The show provides some great investment lessons from very successful business leaders, entrepreneurs, and venture capitalists.
Here are just a few reminders that Shark Tank gives me each week:
- Valuation isn't Rocket Science – In a recent deal, Barbara Corcoran, a Shark on the show, offers a deal for 17% the company in exchange for a cash injection. Why 17%? She says its her lucky number. Valuing a company isn't about being perfect – it's about getting the big things right and letting the rest fall into place. There's always wiggle room in any prediction about the future, and an investment is just that – a prediction about the future.
- People Matter, Sometimes – Deals can get hot and heavy when more than one Shark wants a piece of the action. The hottest and most interesting deals to the Sharks are always those where the business has a moat – an inherent asset that makes it better than just your average business. For most, it's a patent, process differentiation, or first-mover advantage that insulates the business from competition and gives it more value. When businesses have something inherently better about them than their competition, it doesn't matter who runs the show. Sharks see the safety in licensing patents or trademarks, but when it comes commodity businesses like restaurants or retailers, the Sharks are quick to judge the business owner over the business.
- Crowds Lead to Chaos – In a recent show in the fourth season, a bidding war erupts between two Sharks. By the end, the business owner gets two times the initial offer amount for a smaller percentage of the company – a nearly 400% increase in the Sharks' starting offer. The lesson? Crowded auctions are great for sellers and not so great for buyers. I think this logic easily extends onto Wall Street, where hot sectors attract a lot of attention, a lot of money, and high valuations.
- You Have to Work With What You Have – Occasionally, business owners come onto the show looking for an investment as well as the Sharks' connections. The Sharks, being serial business owners and investors, often turn down time-consuming deals. The lesson is simple: as investors we're not running the business. Although Wall Street may cheer on clear avenues for a business to profit by changing direction or seizing new opportunities, it's up to the business to follow that path; as investors, we're not running the show. We have to play the hands we're dealt.
- Details Matter – Whereas valuation is never perfect, execution needs to be. In a recent show, Mark Cuban criticizes an ice cream business, noting that the amount of freezer space in any given store is much more compact than store shelves – getting into new markets may be harder than it appears. Looking into how the business operates is just as important as knowing the numbers behind the operation. (Sidebar: Mark Cuban is by far my favorite Shark. His quick insights into so many business models is astounding.)
- It's Okay to Pass – One Shark, Kevin O'Leary, gives an immediate pass to any seasonal business. While he hasn't led on to why he prefers businesses without seasonal trends, it serves as a reminder that comfort is worth more than dollar signs. Investing starts with preserving capital and ends with growing it. All else being equal, it's better to end up at the same place than risk it all in an investment you don't feel comfortable with for whatever reason.
- Buying the Future is Risky – In the days of high-flying tech startups with billion-dollar valuations, it's odd to see the Sharks buck the trend as relatively conservative investors. The Sharks are prudent, often lamenting that a business “isn't worth that much now,” implying that they're unwilling to buy projected growth. This is a very important tenet of my own strategy – buy what you see today and consider future growth a bonus.
I think there is a lot that every investor, novice or professional, can learn from the approaches of others.
Have you learned any lessons in investing from unexpected places?