Shark Tank is an unqualified success. Having aired more than 200 episodes in the past decade, the television show has success stories, but at what cost.
Aside from garnering legions of fans, ABC’s “Shark Tank”has offered entrepreneurs, and the public at large a peek into some of the financing issues hopeful young companies face. Of course, things are sanitized and compressed for television, but the show often makes for compelling viewing.
Unfortunately, it has created sometimes-damaging perspectives for many of the entrepreneurs I come across. I call it the “Shark Tank” myth.
The Shark Tank myth is that for any company to grow, it needs to take on investors, which is reinforced by the entrepreneurs who ask the show’s panel for help.
I recently met with two entrepreneurs who run a successful service-oriented business. They are thinking about adding and building a technology element to their existing enterprise.
Both think they need to spin off the new company, get investors, raise equity, and do it as a separate entity — thus falling for the “Shark Tank” myth.
In my case, the entrepreneurs in question need roughly $350,000, whether they spin off the new company or incorporate it into the existing business. That’s a lot of cash, but it’s not an unmanageable amount to pay back via a loan.
For example, a Small Business Administration-backed (SBA) 10-year loan of $350,000 with an interest rate of 8 percent would require monthly repayments of about $4,200. That’s well within the entrepreneur’s comfort level.
Many people worry needlessly about debt. Yes, you have to pay back any loans you receive, and the total loan amount can appear daunting, but remember that you’re paying it back in bite-sized pieces. Also, remember that you’re already likely doing the same thing with your home and car, so you have examples of how long-term monthly pay can and do work.
While giving up equity can be an effective strategy for some, more often than not, it’s problematic.
Most importantly, by taking on partners, you’re potentially losing some measure of control in the company. It’s all well and good if your new partners are in complete lockstep with you, but how often does that happen?
If the newcomers’ views are radically different from your own, it can produce, at worst, some level of paralysis in your decision-making.
Venture capitalists, for example, are likely going to want your company to move aggressively to justify their investment — they might wish to have returns of 10 to 20 times their contribution; if you prefer a more measured approach, there’s going to be conflict. Different positions are especially dangerous if your company isn’t a game changer likely to enjoy explosive growth.
It doesn’t always happen, but there have been cases where the equity partners were able to exert enough muscle to force out the original entrepreneur. You don’t want to be that person.
Consider equity a last-resort type of option. If your company is stable, healthy, and enjoying growth, a reasonable loan is a better bet.