| There's a new reality television series on ABC called | | | | cash in the deal and the investor only sees the |
| "Shark Tank". In the series, entrepreneurs pitch their | | | | entrepreneur risking their idea and sweat equity, they |
| inventions and ideas to five multi-millionaire investors | | | | don't see that entrepreneur has anything to really |
| in the hopes of getting the investors to buy into their | | | | lose. I know, the entrepreneur doesn't see it that |
| ideas. What strikes me about the show is how many | | | | way, but without any cash in the deal, what's the |
| of the entrepreneurs don't really have any business | | | | keep the entrepreneur focused when things aren't |
| sense. | | | | going well? What's to keep them motivated to make |
| There are 3 things that stand out almost every | | | | a profit on the investor's money when the |
| episode. | | | | entrepreneur makes a bad decision? If the |
| 1. The entrepreneurs expect a large investment of | | | | entrepreneur was honest with themselves, they |
| money, with no track record. | | | | would have to say, "Not much". As a result, the |
| 2. The entrepreneurs expect a large investment of | | | | investor is asking themselves, what can I do to |
| money, while giving very little stake in the control of | | | | mitigate my risks and to be able to get my money |
| the venture. | | | | back should things go south? From the investor's |
| 3. The entrepreneurs are blinded by their personal | | | | perspective, the 51% stake isn't as much about the |
| emotions to the risks in the deal. | | | | profits as it is about making sure good business |
| Let me explain what I mean. | | | | decisions are being made, protecting their investment |
| The first point is often brought to the forefront | | | | and reducing their risk. |
| when the investors ask the question of the | | | | This leads me to the last point, the entrepreneur is |
| entrepreneur, "How many units have you sold so | | | | blinded by personal emotions. They are so |
| far?" Often the answer is one or two, sometimes | | | | emotionally connected to their idea or their invention, |
| the answer is several hundred, but the profits are still | | | | they cannot see the investor's side of the equation. |
| so small the entrepreneur hasn't broken even. Some | | | | The entrepreneur believes in their product and |
| entrepreneurs have mortgaged their home, their | | | | believe it is the greatest thing since sliced bread, but |
| credit cards and are broke because they have | | | | they lack the knowledge and experience to take |
| poured all of their time and money into their idea. I | | | | their ideas to the next level. This is often visible |
| commend the entrepreneurs for their tenacity and | | | | when the investors will only buy in if they get 51% |
| vision, but there's a common saying in business that | | | | of the deal. The entrepreneurs get offended that the |
| you should let your "income lead your expenses, not | | | | person with the money wants control of the joint |
| the other way around". Now, put yourself in the | | | | venture. The entrepreneur sees the venture through |
| shoes of someone who has earned their money the | | | | their own emotional lenses because they created the |
| old fashioned way and someone comes to you | | | | idea. Unfortunately, those lenses often cause the |
| wanting to borrow money from you for some new | | | | inventor to be blind to risks. An entrepreneur has to |
| idea they have. They tell you that together you can | | | | be able to step back from the scene and evaluate |
| make lots of money using their idea and your money. | | | | with a clear mind the business idea they are pitching. |
| But you find out that they haven't even been able to | | | | As entrepreneurs we need to always be thinking |
| sell their product on a small scale yet. Makes you | | | | about these issues when we are considering bringing |
| really comfortable giving them cash doesn't it? | | | | in private money. Long before we think about yields, |
| The second issue, very quickly follows the first. The | | | | and internal rate of returns or how much money we |
| entrepreneur states that they are willing to give up a | | | | are going to make, we need to ask ourselves |
| 10% share in the company (rarely do they offer | | | | -- What's my track record? Have I done this before? |
| more) for a $250,000 investment from the investors. | | | | Can I reproduce my idea even on a small scale and |
| Now it's time to do some quick calculations. If you | | | | make more than just enough to break even? |
| are selling an investor a 10% equity share for | | | | -- Besides my ideas and sweat equity, what do I |
| $250,000 you are basically saying you believe your | | | | have at stake in this deal? If I don't have any |
| product is worth $2,500,000 and that with having | | | | money, am I ready to give up 50% or more of the |
| little or no sales. You don't need a financial calculator | | | | control and/or profits in my idea in exchange for |
| for this! Often the entrepreneurs don't see a problem | | | | someone else's money? |
| with this math, so when the investor turns around | | | | -- Who can I talk to about my idea that will be frank |
| and offers them the $250,000 for a 51% stake in | | | | and honest with me about the potential as well as |
| the company the entrepreneur is insulted. | | | | the problem areas that I might encounter? Do I have |
| Let me let you in on a little secret about borrowing | | | | someone I can trust to keep my ideas confidential as |
| private investment money. It's not uncommon for | | | | well as who can help me see things without being |
| private money investors to receive 50% or more of | | | | blinded by personal emotion? As one of the sharks |
| the profit when investing in private start-ups. | | | | on the show is fond of saying, "money doesn't have |
| Furthermore, if the entrepreneur doesn't have any | | | | any emotion". |