The Behind the Scenes Cost of Entering the Shark Tank

ABC’s popular reality TV show, “Shark Tank,” features financing negotiations between a panel of venture capitalists (the “Sharks”) and entrepreneurs/small business owners. Like normal venture capital investing, the deals portrayed in the show generally involve an exchange of an equity stake in the company for a certain amount cash that the business requires. The show’s narrative implies that entrepreneurs vie for a spot on the show as a means of raising necessary capital for ongoing business operations. In truth, most companies can acquire the funds that they need from much cheaper sources such as small business loans, debt financing specifically linked to fulfilling purchased orders, or simply by finding less greedy equity investors.

A separate benefit of appearing on Shark Tank is that the show provides seemingly free advertising and brand exposure on a national scale. This benefit is truly too good to be true, because the advertising is in fact quite costly, perhaps the most expensive advertising that a company will ever buy. In order to appear on Shark Tank, business owners agree to give the show’s producer, Finnmax, either (i) a 5 percent equity stake or (ii) a 2 percent royalty on operating profits. This arrangement means that the more successful the business becomes, the more the advertising on Shark Tank will end up costing. In spite of the high costs of negotiating with the Sharks, over 36,000 entrepreneurs applied to appear on the show in 2012 alone.

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