It takes years of hard work, vision, determination, and unbridled passion to be a successful business owner. While many entrepreneurs are aware of that, the one key element many must brush up on is the underlying financials of the business, especially if you're trying to bring new investors on board.
When it comes to many of my commercial real estate transactions, for example, a seller must be able to properly articulate the financial position of the property I want to invest in. The seller must be able to explain the historical return on investment, current net income and any upcoming factors that might impact or enhance the property's earnings potential. Without an in-depth picture of the potential investment, I open myself up to possible losses.
If the seller fails to understand this information, I walk away, just as we see quite often on the popular TV show, Shark Tank - one of my favorite programs at the moment. To get funded by one of the "Sharks," I think there are five main points all investors must understand.
While there is no one secret 'formula' to get a Shark to bite, there are some common sense ways to get the Sharks to hunt, and keeping this in mind, statistically roughly 48 percent of the pitches on the show end up with a favorable outcome.
Articulate Your Idea
As Mr. Wonderful, Kevin O'Leary, pointed out in Inc., "One hundred percent of the entrepreneurs who have gotten a deal on Shark Tank were able to describe their business idea in 90 seconds or less. Eighty-two percent were able to do it in 60 seconds or less."
Brevity is key. If you come into the tank and can't cut to the chase, you're going to lose the attention of the potential investors. Come into the room, be passionate, calm, cool and collected and articulate why the judges (investors) should invest in you. The quicker you can explain the opportunity without droning on, the better. Like anything in life, you must capture an investor's attention within five seconds, or forget it.
Know your Numbers
If you come into a room of potential investors without knowing the numbers, just turn around and walk out. You must present the investors with a fair valuation. If you ask for $50,000 for a five percent stake of an ice cream company ($1 million valuation) without solid earnings projections, you more than likely will get the boot.
You need to be able to talk about breaking even, or if you're already profitable, be able to speak about how quickly the sector you're in is growing or is expected to grow over the next five to 10 years. It's important to be able to explain how much market share you may currently have, or are looking to capture, and if you have a patent for your product.
"If you don't know your numbers, I will personally eviscerate you," said Kevin O'Leary, during an interview in Inc. "You got a spot [on Shark Tank] and you don't know your numbers? If you don't, you should bring in someone who does."
Educate your investors on how you plan to sustain your product, your idea, and your company moving forward. Is it scalable? Investors will typically gauge return on investment (ROI) based on the forward earnings potential. But, if they begin to see a management team that's indecisive and inexperienced, they may decide to pass on the deal.
Always be Honest
The very moment you begin to leave out key details, or attempt to "play games", investors will lose interest. Do not tell an investor that you have great sales and the necessary patents and then turn around and explain that the patents are pending. Don't tell an investor all is well, and then explain that you have $650,000 in loans outstanding. In business, being honest and transparent is essential.
The one thing an investor cannot stand is obscene greed either. For example, I once watched Kevin O'Leary offer someone exactly what he wanted, and the entrepreneur proceeded to ask for more - wrong move. It smacks of problems to come. I've seen other deals lost because someone argued until the cows came home over a two percent difference in what was offered to get the deal done.
If you can sell, you can make a great deal of money
One of the most successful products ever to be introduced on Shark Tank was the "Scrub Daddy," a reusable sponge in the shape of a smiling face. Lori Greiner bought a 20 percent equity stake for $200,000 in the product. A few years later, that little sponge has generated more than $50 million in sales. That's real money.
The inventor of the "Scrub Daddy", Aaron Krause, had just turned down a $100,000 offer for 50 percent of the company from O'Leary. When Greiner offered $200,000 for 20 percent of the company, valuing it at $1 million, Krause was quick to jump at the chance. Sometimes, it would seem, the Sharks get a bit too greedy as well.
The bottom line is, when you sell, know your target audience, the demographics, and psycho graphics. Know your unique selling proposition. It's important to bring to market what others can't.
And, always know your numbers!