Rinkle Dudhani
·
Nov 10 2024
If you're a viewer of Shark Tank, you've likely heard the Sharks fire off questions like "What's your revenue?" or "Is your intellectual property patented?"
These Shark Tank business terms are as common as they come on the show. But if you've ever found yourself scratching your head over the explosion of financial jargon, fear not. This article is your guide to understanding the essential terms used in Shark Tank. Whether you're an entrepreneur preparing to make your pitch or simply a fan looking to enhance your viewing experience, learning these terms will improve your Shark Tank experience.
Pay careful attention to these Shark Tank business terms during your subsequent episode viewing or when attending a real-life pitch. This way, you'll grasp their practical significance and understand how they apply in the entrepreneurial set-up:
Valuation is the assessment of a business's worth, crucial for investors and entrepreneurs. For instance, if a tech startup is valued at ₹ 1 crore, it implies that the investors believe its potential is worth that amount based on factors like growth projections and market demand.
For example, Diksha Singhi, the founder of "A Little Extra", in her pitch, asked for an amount of ₹48 lakhs against 6% equity of her company. This ask valued her business at ₹8 Crores.
48 Lakhs / 0.06 = 800 Lakhs = 8 Crore
To calculate the valuation of a business based on this example, you can use the following formula:
Valuation = Investment Amount / Equity Stake
Equity represents ownership in a company, often given to investors in exchange for funding. For example, if an investor contributes ₹5 lakh for 10% equity in a startup, they own that 5% portion of the company. They will eventually receive profits proportionate to their stake.
You can also calculate equity using the formula below:
Equity = Investment / Total Valuation * 100 %
An angel investor gives money to a new business in exchange for equity or convertible debt. They're also called informal investors, seed investors, or business angels.
These startup investors are usually affluent and want to make more money than they would with regular investments. They're often willing to wait longer for their investment to pay off and may give smaller amounts of money over a longer time.
The seed round is the initial round of funding for a startup. This funding is usually provided by friends, family, angel investors, or early-stage venture capitalists to help develop and launch the product or service.
Gross refers to the total revenue a business earns before deducting expenses. If a store earns ₹50 lakhs in sales, its gross revenue is ₹50 lakhs before subtracting costs like rent, salaries, and utilities.
In the episode featuring Lea Clothing, founder Lavanya Aneja impressed the Sharks by revealing her business's gross margin of 80%. Their reaction showcased how immensely impressed they were with her business's financial performance.
You can calculate the Gross Margin using the formula below:
Gross Margin(%) = (Revenue - Cost of Goods Sold/Revenue) * 100%
Net income is the profit remaining after all expenses, including taxes and depreciation, have been deducted from total revenue. For instance, if a company earns ₹30 lakh in revenue and incurs ₹20 lakh in expenses, its net income is ₹10 lakh.
Net Income = Revenue - Expenses
Margin indicates a company's profit from its operations, calculated by subtracting total costs from revenue. A higher margin signifies more efficient operations and more robust profitability. For example, if a product costs ₹200 to produce and sells for ₹500, the profit margin is 60%.
Margin profit plays a vital role in understanding a business's growth. Your marginal profit should be higher to gain trust in your business potential in front of sharks.
To calculate the margin, use the formula below:
Margin = (Revenue - Cost/Revenue) * 100%
ROI measures the profitability of an investment relative to its cost. For example, if an investor puts ₹1 lakh into a project and receives ₹1.5 lakh in return, the ROI is 50%.
Use the formula below to calculate ROI effortlessly:
ROI = (Net Return/Cost Investment) * 100%
Due diligence is the research work a business does before entering into any transaction or paper deal with a third party. This investigation helps the business trust the party and understand the benefits or risks of working with the third party.
This could easily be done by looking over publicly updated information or by checking on the employees, the progress the product made and its potential to grow the business.
You might have heard repeatedly on Shark Tank India, "Please tell us your EBITDA". Well, now you'll finally understand what it means.
EBITDA stands for "Earnings Before Interest, Taxes, Depreciation, and Amortization." It provides a clearer picture of a company's operating performance by excluding non-operating expenses. This is a commonly used way to assess a company's financial performance and capacity to make money.
EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization
EBITDA = Operating Income + Depreciation + Amortization
In a royalty deal, an investor gives money to a company and, in return, gets a share of the company's sales. This could be a percentage of sales or a fixed amount for each product sold.
Let's understand this with a real-life example. In the pitch of Adil Qadri perfumes, Vineeta Singh invested ₹ 1 crore for 1% equity plus 1% royalty of net revenue until she gets back her ₹ 1 crore.
Customer acquisition refers to the process of gaining new customers for a business through marketing and sales efforts. For instance, a social media platform may use targeted advertising campaigns to acquire new users.
The target audience is the specific group of people that a business aims to reach with its products or services. For example, a luxury fashion brand may target affluent consumers aged 25-40 with high disposable income.
Convertible notes are loans provided to founders by startup investors that can be converted into equity later. This is generally done during a future financing round. They allow startups to raise capital without immediately determining their valuation.
Advisory shares are equity stakes granted to advisors or consultants of a company in exchange for their expertise and guidance. For example, a startup may offer advisory shares to a seasoned entrepreneur who provides strategic advice.
Market value is the price at which an asset would trade in a competitive market setting. For example, the market value of a publicly traded stock is determined by supply and demand on the stock exchange.
A purchase order is a document issued by a buyer to a seller confirming the details of a purchase, including the quantity, price, and terms of sale. For example, a retailer may send a purchase order to a supplier to order inventory for their store.
A soft launch is a limited release of a product or service to a small audience to gather feedback before a full-scale launch. For example, a software company may release a beta version of its app to a select group of users for testing.
Intellectual property refers to creations of the mind. It may include inventions, literary works, artistic works, and names used in commerce. Patents, copyrights, trademarks, or trade secrets protect different types of intellectual property.
You'll understand more clearly what IP means through the pitch of Bio Ecotraps, where the co-founders mentioned that their invention helped drop Dengue rates by 80%!
Crowdfunding is a method of raising funds for a project or venture by collecting small amounts of money from a large number of people, commonly via online platforms like Kickstarter or Indiegogo.
Shark Tank India is an iconic show that has made multiple businesses overnight successes. As an entrepreneur, understanding these Shark Tank business terms is crucial. Being well-versed in them improves your presentation skills, boosts your confidence, enhances communication, and increases your chances of seizing opportunities. However, these terms are just the tip of the iceberg. Stay tuned for more insightful articles, and continue enhancing your knowledge.
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