Viewpoint

To Understand Angel Investing, Watch TV


Raising money from business angels is difficult. Few people are willing to invest their money in someone else's startup and fewer businesses have the right characteristics to be financed through an external capital raise.

Still, people raise money from business angels all the time—not a lot of entrepreneurs, mind you, but enough to indicate patterns that account for who obtains angel financing and who does not.

These patterns have led a lot of people, including me, to write books and articles about how to raise money from business angels.

While the printed word teaches some aspects of raising angel money, it falls short in other areas. Books and articles fail to capture the money-raising process well. They don't show the messy reality of persuading people to provide you with capital. They aren't good at revealing the nuances of human behavior that are involved.

The limitations of the printed word led me to wonder if the British TV show Dragons' Den and its U.S.spin-off Shark Tank complement books and articles at teaching about angel investing.

Does TV falsely speed the process?

To figure out if these shows offer an educational benefit, I sent a message to the members of the Academy of Management's Entrepreneurship Division listserv (a group of business school professors who teach entrepreneurship) to obtain their perspective. Below, I've summarized the views from this decidedly unscientific survey.

A few professors were negative on the value of these shows, largely because the format crams a relatively long process into a TV schedule. For instance, Benson Honig of McMaster University asks: "How many investors would read a plan, view a five-minute presentation, and make a decision?"

Honig makes a good point. A couple of years ago, I did an analysis of the Angel Capital Assn.'s survey of its member groups, which showed that the average amount of time an entrepreneur took to present to the group was 21.1 minutes. (The median was 20 minutes.)

But the ACA survey also showed that some angel groups did allow entrepreneurs only five minutes to present. While these groups didn't make investment decisions after such short presentations, they did choose whether or not to conduct due diligence. Perhaps the short period to present is real.

Another criticism of the shows is that they make angels look foolish and illogical. John Bunch of Benedictine University writes: "I think it is the last thing I would recommend to my students, unless I wanted to show how foolish and illogical business angels can be." But if business angels are sometimes foolish and illogical, isn't that valuable for entrepreneurs to know?

A lot of positive reviews

Most of the academics said that Dragons' Den and Shark Tank are useful educational tools. Part of the programs' benefit comes from having a celebrity deliver a message. As Sarah Dodd of Alba Business School puts it: "Three minutes with Dragon Theo Paphitis convinces my students far more than three hours of me saying the same things."

But the academics also think the shows help for other reasons. Here are a few aspects they find particularly valuable:

• Eden Blair of Bradley University says that the shows "help [students] see what criteria investors use."

• John Stavig of the University of Minnesota explains that they offer "good examples [of] how entrepreneurs need to hone their elevator pitch."

• Roberto James Lopez of Tecnológico de Monterrey says that the shows illustrate "how to tell the story of your business."

• Sean Wise of Ryerson University says the shows "illustrate the type of questions investors…ask."

• Steve Phelan of the University of Nevada Las Vegas says the programs show the tradeoff that angels face between "leaving enough equity for the founder to retain an incentive…[and claiming] as much equity as possible."

• Geoff Archer of Royal Roads University says the shows demonstrate that "some stupid ideas get funded," that "great ideas fail to get funded because of negotiation failure…[and] greedy pre-show valuation," that "founding teammates can really muck up a presentation and/or a deal," that "having even a few customers and some real sales makes a great impression," and that "body language, poise, and listening skills are very important in an elevator pitch-type environment."

Some academics even pointed out specific lessons about raising angel money taught by individual episodes. For instance:

• Noah Wasserman of Harvard Business School says that the Shark Tank "Cover Play" episode addresses "the choice…of control vs. value addition."

• Sarah Dodd of Alba School of Business explains that the Dragons' Den "Golden Rules for Success" episode "provides a very clear dose of reality about four critical, down-to-earth elements of any new venture (cash, common sense, contingency and homework)."

• Dodd adds that Levi Root's musical pitch for Reggae sauce helps remind students that "they need to be creative and compelling" when presenting business plans.

• Gary Dushnitsky of the University of Pennsylvania says that the Dragons' Den episode on the personal air vehicle explains why entrepreneurs' optimism affects the deals that they are willing to take.

• Chris Welter of Ohio State University says that the "Blue Tooth Ear Implant" episode of Shark Tank shows "what types of opportunities should seek funding." He also says that the "Belt Buckle Venture" episode teaches about "realistic business valuations."

The example of business valuation illustrates the kind of lessons that these shows teach. An entrepreneur asking for $100,000 in return for a 10% stake in the company is valuing the business at $1 million. Many entrepreneurs on the show fail to justify these implicit valuations on the basis of anything other than their personal beliefs. In fact, when Sean Lux of the University of South Florida asked the 62 MBAs in his class what was educational about the shows, the class said the single most valuable lesson was the importance of developing "a rationally based valuation of their company (appraisal, venture capital method, NPV, First Chicago, etc.) prior to engaging investors."

In sum, despite the negative reactions of a few entrepreneurship professors, the consensus is that Dragons' Den and Shark Tank help to educate people about angel investing.

Scott_shane
Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University.

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