Is selling equity the best way to fund your business?

I love watching ABC’s Shark Tank and I am really excited to watch Season 5, which starts this Friday. Seeing the creative solutions that people dream up to mundane problems is really fun and exciting.

But the excitement about the product or service pales in comparison to the excitement of the deal. With every new entrepreneur that walks through the doors, I feel like I’m in the tank with them. As I watch them walk down the hallway I’m already thinking:

  • Will they get a deal?
  • Are they going to screw up the pitch?
  • Do they have a business or just an idea?
  • Who is going to give the first offer?
  • How much equity are they going to have to give up?

People usually have two reasons (or some combination of the two) for coming to the Sharks:

  1. They need to raise capital for their business
  2. They want to use the one or more of the Shark’s connections to build their business.

I can completely understand the desire to have a strong strategic partner. For many of the businesses, they need the expertise and connections that Mark, Daymond, Kevin, Lori, Barbara or Robert will bring to the table. If they don’t get a Shark and instead just raise equity from friends and family, the business isn’t going to survive.

I also really enjoy watching each Shark’s different negotiating style. Kevin’s deals are always the worst. He will invariably ask for a royalty, which will suck cash and working capital out of growing businesses when it needs it the most. Robert is often out right away and often acts as the moderator of the panel. Barbara is willing to take a chance on a good idea when people have a lot of heart. Lori is very aggressive on her equity requirements. Daymond is focused, polite, and has a compassionate side. Finally, Mark is always waiting until the end to see what the other Sharks are doing. He uses scarcity of time as a negotiating tactic and will often use his other companies to give himself leverage with the entrepreneur.

While I’m listening to each pitch and Q&A session, I find myself wondering:

“Is there a better way to generate working capital for their small business than selling a portion of their equity?”

Often the answer to that question is “no”. They maybe the entrepreneur only has a business idea or business plan, no collateral. Often, they just plain have a bad idea.

Some Alternatives To Having A Shark Take A Bite Out Of Your Business.

However, what I do see fairly often is entrepreneurs who need working capital but have overlooked alternative financing options. These entrepreneurs shouldn’t give up equity to finance their growth. They are often growing business that have tapped out their friends and family, their bank loans, their retirement accounts, and often taken out a second mortgage on their house.

Many entrepreneurs in the Shark Tank have overlooked some common forms of alternative financing for their business. I have a handy chart below on some of the alternative options to selling equity in a business.

Reasons People Seek the Sharks → Alternative Financing Solutions

  • To buy equipment → Equipment financing or leasing
  • To fill a large order → Purchase order financing
  • To deal with a cash flow crunch → Accounts receivable financing / factoring

By taking a look at other alternative business financing solutions, you can avoid selling equity in your business. If you’d like to learn more about how turning your invoices in to cash can help your business grow, please give us a call at (952) 469–4460 or fill out our contact form.