Why Lori is the Best Shark in the Tank

Shark Tank is one of my favorite TV shows. It showcases aspiring entrepreneurs as they make business presentations to an investor panel, who then choose whether to invest. It is fun to play along and try to predict how the Sharks will react to a business pitch. As a small business owner/entrepreneur, it is fun to imagine how I might do in a Shark Tank presentation. And, it was interesting to watch a college teammate of mine make a successful pitch on the show.

My inner geek came out when watching a recent episode. I got to wondering how much the need to entertain might cloud how the venture capital world is portrayed on the show. How many Shark Tank pitches actually result in successful companies? Is the success rate for Shark Tank businesses any higher than any other small company looking for growth capital? Are there any biases in the way the Shark Tanks choose to invest?

This curiosity led to a wasted work day.

Venture capital, especially at early stages, involves high risk bets. Firms may invest in 100 companies knowing full well that 80 or 90 of them will fail, but that a handful of wild successes will pay off handsomely. It isn’t for the faint of heart. I found an interview with Mark Cuban where he stated he hoped that 15% of his Shark Tank investments would eventually pay off. Even that seems high. Given that he has invested about $32 million so far, that is an admission that $27.5 million of that is expected to be wasted. Gutsy.

I also was able to discover interesting things about the show that are largely hidden from the viewer:

  1. The Sharks themselves are paid to take part. I was able to find discussions that suggested they may make as much as $100K per episode. That is a million dollars or more per season, so perhaps they are playing with house money more than they let on.
  2. Getting on Shark Tank is statistically harder than getting into an Ivy League college. It is estimated that more than 50,000 people apply for each season with less than 1% being successful. That alone should provide some realism as to the probability of success of new businesses.
  3. In the early seasons, an entrepreneur had to give up 2% of revenue or 5% of his/her company to the production firm just to appear on the show. That requirement was removed in later seasons because Mark Cuban refused to remain on the show if it remained.
  4. Many of the deals you see made on the show don’t end up being consummated. Forbes conducted survey research in 2016 that indicated that 43% of Shark Tank deals fell apart in the due diligence stage and 30% of the time the deal changed substantially from what is seen on TV. The deal you see on TV only came to fruition as you saw it about 1 in 4 times (27% of the time).

This makes it challenging to assess the deals and whether or not they paid off. Shark Tank companies are almost all privately-held so their revenue data is tough to come by and we can’t really know for sure what the deal was.

Although we can’t review business outcomes as we might like, we can look closely at the deals themselves. The data we used for this includes all deals and prospective deals from the first nine seasons of the show. So, it does not include the current season, which premiered in October 2018.

In the first nine seasons, there were 803 pitches resulting in 436 closed on-air deals (53% of pitches). Applying the Forbes data would imply that of these 436 deals, 187 of them likely feel apart, and 131 of them likely changed substantially. The net? Our projection would be that 53% of pitches result in handshakes on-air, but post-show only 37% of all original pitches close at all and only 15% of pitches will close at the terms you see on air.

Why would Shark Tank deals fail to close? There is a due diligence stage where investors get to have their accountants review the entrepreneur’s books. I found some articles that indicated that some entrepreneurs got cold feet and refused the deal after the show. Also, some of the deals have contingencies which fail to occur.

It is interesting to look at deals by the gender of the entrepreneur as it shows that Shark Tank entrepreneurs skew heavily male:

  • Men are much more likely than women to appear as entrepreneurs on Shark Tank. Of the 803 pitches, 482 (60%) made by men, 198 (25%) by women, and 119 (15%) by mixed teams of men and women. So, 75% of the time, at least one male is involved in the pitch, and 40% of the time at least one female is involved in the pitch.
  • However, women (59% closed) are more likely than men (51%) to successfully close a deal on air.

There are data that imply that men and women negotiate differently:

  • Men initially ask for higher company valuations ($4.5 million on average) than women ($3.1 million on average).
  • Men also ask for more capital ($342K on average) than women ($238K on average).
  • Men (47%) and women (49%) receive about the same proportion of their initial valuation ask. Men (94%) and women (88%) also receive about the same proportion of cash that they initially ask for.

So, men are far more likely to appear on the show and come with bigger deals on average than women. But they receive (proportionately) about the same discount on their deals as women as they negotiate with the Sharks. If there is a difference in their negotiation skills it is that men start bigger or come to the show with more mature companies.

We can also look at individual Sharks to get a sense of how good of negotiators they are:

  • Mark is the most aggressive Shark. He has the most deals (132, despite not being on the early seasons of the show) as well as the most invested (about $32 million).
  • The cheapest (or most frugal?) Sharks are Barbara and Daymond. Barbara has put forth the least amount of money (about $10 million) and her average deal valuation is $945K. Daymond has put out the second least amount of money (about $12 million) and has an average deal size of $957K. These two Sharks have likely not put much more money into their Shark investments than they have been paid to be on the show.
  • Mr. Wonderful seems to have a “go big or stay home” mentality. He has closed the fewest deals (64) of any Shark. But, his average deal valuation of $2.7 million is the highest of any Shark.
  • Lori and Kevin (31% of pitches) are the most likely to make an offer. Barbara and Daymond (22%) are least likely to make an offer.
  • So, Kevin make the most offers and closes the fewest deals, making him the least desirable Shark from the standpoint of the entrepreneurs.

Barbara is the most likely to invest in a female entrepreneur. She is about as likely to invest in a female entrepreneur as a male entrepreneur despite the fact that so many more men than women appear on the show. Kevin and Robert are the least likely to invest in a female entrepreneur. Mark and Daymond demonstrate no bias, as the invest in about the same proportion as appearances on the show.

ALL

Barbara Lori Mark Daymond Kevin

Robert

Male

60%

44% 53% 60% 57% 67%

71%

Female

25%

42% 33% 27% 25% 19%

17%

Mixed Team

15%

14% 14% 13% 18% 14%

12%

So, who has been the most successful Shark? It can be hard to tell because data are scarce, but my vote would go for Lori. USA Today put out a list of the top 20 best-selling products featured on Shark Tank. Six of the top 10 were from investments Lori made, including the top 3. Eight of the top 10 investments by revenue were made by the two female Sharks, Lori and Barbara.

Who are the worst Sharks in terms of revenue performance? My vote here would be a tie between Mark and Daymond. Mark has just 3 of the top 20 investments and Daymond has just 2. If we can assume that the goal of venture capital is to generate big wins, it is clear that Lori and Barbara are killing it and Mark and Daymond are not.

Shark Tank is a great catalyst for entrepreneurs, but because it is entertainment and not reality it can mischaracterize entrepreneurship in the real world. Sharks may invest for the entertainment value of the show and because investing boosts their personal brand as much as the product. And, it might just be the case that the amount of money they have invested is not much larger than the amount of money they have been paid to be on the show.

Almost all successful people will tell you that learning from their failures was at least as important as their successes, yet Shark Tank never revisits failed investments and it is likely that the bulk of the deals we see on TV do not end up paying off for the investor. The show does not disclose how few of its deals actually come to fruition once the cameras are no longer rolling. Just once I’d like to see an update segment show an investment that failed miserably.

Shark Tank also seems to imply that hard work and grit always triumph, when in reality knowing when to cut losses and having a little bit of luck matters a lot in business success. Grit matters for sure, but not when it’s focus is blind and irrational, and it can be sad to see entrepreneurs who have sacrificed so much and it is clear their business is not going to make it.

At its best, Shark Tank stimulates people to think like an entrepreneur. At its worst, it presents too rosy a picture of small business life which influences people to invent new products and launch companies that are likely to fail, at great consequence to the entrepreneur. It certainly provides great entertainment.

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