How Shark Tank Skews The Real World Of Investment Decision-Making?
“That's how Sharks invest!”- Readers must have often heard this sentence since Shark Tank India has started. The show has successfully grabbed a large audience in the small span. However, do they present the real world of venture capital? Probably Not.
The glamour and the drama can be entertaining, but the pitches, emotional connect and finance jargons often overshadow the actual process. In reality, investing is not about the theatrics, it demands thorough analysis, suitability check and informed decision-making. Explore this article to understand how Shark Tank startup funding is at odds with reality.
The Shark Tank Effect
The Shark Tank first originated in 2009 in America before coming to India1. Since its first telecast, it has picked up a huge craze among youth and old alike in the country. Similar happened when Shark Tank India was aired in 2021. The curiosity of Indian youth to learn about startups, investment strategies and fancy financial jargons picked up. The talks about ‘Investing like Sharks’ were all over the country.
However, the reality of this glamorous show can disappoint many. Several of the selected founders (who leave smiling with the cheques!) have complained regarding delayed or cancelled funding. As of June ‘23, some sources suggest that only 20% of the total commitments have actually been fulfilled2.
So, what is the reality behind the TV camera?
Pitch Or Drama?
The concept of a reality show comes with an attractive bait of a Television Rating Point(TRP). Shark Tank has been one of the highest TRP-gaining shows in the country. Its recent season has recorded a 22% surge in user engagement. Moreover, the Connected TV Viewership(CTV) has also increased by 40%3.
The glossy picture of seamless startup funding with a pinch of emotional drama spices up the pitch. However, it misrepresents the actual startup funding world. Moreover, newbie investor emotions and mindset also get a false idea of ‘investments are so easy’.
Investment Valuations In Shark Tank
Due to the complexity and high volatility risk in the startups, angel investors or venture capitalists are vigilant to valuation figures. Shark Tank has built a blurry notion of valuation.4 Understand with this simple hypothetical example:
An ask of INR 5 crores for 10% equity was presented by the founder in front of the Sharks. Sharks value this company as INR 50 crores. This valuation is derived by ascertaining the share of the Shark after investment.
That is, for 10% equity the Shark will contribute INR 5 crores. So, for 100% equity the value of business will be INR 20 crores.
Sounds so simple, right? Wait! This is the post-money valuation. This valuation represents the value of a startup AFTER the investment is done by a Shark.
However, BEFORE the investments made by Sharks, its value will be pre-money valuation. It is derived by subtracting the investment from post-money valuation. In this example, pre-money valuation will be INR 45 crores.
Therefore, variation in value of the business and showcase of over-simplified processes can confuse the investors and even the budding entrepreneurs.
Glorification Of Investment Risks
Startup investments are highly risky in nature due to their fresh market entry, vulnerability of the idea and legal risks.
Most Sharks on the show have invested a significant sum based on their objectives, expertise, projections and more.
- Aman Gupta (boAT) - Rs. 17.4 crore
- Ritesh Agarwal (OYO) - Rs. 16.3 crore
- Anupam Mittal (shaadi.com) - Rs. 10.8 crore
- Kunal Bahl (Snapdeal) - Rs. 10.2 crore
- Peyush Bansal (Lenskart) - Rs.10.1 crore
- Namita Thapar (Emcure Pharmaceuticals) - Rs. 9.8 crore
- Vinita Singh (Sugar Cosmetics) - Rs. 9.3 crore
Therefore, the process of analysing and investment risks are highly subjective. That means what looks like a great deal on TV might not make sense for someone else. There is no one-size-fits-all formula, which can make the process seem unclear, specifically for the first-time investors.
So, how is the real investment process different from Shark Tank?
The Real World of Investments!
Venture capital funding in India has been significantly expanding. It increased 1.4 times in 2024 compared to 2023. However, experts suggest that it is far different from Shark Tank Pitches. Some key factors setting the reality apart are:
1. Due Diligence: Investment Patience and Paperwork
The process of potential investors verifying the financial, legal, structural and other factors is known as the due diligence process. On Shark Tank, this stage is rarely shown in detail, but that is where deals are truly made or broken. It is one of the most crucial and emphasised stages of startup funding. Beyond startup, traditional investments also require due diligence to crosscheck facts and minimise risks.
2. Fantasized Deal Closing
The fancy process of “DEAL Done” is not the actual end of the process. Those cheques are just a symbolic letter closing the deal, subject to multiple conditions. In reality a deal is ‘Done’ after a thorough process of due diligence, legal review, sometimes revision of deal negotiation and more.
Moreover, some Shark Tank deals are even delayed or closed. So, viewers may be getting a wrong impression of simplified deal closure.
3. Emotional Rollercoaster of Investing
Usually, the sharks or angel investors have planned early exits to gain their share. However, in the real scenario, the investment may require a long-term outlook and regular monitoring. The journey compiles various processes, investment decision-making, documentations, and more.
Therefore, it is important for investors to look beyond Shark Tank and understand how things actually work off-screen.
The Correct Time for Saying “I’m Out”
Like Sharks, investors should also know their time to say goodbye to a specific investment. Sharks always keep strings in their control to deny or accept Shark Tank deals. However, their investment timelines should not affect the investment decisions of investors as suitability is a highly subjective aspect.
When Saying No is the Smartest Move!
One of the key investment strategies for beginners can be to determine their investment span based on tenure, event or objectives of investment. Based on such analysis, investors can say goodbye to traditional investment and opt for futuristic alternative investments like Securitised Debt Instruments.
In short, investors should determine their exits based on multiple factors. Moreover, one can consider the views of market experts and analyse their investment projections and aspirations before investing.
Lessons From Investors Who Dodged Best Deals
A key lesson from Sharks is their distancing attitude when they note aspects not matching their investment objectives. For example, it is usually evident how Shark rejects a deal with a dialogue “It is out of my expertise and for that reason, I am out”.
Soham Bathwal, an angel investor, correctly addressed the topic in his LinkedIn post. He explains how he rejected 100+ deals due to some core reasons like lack of an efficient founding team, missing conviction in their vision and frequent fundraising history.
Instincts vs Data-Driven Investment Decision-Making
A key aspect contradicting actual investment from Shark Tank deals is sometimes their intuitive faith in some founders or businesses. Instincts can be a part of the investment process, but they cannot dominate the same. Data helps in identifying the financial strength and sustainability of an investment .
Madhu Shalini Iyer, managing partner at Rocketship.vc explained they select startups based on the computational algorithm analysing extensive data5. She explains how it helps to make informed investment decisions even in the market slowdowns.
Myth Of Overnight Success!
When a startup achieves the valuation of USD 1B, it is considered a unicorn by the venture capital industry6. The Shark Tank deals do not guarantee unicorn success for startups. It can be just another funding, helping their businesses.
Ever thought about what happens to startups after their Shark Tank episodes?
1. How Many Startups Make It Big After Shark Tank Funding?
This table explores some startups that were successful after getting the deal and after facing rejections.
Particulars | Few Examples of Startups |
Successful startups after successful Shark Tank deal7 | Skippi Ice Pops, Hammer Lifestyle, CostIQ, Beyond Snack, Nestroots, Blue Tea |
Successful startups after failed Shark Tank deal | Theka Coffee, Torch It, Urban Monkey, Qzense Labs, Moonshine, Flatheads |
This indicates that startup success is not strongly attached to the Shark Tank deal There are startups outshining the criticism from the show.
2. Shark Tank Style Investment And Their Survival
Sharks are angel investors willing to offer their expertise and capital in exchange for equity (in most common cases). However, their investment analysis, deal offer, or process does not guarantee the survival of the startups. Here are some of the startups failing post successful Shark Tank deals.
Particulars | Few Examples of Startups |
Startups failing after successful Shark Tank deal.8 | Sippline, Astrix, NOCD, Theas and Seed, Elcare, Poo de Cologne, Julaa Automations |
Therefore, completely relying on investment strategies or style from the show may not be sustainable.
3. The Turtle Investments Wins the Race!
The volatility of ‘hare’ cost him a race while the steady ‘turtle’ kept going. Similarly, investments require a dedicated analysis to earn realistic returns. Therefore, fundamentally strong investments can provide a sustainable future. For example, if an investor had invested in the corporate bond market in 2019, his/her corpus would have earned 51.6% returns by 2024! Therefore, informed and fundamentally sound investment decisions can help earn significant returns.
Learn This From Shark Tank!
Despite the pitch drama and confusing valuations, the wide reach of the show has benefited viewers in many ways. Their terminology explanations, opportunities for budding startups, some investment strategies and business acumen have brought significant awareness. Explore these Shark Tank pitches that taught some key lessons to investors.
Power Of Storytelling
Storytelling can indicate the potential of a market and investment product.
The pitch of ‘Dil Foods’ was its evidence9. The founder was absolutely clear about her brand, business, numbers, vision and market. Her practical plan of market sustainability, peer competition and business execution amazed the Sharks. She received a handsome deal of INR 2 crores at 2.67% equity with 4 Sharks on board.
Data is the Key!
The fundamental strength of a business is reflected by its financial and non-financial data. Therefore, analysing it in detail can unlock great secrets!
In Shark Tank Season 4, the pitch of a kids wear brand started impressively10. However, as it progressed, Shark Aman Gupta pointed out some misleading profit details. Such timely observations can help determine the possible loopholes and save investors from bad deals.
Deal Negotiation Can Be Your Secret Weapon!
The price discovery process plays a crucial role in regular investments as well as complex startup funding. Therefore, deal negotiation skill opens the door to several opportunities for investors.
The pitch of ‘Jarsh Safety’ is classic evidence of it11. The post-money valuation was INR 5 crores, and the deal negotiation involved 4 out of 5 sharks. After negotiations, the founders got a final post-money valuation of INR 3.33 crores. Despite pressure from multiple sharks, the founders strongly backed their demanded valuation and negotiated to bag the most suitable valuation.
Conclusion
Analysing varied factors indicates that Shark Tank is not equal to real-life investment strategies. They can mislead investors, glorify risk and create startup funding fantasies. However, investors should understand the thin line between reality and reality shows! It can help them in pragmatic investment decision-making.
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Frequently Asked Questions
1. How different is startup investing than stock market investing?
The normal stock market investment differs from startup investing based on the business structure, risk level, potential investors and returns. Startups are private firms with high risk due to early-stage and volatile returns. However, companies in the stock market are public with moderate to high risk and returns affected by market fluctuations and types of investments.
2. Can retail investors invest in startups?
Yes, retail investors can invest in startups through venture capital or angel investment funds. However, startups are highly risky, and their potential returns may fluctuate heavily. Therefore, investors should analyse their risk capacity before opting startup investment.
3. What are the most successful shark tank rejects?
There are many such successful startups that were rejected by Shark Tank, but they later raised external funding. Some of them are Theka Coffee, Urban Monkey, Keto India, Flatheads and Torch-It.
References
1. First Post, accessed from: https://www.firstpost.com/entertainment/explained-a-brief-history-of-reality-show-shark-tank-ahead-of-its-indian-adaptation-premiere-9745611.html
2. INC42, accessed from: https://inc42.com/features/why-young-startup-founders-are-losing-faith-in-shark-tank-india/
3. The Economic Times, accessed from: https://economictimes.indiatimes.com/industry/media/entertainment/shark-tank-india-soars-with-40-surge-in-ctv-viewership/articleshow/118316360.cms?from=mdr
4. Going VC, accessed from: https://www.goingvc.com/post/why-the-pre-money-valuation-is-different-than-what-you-see-on-shark-tank
5. The INC 42, accessed from: https://inc42.com/features/how-rocketship-vcs-data-driven-approach-helps-it-secure-quality-startup-deals-even-during-slowdowns/
6. The Economic Times, accessed from: https://economictimes.indiatimes.com/wealth/earn/when-is-a-startup-referred-to-as-a-unicorn-5-things-to-know/articleshow/84918227.cms?from=mdr
7. India Times, accessed from: https://www.indiatimes.com/entertainment/from-nostalgic-ice-pops-to-smart-tech-6-shark-tank-india-brands-that-went-from-startup-dreams-to-multi-crore-success-stories-654623.html
8. Shark Tank India Club, accessed from: https://www.sharktankindiaclub.com/shark-tank-india-failures-companies-that-went-bust-after-season-1/
9. Indian Startup News, accessed from: https://indianstartupnews.com/news/shark-tank-india-judges-to-invest-rs-2-crore-in-dil-foods-at-rs-75-crore-valuation-2403481
10. The Times Of India, accessed from: https://timesofindia.indiatimes.com/tv/news/hindi/shark-tank-india-4-aman-gupta-calls-out-kids-wear-brand-founders-for-misleading-unit-economics-says-your-brand-is-a-hit-or-miss/articleshow/118793535.cms
11. The Times Of India, accessed from: https://timesofindia.indiatimes.com/tv/news/hindi/shark-tank-india-4-namita-thapar-ritesh-agarwal-and-aman-gupta-keep-negotiating-their-offer-to-crack-a-deal-with-jarsh-founders/articleshow/117406001.cms
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