Every year tens of thousands of entrepreneurs apply for one of just over 100 spots available on the popular television show Shark Tank. At the very least, an appearance on the show provides great exposure for an entrepreneur. The primary reason they seek a spot, however, is to obtain capital. Anyone who has watched the show knows that the “sharks” don’t give away their money; they want a considerable stake in any business in which they invest. As I noted in an article written for Chief Executive, “As a founder, the best way to maintain ownership of your company is to put your money where your mouth is. That means investing your own capital as much as you can in the earliest stages of the company. This not only maintains larger equity for you — as the earliest rounds are usually the most dilutive — but also demonstrates your confidence in the business which helps when attracting capital from investors.”[1] Unfortunately, many young entrepreneurs don’t have a stash of money to invest in their start-up venture and they have to seek outside funding. Below are few ways experts suggest going about raising capital without being eaten by sharks.

Avoiding the Sharks

1. Know your end-game. Start-up adviser Hillel Fuld insists the most important question any entrepreneur can ask themself is: “What’s my end game?”[2] He explains that the strategy used to raise capital is different for different end games. He explains, “Do you raise capital or do you bootstrap? This might be the most important decision you make when it comes to building your company. But how do you decide? The answer is that you refer back to your end game. If your end game is making as much money as possible, which by the way, is a terrible end game, then presumably you want to keep as much of the company as possible. If, however, your end game is to make maximum impact in minimum time, then raising capital might empower you to make that impact and it might accelerate the process of doing it as quickly as possible.”

2. Don’t be greedy. The first thing that should be obvious is that the more capital an entrepreneur seeks to raise the greater the stake of their company investors will demand. Marc Andreessen, a General Partner at Andreessen Horowitz, suggests that entrepreneurs should raise money using a framework taught to him by Andy Rachleff, the Chairman at Wealthfront Inc., called “The Onion Theory of Risk.” Andreessen explains, “The way I think about running a startup is the way I think about raising money. It’s a process of peeling away layers of risk as you go.”[3] In other words, don’t try to raise more money than you need to accomplishment the tasks at hand. Mike McGuiness, Co-founder of Perch, explains, “You can think of a day 1 startup as having every conceivable kind of risk: founding team risk, product risk, technical risk, market acceptance risk, revenue risk, cost of sales risk, viral growth risk, etc. … You raise seed money to peel away the first two or three risks (e.g., founding team risk, product risk, initial launch risk). You raise the Series A round to peel away the next layer of risks (e.g., recruiting risk, customer risk, revenue risk, cost of sales risk). And so on.”[4]

3. Choose your financial partners wisely. As I noted above, not everyone has the means to fund their own company. As a result, wisely choosing partners from your personal connections and from venture capital (VC) firms is critical. In my Chief Executive article, I noted, “It’s easier to convince your friends and family to support your business and raising funds within your personal network allows you to maintain greater equity in your company. These funds are less dilutive and there is often no expectation to share leadership positions such as board seats with those contacts. Individually, though, they provide fewer funds, which means you need to make more calls and leverage more connections. On the flip side, garnering support from VCs requires more preparation and proof, and ultimately equity and control are diluted every time you take funding. VCs will naturally expect to have a seat on the board, but, if chosen carefully, they can be a great asset to a founder. … VCs have the means to offer greater access to capital, talent, professional advisors, business partners, and potential clients.”

Selling Your Vision

Whether you are seeking funds from your connections or a VC firm, you need to convince them about the potential of your vision. Kristy Campbell, an Executive at Rev1 Ventures, offers five tips on how to win over investors. She writes, “The fundamentals of building an investable start-up remain the same. You don’t need to be a mind reader to determine what investors want to know.”[5] Her tips are:

1. Be clear about the problem. One of the last books written by the late Harvard Business School professor Clayton Christensen was entitled Competing Against Luck: The Story of Innovation and Customer Choice, coauthored by Karen Dillon, Taddy Hall, and David S. Duncan. In the book, they discuss the Theory of Jobs to Be Done. According the book’s introduction, that theory helps companies understand their “customers’ struggle for progress and then [creates] the right solution and attendant set of experiences to ensure [they] solve [their] customers’ jobs well, every time.” In other words, the most successful companies solve problems. Campbell notes, “It is more important than ever to be clear with investors about the problem your company solves. The number one thing that matters today is how quickly and clearly an entrepreneur can articulate the problem that her startup solves.”

2. Know your audience. Commonsense dictates that you should look for money from people interested in the problem you are addressing. Campbell writes, “Determine beyond any doubt that you are working in a space that an investor cares about and that your vision and goals align with theirs.”

3. Provide the evidence. If you can demonstrate there is a market for your ideas, you’re already ahead of the game. Campbell insists, “Nothing beats demonstrating your first-hand understanding of your market. Entrepreneurs who have lived with a problem in previous roles or their personal lives uniquely understand the impact and the potential gains of their solution. … Convincing customers helps convince investors. Investors expect entrepreneurs to be enthusiastic. When that passion is combined with an understanding of customers’ needs and of the impacts that your startup solving their problems can have on their bottom line, investors pay attention.”

4. Understand the economics. Remember the dot.com bubble? The dot.com bubble burst because of the irrational exuberance of investors who failed to examine the business plans of start-up dot.com companies. Campbell writes, “What has to happen for your new business to achieve 20, 50 or 100% year-over-year growth? Investors will listen when you demonstrate your clear understanding of the business unit economics for your company.”

5. Show your flexible mindset. How many times have you watched a participant on Shark Tank go down in flames because they were unwilling to see things from another perspective? Campbell explains, “Investors want to collaborate with high-integrity, coachable entrepreneurs. Every interaction with you influences whether you are someone investors will trust and want to invest in. Balance the tightrope between ego and confidence. Be willing to acknowledge what you know and what you don’t. It’s rare to find an entrepreneur who hasn’t made mistakes.”

Concluding Thoughts

As I noted in my Chief Executive article, “For a company to succeed, it requires more than a bright idea; it requires a strong foundation comprised of a collaborative team, partners, and strong leadership, all of which is fostered by strategic funding. The more equity the founding team preserves, the more control and direction they maintain in the long-term, leading to sustained success.” That’s why watching out for sharks who want to take too big of bite of your company is always a good idea.

Footnotes
[1] Stephen DeAngelis, “A Founder’s Guide To Funding,” Chief Executive, 2 June 2023.
[2] Hillel Fuld, “The 1 Question to Ask When Starting a Company That Most Don’t Ask,” Inc., 9 August 2023.
[3] Mike McGuiness, “Should startups always raise as much money as possible?” X (formerly Twitter), 31 July 2023.
[4] Ibid.
[5] Kristy Campbell, “5 Tips to Win Over Investors in Uncertain Times,” Entrepreneur, 29 May 2023.