If you are an entrepreneur, then chances are you have seen the show Shark Tank. If you consider yourself to be an entrepreneur and you are not familiar with this show, then you are definitely missing out on a show that can teach you about basic business principles. What business students pay thousands of dollars to learn in a fancy business school you can learn for free by watching Shark Tank.
The way that the show works is entrepreneurs, who need financing for their ventures, are given a chance to pitch their idea or business to investors who are looking for businesses to invest in. The entrepreneurs have to show the investors why their venture should be financed.
There is a lot of terminology that is used throughout the show that people, who have not been exposed to business, may not understand. Nevertheless, it is crucial that people who watch the show understand certain terminology to in order to understand what is going on throughout the show.
Here is some terminology that viewers should understand when watching the Shark Tank TV.
- Customer Acquisition Costs
The term space in the context of the show refers to market, industry or arena.
Typical statements using the term "space" used on Shark Tank include:
-I have do not have a lot of expertise in this space.
-I have a lot of experience in this space.
-Who are your competitors in this space?
You can substitute the term space with market, industry, or arena in each statement above without changing the meaning of the statement.
The term equity in the context of the show refers to ownership, interest, or stake.
When the entreprenuers are asking for an investment from the investors they will say things like:
- I am asking for $250,000 in exchange for 10 percent equity in my company.
- I would like $50,000 in exchange for 25% equity in my business.
- I am offering 50% equity in my business for an investment of $500,000.
You can substitute the term equity with ownership, interest, or stake in each sentence without changing the meaning.
Valuation or Value
The term valuation is used quite a bit by the investors on the show. Valuation, of course, is simply referring to how much the company is valued. The investors derive the valuation from the equity or ownership that the business owner is willing to give up and the price of that equity or ownership.
A business owner on the Shark Tank asks for $250,000 in exchange for 10 percent equity in their company.
The price for 10% of the company is $250,000. This means that the business owner thinks that their business is worth $2.5 million ($250,000 divided by .10).
Keep in mind that before business owners get investors in their businesses they have 100% ownership. After they receive investors their ownership percentage is reduced. In this case if the investors were to make this investment they would have 10% ownership in the company and the business owner would retain 90%.
The example above explains how the investors are able to tell a business owner almost immediately what they are valuing their business at.
More often than not you will hear the investors tell the entreprenuers that their valuations are crazy.
The reason why this is done is because the investors value a business based on earnings. Valuing a company is not an exact science but most investors will value a company by taking the profit or earnings and multiplying it by a certain multiple. The multiple could be 4 or it could be 2.
So based on the example above if the business values their company at $2.5 million yet their profit is only $100,000 a year, then an investor will give it a value of $400,000 if they are using a multiple of 4 ($100,000 times 4). As a result, the investor will tell the business owner that they are overvaluing their company.
When the investors on Shark Tank are evaluating a company they will often ask whether the company has anything proprietary. In this case they are referring to intellectual property like patents, trademarks, or copyrights.
You will often hear the investors ask questions like:
- Is this patented?
- Can anyone else make this?
- Is this logo trademarked?
Investors like it when a company has an idea, product, or process that is unique, makes money and competitors are not able to duplicate because of intellectual property rights.
Investors will frown upon companies that have a idea or product that a competitor can easily duplicate because the idea or product is not proprietary.
Customer Acquisition Costs
The term customer acquisition cost is used often on Shark Tank. The term refers to the amount of money that a company uses to get a customer.
On Shark Tank the investors will ask the business owners:
- How much does it cost you to acquire a new customer?
- What are your customer acquisition costs?
Although customer acquisition cost is directly related to marketing and advertising there is a big difference between asking for advertising costs and customer acquisition costs.
Advertising costs refer to how much you spent on marketing and advertising. On the contrary, customer acquisition costs refer to how much advertising was used to convert someone into a new customer.
Customer acquisition cost is calculated by taking the total amount of marketing and advertising divided by the number of new customers.
If a company spent $40,000 on marketing and advertising for 1000 customers, then the company's customer acquisition cost would be $40 ($40,000 divided by 1000).
So if an investor was to ask the owner of this company what their customer acquisition cost are, then the owner would tell them that it cost about $40 to acquire a new customer.
Investors will look at customer acquisition costs in relation to sales or profit per customer. So an investor will look favorably on a business that makes $1000 in profit per customer yet it costs them $40 to acquire each customer. On the other hand if a company only makes $20 in profit per customer and it costs them $40 to acquire each customer, then an investor will tell them that their customer acquisition costs are too high.
Uncover more Shark Tank terminology in the article below: