At its core, Shark Tank is about presenting the negotiations that take place between investors and entrepreneurs in an entertaining way. However, the Sharks are not there to simply discover great ideas. They are on Shark Tank because they have every intention of making money by investing in some exciting ventures.
The Different Ways Investors Make Money on Shark Tank
So, how do Shark Tank investors make money on their investments? The Sharks can profit from their time on the show in more ways than one. They may also profit in direct and indirect ways.
The Sharks Profit from the Cash Flows of Their Investments
When a Shark agrees to invest in a company that appears on the show, they usually do so in exchange for ownership equity. In other words, the investor is given partial ownership of the business. The exact percentage that the investor gets will depend on the negotiations.
Post-show, both the investors and the entrepreneurs can review the negotiated deal and decide if they want to go through with it. The investors may conduct a more thorough examination of the company to check if the entrepreneur’s claims check out. From there, the two sides can either come to a deal, modify the agreement, or terminate it.
If the two sides agree to a deal, then the investor can soon start making money as a partial owner of the entrepreneur’s business. The amount that a Shark can earn from their investment will depend on their ownership stake and the company’s reported profits.
An investor can make a tidy profit by simply maintaining their ownership stake. If they have a 10 percent stake in a business that rakes in $1,000,000 in annual profits, then they will receive $100,000.
The Sharks can receive their share of the profits as dividends. Alternatively, they may decide to re-invest their earnings into the company in the hopes of growing it and garnering larger profits in the future.
The Sharks Profit after Selling Their Ownership Stake in the Company
If an investor decides to re-invest their earnings instead of taking the money right away, that’s a sign that they are confident in the company’s prospects. They are re-investing because they believe that the business still has room for significant growth.
The Sharks can continue to re-invest their earnings until the company reaches a size where they are comfortable selling. Once the company reaches that size, the invested Sharks can choose to sell their ownership stake. They will get a larger return on their original investment because the company is now more profitable.
Notably, the investor does not have to sell all of their shares to make money. If the Shark originally bought a 20 percent stake, they can sell half of that to turn a tidy profit and still maintain equity in the business. They can still have a say in the direction of the business by doing that.
The Sharks Profit if the Company Is Eventually Sold
On Shark Tank, the investors typically don’t invest enough money to warrant getting majority stakes in their chosen companies. Even the entrepreneurs may balk at such a deal because they don’t want to give up control of their company.
Since the investor does not control the company fully, they cannot stop the owner from selling it. The current owner of the company may be inclined to sell after receiving a substantial offer from a different investor. They may be comfortable with the idea of giving up control of their business since it means they can secure generational wealth for their family.
Although the investor cannot stop the sale of the company, they can still profit from that transaction. The money they make from that sale will again be determined by their ownership stake. Hypothetically, the Shark could pocket a $1,000,000 profit if they had a 10 percent stake in the company when it was sold for $10,000,000.
The Sharks Benefit from Appearing on the Show
According to this article from Gorgias, the investors who appear on Shark Tank are millionaires multiple times over. If we’re focusing on Mark Cuban, he has an estimated net worth of over $4 billion.
Given their wealth, the investors on Shark Tank may not see their net worth move much based on the deals they make on the show. Instead, the show may benefit them in a different way.
The show routinely pulls in millions of viewers with each episode. It is a ratings powerhouse in the United State and it consistently ranks among the top-performing shows.
For the Sharks, being on the show means they are getting primetime exposure to a large audience. They are effectively elevating their profile by simply appearing on the show. That kind of exposure is arguably more valuable than the profits they may earn from their investments.
Moving forward, the Sharks can leverage their newfound status as TV stars to lock down better business deals. At the very least, more people will hear about and take an interest in their business ventures thanks to the show.
Do the Sharks Always Make Money on Their Investments?
The investors on Shark Tank take great care to make the right investments. They take time to examine a company carefully before they cut a check to the business owner. They may even renegotiate the terms of a deal to minimize their risk as much as possible.
Even with all of that due diligence, the Sharks don’t always make money on their investments. During an appearance on the Full Send Podcast, Cuban revealed that his investments haven’t been as profitable as he had hoped. He even shared that he had lost more money overall on those investments, Techcrunch reported.
Investing in a small company carries a significant amount of risk. It should come as no surprise that those risky investments don’t always turn out well even for the Sharks.
The investors can make money on Shark Tank if their partner companies manage to turn profits. Even without those profits, the Sharks can still benefit from the show because it gives them valuable exposure.