Most of these inventory-financing deals for physical products seem like they would be much better dealt with via loans, unless the equity stake is really more of a quid-pro-quo for whatever connections the sharks have.
A lot of the Shark Tank investments seem like bets on the underlying technologies or products, but against the entrepreneurs themselves. When Mark Cuban (for instance) invests in Company X on Shark Tank, he basically buys the founders out of their controlling stake for what amounts to pennies on the dollar, figuring that he can always monetize whatever inventions the entrepreneurs have developed.
From Cuban's perspective, that seems pretty reasonable. He's basically figuring "You got lucky, you came up with something interesting, but you're not the guy (or girl) to make that something work. I'll take it off your hands and let you cash out." In a way, that sort of deal feels more like corporate M&A than it does a VC investment.
As Jeremy puts it in his recap: "If barriers to entry are low, all the startups do is serve as outsourced R&D for the big incumbents who can come in and use their scale to eventually recapture share from the startups who proved out a new market."
That's basically the Sharks' playbook. I wouldn't be surprised to learn that the first thing a Shark does, upon buying a controlling stake in Startup X, is take it to BigCo Y to flip or license it.
I've watched Shark Tank from the first season. The radical majority of Cuban's deals in fact are minority positions. He very rarely buys controlling stakes.
His most valuable asset is time, and he's already loaded up on investments. He doesn't want to run the companies, so most of the time he prefers to retain the entrepreneurs or not invest, and he makes that clear routinely on Shark Tank.
Kevin is the shark that most frequently seeks complete buyouts.
You're probably right. I thew Cuban's name out there as a random example, and I probably shouldn't have.
That said, I've seen most of the show (perhaps not much of the first season, but most of the series since then), and I would guess buyout -- or at least buy-to-flip -- deals are the majority and not the exceptions.
I've wondered about that. Take your PO to the bank, and they'll be more than accommodating in setting you up with a revolving line of credit. Why give up equity? Sometimes they do say "go away, you don't need me", but other times they snap the company up.
A lot of people are pretty explicit that they are looking to leverage the sharks specifically. The sharks are also pretty explicit, frequently saying "this is a good idea but not good enough for the amount of work I'd have to put in".
You can tell the ideas that the sharks think are good because they talk about how much of their time they're willing to give, not just the money.
