Tank has had an overall good impact on broadening people’s awareness of investing in start-ups.

Coming of Age

Shark Tank entered the American mindset as a core demographic, millennials, were coming of age. This age group had a distinct set of experiences that affected how they think of entrepreneurship and how they manage money.

In 2015, The Washington Post reported that millennials had the best chance of renewing American entrepreneurship which, according to the article, had been on the decline since 2010 (popularity of Shark Tank notwithstanding). Millennials know more about entrepreneurship than any other generation. By 2020, they will also make up the largest age group in the U.S.

Millennials may start fewer businesses than generations past, but they still have money to invest. The strategy of most millennials, however, differs from those of their parents. Aligning of goals is very important to millennial investors. They want to give money to companies they believe in and who follow the same ethical code.

Many members of this generation are cautious about where they want to invest their money. They may want to risk very little at one time. There is a growing trend toward investment opportunities that cater to low-dollar contributions. These investors are looking for an alternative to the traditional mutual fund with a hefty minimum investment.

As such, there’s a growing market of people looking to invest. They are willing to take a gamble on new companies if they like what that company has to say. That means you can reach these potential investors. You need only spread the word about crowd investing and having a strong elevator pitch about why you’re the right company to receive their dollars.

1) “We fact checked 7 seasons of Shark Tank.” https://www.forbes.com/sites/emilycanal/2016/10/21/about-72-of-deals-that-happen-on-shark-tank-dont-turn-out-as-seen-on-tv/#32029a844ed1

2)  J.D. Harrison, “The decline of American entrepreneurship — in five charts,” Washington Post, February 12, 2015. https://www.washingtonpost.com/news/on-small-business/wp/2015/02/12/the-decline-of-american-entrepreneurship-in-five-charts/.