Valuations that Work for Founders and Investors – Part 1

Valuation. Like I have, anyone who has ever watched Shark Tank repeatedly knows what a ‘shark’ deal looks like. 25-40% equity for $100-300K. The founders get $150,000 for 30% equity on a classic Shark Tank deal. That is a pre-money valuation of only $350,000 on the business. We often hear that the company sells less than $500,000, which is exactly what the Sharks want. It puts the valuation within 1-2x of actual trailing sales.

It also places the business in Phase 1 of my growth model – a volatile time. 

The lower your trailing revenue, the more equity any intelligent investor will want. You will likely get no investors if you have too much debt. Debt that exceeds your revenue by 100% or more is a big red flag. It is NOT the same as seed money, even if it’s a HELOC on your house. Investors do not want to have to sue you AND take away your residence. That’s a very nasty look in a small world.

But wait, what can anyone do with $150,000 from Mark Cuban other than tread water for 3-6 months? Not too much. But the Shark gets a ‘cheap’ opportunity to invest in the next Dude Wipes, which Mark Cuban did. Lucky him. 

The real bonus of Shark Tank is a massive spike in new online customers. So, if you can get on the show, you will receive that online revenue bonus with or without closing a deal post-show. Even if you give away the equity, the Shark will get a paper return as fast as your online sales spike. 

If you’re in retail, though, shark-like deals are crazy. You won’t get the same degree of sales spike (because you are not nationally distributed yet in most cases), and you will end up treading water until the next fundraiser, in which your 70% remaining equity may go down to 49% or less to raise what you then need to grow. 

(Continued on Friday, March 8)

Dr. James Richardson

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