For the past few weeks, one of my economics professors has been recommending that I watch "Shark Tank."
I finally got around to it this weekend, and over two days watched all six episodes on Hulu. Shark Tank is a show in which entrepreneurs pitch their business ideas to five Sharks, the "Sharks" being venture capitalists. Venture capitalists are investors who use their own money to invest in small companies in exchange for equity or ownership interest. Along with entertainment, the Sharks provide many lessons about business and life that everyone should keep in mind.
Hopeful entrepreneurs always approach the Sharks enthusiastically to pitch their ideas. However, usually within the first two seconds, the Sharks have made up their mind: They either love the idea or hate it. The first lesson is that small business owners always overvalue their business.
For example, a person might ask for $100,000 for a 10 percent stake in their company. That values the company at $1,000,000. For a company to be worth a million dollars, it must have a proven revenue stream, i.e. sales, and be operating somewhat efficiently. Many times the companies on this show have only sporadic sales, if any at all. The Sharks usually tear these entrepreneurs apart, for good reason.
I've seen some really good ideas and some really bad ideas on the show. Obviously, the producers pick a variety to keep the viewers' attention. On one particular episode, a man had, in my opinion and the Sharks', an awful idea. Not only was it bad, he had quit his job, took out two mortgages on his home and used up his three kids' college funds for the business. His idea was to have kiosks in doctor's offices with detachable LCD TV's that could be used for internet access. A neat gadget sure, but practical? He claimed he could make money selling ads, but the Sharks pointed out that no one would pick up a small computer screen to take to their seat to watch ads. The entrepreneur's only other selling point was that people could use his device to check their e-mail. The Sharks simply showed him a cell phone, before unanimously declining to invest in the business. They recommended he quit this business before he bankrupts his family and ruins his children's chance at college.
The Sharks correctly point out that many times entrepreneurs are given false encouragement from everyone they know. A person could have an abysmal business idea and all their friends and family will support them. Business, and especially entrepreneurship, has no place for false hope. There needs to be people out there giving reality checks to entrepreneurs who have stupid ideas.
The institutional force that usually checks bad ideas is a bank. Banks will not loan money to people or companies that they feel are not safe investments. Unfortunately, by the time most small businesses talk to a bank, the owners have already invested their life savings and sometimes even fully financially leveraged their personal assets. It seems like a huge waste considering that over 80 percent of small businesses fail within the first five years.
I would venture to guess that many among that 80 percent are from entrepreneurs who started their business with little to no formal business training. I would like to argue that taking business classes and even majoring in entrepreneurship vastly increase the odds of success, but honestly I don't think it does. I've taken the introductory entrepreneurship course and I am friends with a few entrepreneurship majors. From what they've told me and what I've seen, even some of the entrepreneurship majors have bad ideas, yet everyone around them still encourages them. That uninformed encouragement only yields false hope.
If Ball State's nationally ranked entrepreneurship program doesn't produce high-powered entrepreneurs - most graduates end up working corporate jobs - what chance is there for an uneducated, inexperienced entrepreneur? I think the numbers speak for themselves. Most small businesses fail and the successful ones must contribute a lot of their success to luck.
All that aside, I am not against entrepreneurship. In fact, entrepreneurship is a vital aspect of our nation's economy and actually the cornerstone to the American Dream. However, I do think that people should be more careful when opening a business. They should evaluate the risks and potential reward. The research is essential. They should write a business plan, seek outside objective input and, most importantly, be lucky.
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