I'm enjoying the new season of Shark Tank, a reality show where entrepreneurs pitch their businesses to venture capitalists who decide whether or not to invest in a business.
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?
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I like your last take away. The value of a business is the amount of money it makes now or heavily discounted future income. Too many people believe in pipe dreams with multiples for their companies which are just insane.
I’m always amazed how willing investors are to pay for the future by buying untested companies in fast-growing industries. All else being equal, I find the valuations in the “boring” corners of the investment universe to be much more attractive for long-term investments.
I looooooooooooove that show! It gets so heated and intense at times; I couldn’t believe the guy last week who had the lids you could place on top of plates (kind of like storage containers that you could simply place on your plate). He started asking for $90k (for 5% of the company) and was then offered $900k for 30% of the company and he declined. That guy was the biggest moron I’ve ever seen. (I think he ended up getting $90k deal for 7% because he really upset the sharks)
I need to be more reflective when watching shows such as this; unfortunately when I watch TV I mostly watch it as entertainment and let my mind drift away.
I think there’s a lot that can be learned from TV, as mindless as some may say it is. I agree on the guy with the storage thing, though he really had an awesome product with a lot of potential and competition protection. I’d love to have a slice of that company – I could see that being a huge As Seen on TV product.
As a value investor I really appreciate your emphasis on value. #1 is a great take away. There is no exact number, it’s the principle of intrinsic value and a purchase price that provides a margin of safety.
I’m a little biased to the value camp. Historically, value provides the best returns. That shouldn’t be any surprise; investing is about not messing up, and a margin of safety is absolutely everything.
I used to watch that show alot, not so much lately. I like that point about it being crowded and it reminds me of real estate. When everyone trying to buy and be flippers/investors its time to sell. When you see stocks jumping take some profit. Like with the seasonal investing know your limits, with stocks for instance set a price you are going to sell when it gets high and know the floor when you aren’t going to keep the stock if it gets to low.
Right on – you have to have a value at which it makes sense to own a business, and a price at which you’re willing to let it go. Knowing when to buy is a lot easier than knowing when to sell. It’s hard to leave behind a big winner!
I have never watched this show but I have heard about it. Interesting analogies. You have definitely given me some food for thought.
You should check it out; it’s a fantastic show!
Best financial show that’s been on mainstream television that I can remember. If business & finance were taught like this in our public schools I would imagine our country wouldn’t be in the financial trouble that we’re currently facing.
I never noticed about Kevin passing on seasonal businesses. He probably likes the comfort of stable revenue streams. I think I might be the same way. My aunt and uncle owned a card/gift shop for a number of years, and it always unnerved me that they basically kept the place going for 11 months out of the year on a loss (or maybe breaking even if lucky) but then counted on the Christmas rush to make their profits for the year. It obviously worked for awhile as they were open for 15+ years, but I’m not sure I would have the risk tolerance for that.
I have a friend that was on the show. He got a deal but then it broke down after the show however he said the opportunity to show his product on national TV was worth everything. He also said that being in front of four extremely successful people to present and negotiate was invaluable…again worth more than actually getting a deal with anyone because he’ll be able to take that, keep his full company and continue to move forward.