Top Business Terms Of Shark Tank Entrepreneurs Should Know

1. Idea Stage

The Idea Stage is the very beginning of an entrepreneur’s journey, where they have just conceived a new product or service. They are enthusiastic about their idea and believe it solves a problem, but there’s little to show for it yet.

For example, the entrepreneur identified a problem with a marriage website’s photo upload process. Their idea is to create a new website that automatically reduces image size for upload. This is a classic Idea Stage concept – identifying a need and brainstorming a potential solution.

What Shark Tank Investors Look for Beyond the Idea Stage

While ideas can be exciting, Shark Tank investors are looking for more than just a concept. Here’s what typically makes a stronger pitch:

Validation: Has the entrepreneur conducted any market research to show there’s demand for their idea?

Prototype: Is there a prototype to showcase the idea’s functionality?

Business Plan: How does the entrepreneur plan to turn their idea into a viable business? This includes details on marketing, sales, and financials.

Shark Tank and the Idea Stage

Entrepreneurs in the Idea Stage do appear on Shark Tank, but it’s a tough sell. The Sharks are more likely to invest in something more developed, where they can see traction and the potential for return on their investment.

Should You Pitch an Idea Stage Concept on Shark Tank?

It can be risky to go on Shark Tank with only an idea. However, the show’s exposure can be a great way to generate interest and potentially find other investors. If you do decide to pitch an idea stage concept, be prepared to demonstrate your passion, research, and a clear vision for how you’ll move your idea forward.

2. Prototype

A prototype in Shark Tank refers to an early model of a product that demonstrates the core concept. It’s a rudimentary version used to test the idea and gather feedback before investing heavily in manufacturing and design.

Example of an effective prototype. Here’s how it breaks down:

Landing Page: An internet page designed to capture user interest, in this case, the landing page gauged interest in a file conversion service by simply asking visitors “Do you want to convert to 40kb?”.

Yes/No Options: The two options provided a clear way to measure user interest. Clicks on “Yes” indicated potential customers.

Validating Market Need: This ingenious approach validated that there might be a market for the service, justifying further development.

The key takeaway is that a Shark Tank prototype doesn’t have to be a fully functional product. It can be as basic as a landing page, a physical model, or even a detailed sketch. The goal is to demonstrate the core idea and assess its viability.

Here are some additional points:

Types of Prototypes: There are various prototype approaches, from low-fidelity (basic sketches) to high-fidelity (more refined models). The complexity depends on the product and stage of development.

Benefits of Prototyping: Prototyping helps refine ideas, identify flaws, and secure investment by showcasing the product’s potential.

Examples of Shark Tank Prototypes: Provide real-world Shark Tank examples where prototypes played a crucial role in securing investment.

By incorporating these elements, you can create a comprehensive and informative blog post explaining prototypes in the context of Shark Tank.

3. MVP (Minimum Viable Product)

An MVP, or Minimum Viable Product, is a term frequently used on Shark Tank. It refers to the very first functional version of a product that incorporates just enough features to effectively validate its core concept and gather valuable user feedback. In essence, it’s a way to test the waters and see if there’s a market for your idea before sinking a ton of time and money into development.

Here’s a breakdown of the concept:

MVP vs Prototype: This distinguishes between a prototype, which is a rudimentary version that demonstrates a product’s feasibility, and an MVP, a fully functional product ready for user testing and feedback.

Core Functionality of the Example MVP: The example centers around a website that successfully converts images up to 2MB into a significantly reduced size of 40KB or less. This core functionality effectively validates whether there’s a demand for a product that addresses image size reduction.

Future Improvements Based on MVP Feedback: The text acknowledges the potential for future improvements based on the feedback gathered from users. For instance, the ability to handle larger images could be incorporated based on user suggestions.

Importance of MVP in Shark Tank: For investors on Shark Tank, a strong emphasis is often placed on ventures that possess a validated MVP. This is because an MVP serves as a form of validation that there’s potential traction in the market, ultimately reducing the inherent investment risk.

In conclusion, an MVP is a crucial concept for startups seeking to pitch their ideas on Shark Tank or to any potential investor. It’s a strategic method to gauge market interest and refine your product before going all-in on development. By strategically utilizing an MVP, you can significantly improve your chances of success!

4. Pitching

Pitching in Shark Tank: More Than Just an Idea

In Shark Tank, “pitching” is the traditional presentation of a business idea. Here’s a breakdown:

Traditional Pitching:

Imagine a group of investors seated at a table.
You, the entrepreneur, use a presentation (often a PowerPoint deck) to explain your business.
You focus on the business model (how you’ll make money) and the business plan (your financial roadmap).

Shark Tank Pitching:

Shark Tank takes the concept of pitching and adds a twist.
It’s a presentation with a captive audience (viewers) and a panel of successful investors (“sharks”) who can potentially invest in your business.
Your pitch needs to be compelling and captivating to grab the sharks’ attention and convince them to invest.

The difference between a business model and a business plan:

Business Model: This explains how your business will make money. In the example of convert40cub.com, the free image conversion with a paid option for larger images is the business model.

Business Plan: This details when and how much money you expect to make. The excerpt showcases how convert40cub.com plans to reach specific user targets and generate revenue based on its pricing model.

5. Bootstrapping

In Shark Tank, bootstrapping refers to entrepreneurs funding their business themselves, without relying on investment from the Sharks or other outside sources.

The passage you provided goes on to discuss alternatives to bootstrapping, which are incubators and accelerators. These organizations can provide startups with various forms of support, including:

• Funding
• Office space
• Connections to mentors and investors
• Help with developing prototypes

While the text mentions these alternatives, the key takeaway for bootstrapping on Shark Tank is that the entrepreneur is coming to the show without needing the Sharks’ money. They’ve been building their business on their dime.

This can be a strategic advantage on the show. Sharks may be more impressed by an entrepreneur who has already achieved traction without outside investment. It demonstrates frugality, resourcefulness, and potentially a lower risk for the investor.

6. Seed Round, Angel Round

Seed Round:

Description: This is typically the “first injection of capital” a startup receives. It helps them develop their initial idea, build a prototype, and validate their concept.

Investors: Seed funding often comes from a combination of sources, including:

Friends, Family, and Fools (FFF): As the text mentions, these are people close to the entrepreneur who are willing to invest based on their belief in the founder’s vision rather than a strong financial forecast.
Angel investors are affluent individuals who use their funds to invest in early-stage startups. They are looking for high returns but also understand the high risk involved.

Focus: Seed funding is used for activities like market research, product development, and building a minimal viable product (MVP).

Stage: The startup is usually at the idea stage or prototype stage. There’s a high degree of uncertainty about the product’s viability and future success.

Angel Round:

Description: An angel round is another form of early-stage financing that often follows a successful seed round. It provides additional capital to help the startup further develop its product, test the market, and potentially start generating sales.

Investors: Similar to a seed round, angel investors are the primary source of funding. While some venture capitalists (VCs) might participate in later rounds, they typically shy away from the high-risk nature of angel rounds.

Focus: The funds from an angel round are used for activities like scaling production, building a team, and initial marketing efforts.

Stage: By the angel round stage, the startup typically has a more developed product or service and may have some initial traction in the market. The risk is still significant, but there’s a clearer picture of the potential.

Key Points for Shark Tank:

• The entrepreneurs pitching on Shark Tank are likely seeking funding somewhere between the seed and angel rounds.
• The Sharks themselves might act as angel investors, providing capital and guidance in exchange for equity in the company.
• Understanding the characteristics of seed and angel rounds helps viewers evaluate the stage of the business and the risks involved in the entrepreneur’s pitch.
  

here’s a breakdown of Venture Capital (VC) funds and Private Equity (PE) funds in the Shark Tank:

Funding Stages:

Seed Round & Pre-Seed Round: These are the earliest stages of funding for startups. They typically involve smaller amounts of money and often come from individuals (friends, family, angel investors) or one or two VC funds. The focus here is on validating the initial idea and getting a basic product or service off the ground.

Series A, B, C, etc.: These are later funding stages where startups are looking for significantly larger sums of money to scale their business. This is where you’ll see the “big ticket size rounds” mentioned in the text. Here, the investors are primarily VC firms or PE firms.

Who are VC and PE Firms?

Venture Capital (VC) Funds: These firms invest in early-stage, high-growth companies with the potential for significant returns. They take on a higher risk because the companies they invest in are unproven. Think of them as putting money into ideas with the potential to become the next big thing. On Shark Tank, VC investments are likely for companies with a clear path to rapid growth and market dominance.

Private Equity (PE) Funds: These firms typically invest in more mature companies that are already profitable or have a clear path to profitability. They focus on companies with established business models and strong leadership teams. While PE firms might appear on Shark Tank, it’s less common as the show typically features earlier-stage businesses.

Key Points:

• The type of investor a startup seeks depends on the stage of development.
• Seed and Pre-Seed rounds involve smaller amounts and higher risk for investors.
• Series A and later rounds involve larger sums and focus on scaling existing businesses.
• VC funds invest in high-growth potential and PE funds in established or soon-to-be profitable companies.
  

Additional Notes:

• The “crowdfunding” is another way to raise money early on. This involves raising smaller amounts from a large number of people online.
• Shark Tank itself isn’t a funding round, but a platform for entrepreneurs to pitch their ideas to potential investors (often VCs) who might be interested in a Seed or Series A investment.
  

Valuation

The term “valuation” in Shark Tank, clarifies the difference between pre-money and post-money valuation. Here’s a breakdown:

Valuation:

• This refers to the estimated total worth of a company.
• Unlike gold with a fixed price, valuation is an estimate based on negotiation and future potential.
  

Pre-money Valuation:

• This is the company’s worth before receiving any investment.
• Imagine a company with 1000 shares (500 each for two founders) and a valuation of Rs 1 crore (Rs 1000 per share).
  

Post-money Valuation:

• This is the company’s worth after receiving investment.
• The example explains how issuing new shares to an investor (e.g., Andy investing Rs 20 lakh) affects ownership percentages.
• Here’s a misconception: People might think Andy gets a 20% stake by simply dividing his investment (20 lakh) by the valuation (1 crore).
• The reality: The company creates new shares worth his investment (200 shares) instead of the founders giving away theirs.
• This increases the total number of shares (1200) and dilutes the founders’ ownership (down to 41.67% each from 50%).
  

Key Points:

• Negotiation between founders and investors determines valuation.
• Pre-money valuation considers the company’s worth before investment.
• Post-money valuation reflects the company’s worth after investment, taking dilution into account.

Additional Notes:

• The text mentions alternative methods like Discounted Cash Flow (DCF) and Revenue Multiple for valuation but highlights their limitations.
• It concludes by mentioning alternative investment methods that don’t rely on valuation for early-stage startups.

Convertible Notes Explained in Shark Tank Terms

Convertible notes are a financing option presented on Shark Tank where investors provide capital to startups without needing to determine a company’s exact valuation at that early stage. Here’s a breakdown based on the text you provided:

The Deal:

• Investors offer money to a startup through a convertible note.
• This acknowledges they can’t pinpoint the company’s current worth.
• The perk for investors: When the startup secures a future funding round with a valuation, the investors get a 20% discount on that valuation when converting their notes into company shares.

Example:

• A startup receives a convertible note of Rs 20 lakh.
• In the next funding round, the startup’s valuation is set at Rs 1 crore.
• With the 20% discount, the Rs 20 lakh note converts into shares based on the discounted valuation of Rs 80 lakh (Rs 1 crore minus 20%).

Key Points:

• Convertible notes are offered before a formal valuation takes place.
• Investors benefit from potential company growth by getting a discount on future valuation.
• This option allows startups to secure funding without a fixed valuation at an early stage.

Additional Shark Tank Terms:

Term Sheet: A preliminary document outlining the investment agreement (not legally binding). Signing it doesn’t guarantee funding.
Shareholding Agreement (SHA): A legally binding contract detailing ownership percentages after investment.
Cap Table: A document listing ownership percentages of all shareholders in the company.

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