Swimming with Sharks

Insights and analysis from ‘The Shark Tank’ – season three
 
The curtain has now closed on another exciting season of Shark Tank Australia, and one thing remains for sure – pitching a business idea to the Sharks is not for the faint-hearted.
 
Season 3 has included 13 episodes and aired between June and September this year.
 
Once again, we have seen a number of aspiring entrepreneurs attempt to compel the sharks to invest in their start-up enterprises – some successful and others, well, didn’t quite manage to attract a bite.
 
The team from the Moore Stephens Corporate Advisory division has gone along for the ride to provide a summary of the key metrics for this season, along with the key insights derived.

Key insights

 
Scale – from big things little things grow
One of this season’s unrivalled buzzwords has been ‘scale’ or ‘scalability’.
 
Each episode, we have heard the Sharks question the scalability and growth trajectories of the business models being presented.
 
Pragmatically, a business plan or model will not attract investors unless it is based on a scalable idea. This season we have seen that the most successful pitches have been based around business models, where the products have a tested market, and can be produced and pushed to additional markets with a low incremental production cost. Other factors around scalability that the Sharks have considered include:
 
  1. Can automation be built into parts of the business model;
  2. Is the business model open-ended and can it be continuously improved;
  3. Are there opportunities for licensing and franchising; and
  4. What parts of the business model can/should be outsourced.
However, as we have seen in this season of Shark Tank, simply saying that the business is ‘scalable’ will not cut it.  Time and time again we have seen the entrepreneurs crumble when asked to substantiate their revenue and growth forecasts.
 
Like in previous seasons, a lack of financial knowledge or ability to validate the metrics of the business model has been the prevalent reason for a number of start-ups failing to receive offers from the Sharks.
 
MVP – Show us how it works
The start-ups that have succeeded to secure the most lucrative offers from the Sharks have typically been the ones where the entrepreneur has been able to prove that a market exists for their products.
 
However, a number of the business models being pitched relate to enterprises that are in the pre revenue stage, and funding is being sought in order to develop the business further.
 
So how do these entrepreneurs prove a market exists when they have not yet launched the product?
 
This season we have seen a number of ‘pre-revenue’ business models validated through the use of a Minimal Viable Product ‘MVP’.
 
The Minimum Viable Product can be defined as a development technique in which a new product or website is developed with sufficient features to satisfy early adopters. The final, complete set of features is only designed and developed after considering feedback from the product's initial users and investment/funding has been sought.
 
The Shark’s were visibly impressed in the circumstances where an entrepreneur had tested their market via use of an MVP.  
 
Value proposition – what’s the problem you are solving?
Another pain point for some of the entrepreneurs this season has been the humble but ever -important value proposition. Despite this being a common thread throughout the previous seasons, a number of the entrepreneurs struggled to define the core market demand and value-add for their business.
 
Based on this season, it appears that the elements of the value proposition that the Sharks are interested in include:
 
  1. What is the key benefit that the product/service offers;
  2. How does the product/service solve the customers needs; and
  3. What distinguishes the product/service from those already operating in the market.
 
In particular, Steve Baxter asked a number of entrepreneurs to explain the core value proposition of their businesses. In Steve’s words, “What problems are you solving for your customer?”
 
This goes to show the importance of developing a business plan with the customer in mind.  Ultimately, we have seen that the models, which are not solving a problem for the intended customer, have been unsuccessful in obtaining investment from the Sharks.
 
The Entrepreneur
This season we have also seen that the Sharks will often emphasise the personality and attributes of the entrepreneur over the business model being presented.
 
In particular, the entrepreneurs who have shown a genuine desire to make sacrifices to get their business off the ground have impressed the Sharks. We have also seen that the Sharks will consider whether the entrepreneur is someone that they believe they can work with prior to making an offer.
 
This suggests that an entrepreneurial spirit and the ability to be mentored are important factors in the decision making process for the Sharks.

Analysis – Season 2 v Season 3

The key metrics from the last three seasons of Shark Tank are outlined below:
 
Metric Season 1 Season 2 Season 3
Average asking amount  $299,129  $312,143  $212,959
Average amount received (Equity & debt)  $162,261  $232,742  $338,350
Average asking valuation  $2,002,034  $1,857,338  $1,768,464
Average final valuation (based on deal)  $362,275  $878,494  $1,430,293
Discount on original valuation 68% 47% 13%
 
Based on the above, the main observations regarding trends between each of the seasons include:
  1. The average asking valuation has decreased year on year, suggesting that the entrepreneurs may have adopted more realistic and accurate valuation techniques;
  2. The average amount received (debt and equity) has increased, suggesting that the entrepreneurs have presented more compelling pitches. The increase in loans provided also indicates that the Sharks are taking a more holistic view on investing in the start-up businesses; and
  3. The discount on original valuation percentage has decreased significantly, which suggests that the entrepreneurs may have employed more effective negotiation strategies. Again, this also indicates that the original valuations presented are more aligned to the true value of the business.

Season 3 Snapshot

 
 

 
 

 

































For a complete look at our data, click here.