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Shark Tank: A Thought

Image result for shark tank

I enjoy the television show SHARK TANK and for my birthday's blog post I'll indulge myself in a simple comment thereon.

The rules of the 'tank' provide that the entrepreneurs must get at least the amount of cash they ask for. When they come in and make their pitch, they may ask for, say, $100,000. If they do, then they may accept an offer from one of the sharks for that amount, or (if they're fortunate enough that the sharks end up bidding against one another) for more than that. But they cannot lower their offer to, say, $75,000. They either get their $100,000 or they leave empty handed.

This may seem unrealistic. Why can the entrepreneurs not adjust to unexpected skepticism by lowering their own expectations on the fly?

In a sense, though, they can: and the way in which they can do so is by lowering their implicit company valuation.

When an entrepreneur walks into the "tank" to make his pitch, he might indeed ask for $100,000. But he'll also be specific about the amount of equity in his business that will buy, implicitly valuing the whole entity in the process.

For example, he will say that he is offering the $100,000 in return for 10% of his company's equity. That values the company at $1 million. Any increase in the equity figure is a lowering of expectations. So, he might respond to unexpected skepticism by acknowledging that the $100,000 will buy a shark 20%, or 25%, instead of the originally contemplated 10%. That would change the valuation for the whole to $500,000 or $400,0000, respectively. Lowering his expectations on the fly is perfectly possible and happens on every program.

And this is quite realistic as to how the private equity market interacts with entrepreneurs.


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