Swimming with the Sharks - Insights and analysis from season two of Shark Tank

Channel Ten’s Shark Tank was back for a second season, aired between 8 May and 7 July 2016, and featured budding entrepreneurs pitching their business ideas to venture capital investors (the ‘Sharks’). Moore Stephens’ Victorian Corporate Advisory Team took this opportunity to once again swim with the Sharks and gain an insight into the minds of both entrepreneur and investor.

Season Two commenced with the introduction of new Shark, Dr. Glen Richards. A veterinary surgeon and Founder and former CEO of Australia’s largest pet care company, Greencross, Dr. Richards filled the vacancy created by the departure of resident Shark, John McGrath, who stepped down to focus on his own business, McGrath Limited, which listed on the ASX in late 2015.

The 13 episodes from Season Two featured 49  business proposals (an average of 3.8 per episode), compared to 62 proposals over the 15 episode first season (an average of 4.1 per episode). Despite the lower number of proposals, there were significantly more deals agreed – 65.3 per cent (32 proposals) in Season Two compared with only 37 per cent (23 proposals) in Season One. This suggests that the entrepreneurs might have been significantly more prepared this time around.

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Figure 1: A comparison of the deals made in Season One and Season Two.

It was evident throughout the season that there were a number of elements being taken into consideration by the Sharks when deciding whether or not to inject money into a business venture. 

Key considerations

Revenue 

When considering a proposal, the Sharks took into account actual sales made to date rather than the entrepreneur’s projections for sales in the future. The Sharks were more likely to invest in a business that had generated sales in the past, as it was seen as proof of customer demand and the potential to give the investor a return on their capital. 

All proposals operating for more than one year that had decreasing sales figures failed to attract the Shark’s investments, as this was a sign of limited growth or lack of sustainable demand for the product. 

Insight: Demonstrating revenue and revenue growth is key. 

Business valuation

In Season Two, similarly to Season One, it was evident that both the Sharks and the entrepreneurs had different ideas when it came to the valuation of the business, as the majority of entrepreneurs were valuing their business at an inflated rate. This could be as a result of overestimating the potential of their business, or could be purely a negotiation tactic. 

While the entrepreneurs typically received all the funds that they were seeking, it came at a cost of giving up more equity at reduced valuations. For all of the proposals that ended up as deals, the final valuations of the businesses were approximately 20 per cent lower than the entrepreneur’s initial valuations – which was a lot more favourable compared to the 40 per cent reduction seen in Season One. Again, this suggests that the entrepreneurs were a lot more prepared and were more convincing when presenting a compelling business case and/or, were better at negotiating. 

A poor demonstration of sales and profit saw the Sharks struggling to agree with the majority of the entrepreneurs’ valuations. 

Insight: Be prepared to demonstrate, with hard numbers, why your business is worth your asking valuation.

Marketplace potential

A lot of emphasis this season was placed on whether the product can be scaled to meet the requirements of international markets, particularly in the US. The Sharks were more inclined to invest in a business that had the potential for growth into an international marketplace, and were especially interested in those companies that had already obtained international patents. 

The Sharks often steered clear of overly competitive markets, drifting towards products that had a point of difference from the current marketplace offerings. 

Insight: Know your marketplace and the selling point that makes your business unique. 

Entrepreneur Personality

A frequent question asked by the Sharks throughout this Season was, “Can we see ourselves working with the people behind this business?” The Sharks put a lot of emphasis on getting to know the background of the entrepreneur and the people who currently work within the business. Whether they could work with the people behind the business was purely subjective to each Shark, as they have different requirements and personality traits. 

However, the Sharks were there not only to invest, they were keen to grow the business and see it succeed by injecting their time and efforts into the product/service as well. They were generally looking for the entrepreneur’s full attention, and did not like it when they had multiple projects happening at once. 

Insight: Generally all Sharks liked the passionate and enthusiastic individuals who were ‘giving it a go’.

Investor Experience

As well as looking to invest their funds and gain a return on their capital, the Sharks considered their own expertise and what they could bring to a business to make it grow. 

Dr. Glen Richards asked, “How can I make the investment amplify through what I know, who I know and what I can contribute?”

The Sharks were more inclined to invest in ideas and businesses within markets they are familiar with, and to which they could bring their current networks and experience. 

Insight: Mentors can bring a great deal more than cash to a business. 

Comparisons with Season 1

When compared with Season One, Season Two saw all of the Sharks invest more money, in part due to the greater number of deals that were agreed – 32 in Season Two compared with 23 in Season One. Generally, the average amount of the investment also increased. 

Overall the total amount invested by the five Sharks combined was $7.2 million (including $0.8 million of loans to be repaid on commercial terms) compared with $3.7 million in Season One.

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Figure 2: Average and Total Investment made by Sharks over both seasons.

Andrew was again the more conservative of the Sharks, investing in the least number of deals (9). 

Entrepreneurs did better in Season Two than in Season One though, with less equity given up, lower discounted valuations to their initial valuations and more completed deals.

 shark-tank-3.jpgFigure 3: A breakdown of the equity given up per each deal made in Season One and Season Two.

This season showcased a number of different insights into the minds of entrepreneurs and investors. It highlighted the importance of demonstrating revenue and revenue growth potential, having an accurate business valuation and strong market place potential. 

The Sharks also revealed how important an entrepreneur’s attitude and approach towards their business can be, and whether or not the Sharks felt they could contribute to a business in more ways than just an injection of funds.  

As an entrepreneur, you need to be prepared and know your product, and its place in the market, inside out. 

We hope you have gained something from our insights from Shark Tank Season Two, and remember to look out for Season Three which is set to air in 2017. 

For more information, please contact:

Colin Prasad
Associate Director - Corporate Advisory
p +61 3 9608 0213
e cprasad@moorestephens.com.au