Sharks take more equity in startups than VCs, but provide more services, distribution value
With his role on Shark Tank, Mark Cuban is probably best known to most people for being an investor.
According to Sharkalytics, Cuban has made $19.85 million in 85 deals so far, at least on air.
When he sat down on stage with Vator CEO Bambi Francisco at Vator Splash LA on Thursday, she asked him to confirm those numbers and share his return on investments, as well as how Shark Tank investments compare to his personal ones.
"Let me give you a little background on Shark Tank. When they walk in the door, we know nothing about them. They come in, get on the carpet, and what takes as long as 14 minutes on TV might go 20 minutes if its a really dumbass deal, to two hours. We'll go through and ask a lot of questions. If you make a deal then we have a chance to do due diligence," he said.
"Early days, probably, 40 percent fell off because they were bullshitting one way or the other. 'Oh my widget only costs 30 cents to make.' Well, then you do due diligence, it costs them $3 now but if they make seven billion of them it costs 30 cents. Now, actually, more of them fall out because we've kind of become a growth hack for a lot of companies. I'd say 50 percent of the companies close. To this point, I've closed 71 deals, and I think I'm in for $30 million, give or take, I've sold four of them, none were big hits. Of those 71, two are out of business, three are out of business that aren't smart enough to know it. 12 to 15 of them are making half a million or more a year, and a couple of those are making millions per year."
"So none have returned your $30 million," she asked.
None, he said. But while none of his Shark Tank investments have returned the total $30 million he has put in, "if I did a market to market, based off of growth, I'd be way up. On a cash basis, I'm still down."
Francisco then asked him why Shark Tank investors take so much equity.
"In Silicon Valley, typically, if you're doing a seed round or early stage, you're taking 20 percent. When I watch Shark Tank, sometimes you guys are taking 30 percent to 50 percent of their company. What kind of message are you sending to America?" she asked.
"That it's better to have 10 percent of a watermelon than 100 percent of a vine grape," Cuban answered.
"It's little bit of a different perspective of how we do it than in Silicon Valley. Remember, there's just a small percentage of companies that are tech companies. Think of a software company. Their situation is where we might ask for a bigger valuation, or a smaller valuation and bigger equity percent, than you might get here in the Valley. But I would rather tell you that valuations in the Valley are ridiculous and valuations in LA are not as bad, but coming close. We go outside the west coast, valuations are half," he said.
"In terms of sending a message, everybody has to value their company but the reality is that if you're asking for money, you're asking for a reason. I always tell people, ‘sweat equity is the best equity.’ In this day and age, particularly with software companies, you try to spend money on growth hacks, and say, 'I want to go out there and be ubiquitous, and have to spend a lot of money to get there,’ but more than 99 percent of those companies fail. The best companies, and the best experiences I've had, are where the best equity is sweat equity. Where you've got a great idea and you go out, you launch it, you get some traction, you get your KPIs, and then you have something to sell. To me, it's crazy when somebody just has an idea, goes to UC Berkely and thinks they're worth $8 million."
Does it demoralize the founders to take such a larger percentage of the company?, Francisco asked.
"When you get on Shark Tank, we get see a company go backwards. It is a growth hack, it will create sales, and there's such visibility and I think the sharks are smart, usually, for the most part. We help companies grow. Now, if you're a tech company, some of us have those tech skills, Robert and I, and some don't own software companies on there, but, I think it's wrong to think that we're taking too much of the company."
While the time to film the series is minimal, taking only a couple of weeks, after that is where the real commitment comes. And that, according to Cuban, is what really sets the sharks apart from VCs.
So sharks basically add more value to startups than VC's, she stated.
"Spending time with the companies, helping them, that's 24/7. They can all email me any time. I'm always accessible full time via email, and, if it's a real problem, I'll go visit. I've got a staff of 15 and we're there all the time,” he said.
Now, when you take about VCs and investing in the Valley and investing in tech companies, that's pretty much hands off, maybe some connections, maybe a board meeting. It's not, 'we'll take over their accounting,' which we do. It's not, 'Ok, we'll help you with all of your HR,' which we do. There's just so many back office things and then going out and setting up Amazon exclusives, Amazon Pay, all these different things. There's so many things that would cost money if you were just going through a traditional VC that we provide."
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