Herd Mentality on Shark Tank

Shark TankI just caught the very end of this week’s episode of Shark Tank. As you may have noticed in the past, I don’t care for the show. It provides a ridiculous view of how venture capital actually works. But more important, it mythologizes the rich and pushes the idea that the rich are entrepreneurs when usually they are anything but. The people presenting are entrepreneurs, but the people in the chairs are generally not, although some of them used to be.

The bit I saw tonight was a perfect encapsulation of the show. Some doctor was producing some kind of medical device that she wanted to market to the general public. She valued her company at $5 million. The most annoying of the “sharks,” Kevin O’Leary made an offer based upon his belief that the company was worth $3 million. After this, two other “sharks” made offers that went along with the $3 million valuation. The doctor stood firm on her valuation. At that point, one of the “sharks” that was not interested in investing told her that she was crazy not to go with O’Leary’s offer because clearly her company was only worth $3 million.

And how did this “shark” know that it was only worth $3 million? Because three of the sharks all believed it. Such is the nonsense of the “sharks.” They all see themselves as equals in one way: as rich people, they all feel that the entrepreneurs who are looking for venture capital should treat them as the gods they seem themselves as. How dare this doctor question the combined wisdom of the sharks!

There are two issues here. First, the doctor understands her company and the market far better than the “sharks”—none of whom is an expert in her field. And in the discussion, she argued that the company was worth more because in that field, most products fail long before they reach the point she had with her company. Effectively, she made the same argument that I make about the entrepreneurial process: the hardest part is the idea and making it work. From that point, it is just a matter of effective management. She’s asking for venture capital, not an angel investment.

The second issue is critical to why I despise the show. When O’Leary came up with his $3 million valuation, it wasn’t based on anything. He had no reason for thinking that. If she had valued it at $7 million, he probably would have “determined” that it was worth $5 million. And when the doctor pushed back on it, the only response she got was cant about investment risk, as though investors should get a huge return on their investments without taking risk. What’s more, there are two reasons why the other “sharks” jumped on the $3 million valuation. First, it’s just herd mentality.[1] Second, it was in their best interest in terms of negotiation. By grabbing it, they put themselves in a position to get a better deal on their investment. No one was going to say, “I think Kevin is totally wrong; your company should be valued at $7; I’ll give you the money you want, but I’ll take a smaller percentage of your company!”

When I see the show, I almost always hope that the entrepreneur will walk away. It usually is a bad deal. What’s more, I can see a lot of interesting ideas being turned into quick profits rather than solid going concerns. In this case, there was a happy ending: the doctor respectfully declined the offers. And the “sharks” were amazed that anyone would question their inerrancy. I think rather than “sharks” they should be referred to as “catfish,” because they are bottom feeders who prey on the dreams and desperation of the best that humanity is.

[1] Actually, at one point, another of the “sharks,” Robert Herjavec, offered to add half as much to O’Leary’s offer. It seemed to be a way of splitting the difference. But O’Leary immediately jumped in and said something like, “I still want 20% because I think the company is only worth $3 million.” Herjavec backed him up on that, but that wasn’t what it sounded like he was proposing. So there was clear indication that their valuations did not agree and were little more than WAGs.

Leave a Reply

Your email address will not be published.