The TV show Shark Tank, which a Forbes contributor called the American Idol for small business startups, has become increasingly popular since its debut in 2009. Featuring a series of entrepreneurs—many down on their luck—making the case to investors for financial underwriting, Shark Tank offers lessons for small business owners on the do’s and don’ts of seeking outside funding. Often, the contestants’ preparation leaves a lot to be desired.
“People should understand their financials when they go into these meetings, and often they don’t,” says Brad Aronson, a Philadelphia-based blogger and entrepreneurship educator. “I’ve seen people say, ‘If only I can get $100,000, here’s what I’ll do with it.’ But they often don’t know where that money will go and to what effect.”
Determine the Financial Need
Entrepreneurs first need to understand where their business stands financially, Aronson says. Perhaps they need to hire additional staff, or maybe they just received a large order and need funds to handle it.
In these simple situations, Aronson suggests asking family and friends for financing.
“There’s high risk here because you don’t want to lose their money, but if you don’t have proof that your venture actually will succeed, they may be the only ones you can get money from,” he says. Aronson suggests offering these investors equity, rather than structuring the investment as a loan, to make the investment a bit more comfortable to them. That way, if repayment is difficult, the lender knows he or she will at least have a piece of the business.
When the financial needs are greater—perhaps for manufacturing prototypes, acquiring expensive machinery or aggressively entering new markets—an appeal to outside sources of funding is appropriate. For funding requests like these—of amounts up to about $200,000—consider pitching your proposal to an independent “angel investor.” If the request is appropriate for the need, the angel investor may opt to fund a small test. Pending a successful trial run, a full-fledged venture capital firm is often the best fit for funding requests larger than $200,000.
Perfecting Your Pitch
When it’s time to make your case to potential funders, persuasion is important. To help you prepare, Aronson suggests the following tips:
Seek an introduction to the investor from a mutual friend or colleague. You’ll be more likely to be granted the opportunity to make your pitch.
Perfect your pitch by practicing with colleagues or friends.
Present a high-level overview of the promise your business holds. Don’t go into enormous detail with tons of slides.
Make sure you’re personally invested in the business with your own money to give investors confidence in your own commitment.
Make any financial projections realistic and not overstated. Ask an accountant or money-savvy friend to review your financials.
Save a lot of time for questions, and don’t be defensive with your answers.