Mark Cuban and Other 'Sharks' on What Makes a Hot Business Idea

LOS ANGELES--Would you buy sunglasses made out of wood? Or a frozen "gumbo brick" you add your own chicken or sausage to? Or a bird feeder that zaps squirrels with an electric shock, to dissuade them from feasting on seed meant for birds?

These were some of the next big ideas pitched recently on the set of Shark Tank, the ABC reality show in which entrepreneurs seek funding from a panel of "shark" investors, including billionaire Mark Cuban, fashion magnate Daymond John, Canadian venture capitalist Kevin O'Leary, QVC diva Lori Greiner, tech multimillionaire Robert Herjavec, and former real-estate tycoon Barbara Corcoran, who alternates with Greiner.

The popularity of the show, which airs Fridays at 8 p.m. and is now in its fourth season, reflects a rise in entrepreneurship in recent years, due to the declining appeal--and availability--of corporate work. Entrepreneurship has also become sexy, thanks to rich celebrity innovators such as Steve Jobs, Mark Zuckerberg and, well, Cuban, who owns the Dallas Mavericks basketball franchise and has appeared on Dancing With the Stars, among other adventures.

[See The 10 Youngest Billionaires in the World.]

Everybody, it seems, has a great product that will become the next Snuggie, Razor scooter, Facebook, or Twitter. Two that got offers so far this season: a belt buckle that doubles as a beverage holder and a bedbug early warning indicator.

U.S. News sat in on two days of intensive taping earlier this fall as more than a dozen hopefuls made their case. (We were allowed to publish details of the pitches, which haven't all aired yet, provided we don't reveal whether they led to a deal or not.) Entrepreneurs who are already running a business typically ask the sharks for investments ranging from $10,000 to several hundred thousand dollars, in exchange for partial ownership of their companies. The sharks dissect the business plan, with some typically being supportive and others skeptical. Sometimes, the sharks attempt to trump each other's bids in order to get a piece of the action. Other times, everybody takes a pass. And occasionally, a gutsy entrepreneur will turn down a lowball offer or one that comes with too many strings attached.

Hanging out with entrepreneurs is a welcome antidote to the gloom that pervades much of the economy these days, since they tend to have an infectious optimism, no matter the unemployment rate or the direction of the stock market. But building a successful business can be crushingly difficult and far less glamorous than anything you'll ever see on TV. And making a pitch to investors--whether on-air or off--can be a test of any business owner's ego and grit.

A lot of people clearly buy into gauzy myths about entrepreneurship that true pros know are bunk. Some of the most common misperceptions: A great idea will automatically lead to a great business; as long as you're passionate, everything will fall into place; and more cash or better connections are all it will take to "get to the next level," a common cliché. "Most of us started with no cash and no connections," Cuban said after taping ended one day. "True entrepreneurs find a way. Those who aren't true entrepreneurs find excuses." Cuban should know. As a teenager, the Pittsburgh native earned extra cash by selling garbage bags, stamps, and coins, sharpening entrepreneurial skills that helped him launch several successful technology firms in the early days of the Internet. His latest ventures include HDNet and the Landmark theater chain.

Each shark seems to prefer investing in a particular type of enterprise. Greiner, for example, looks for businesses that have patents, so competitors can't simply steal their idea or copy their technology. O'Leary likes people who have analyzed the cost of acquiring customers and can keep it relatively low. John likes ideas that can be licensed to more established producers, which is sometimes a more plausible way to make money than trying to take market share away from entrenched companies. But all of them tend to look for innovators who can answer certain basic questions:

Would your enemies buy it?

One common mistake entrepreneurs make is falling in love with their own idea or testing it out only within the comfort zone of family and friends. "Entrepreneurs constantly tell me, 'My friends love it,' " said Corcoran. "I can't think of a worse test. Instead, pitch your ideas to enemies. Take it to your mother-in-law. Falling in love with your own concept is poison."

While seeking funding for his "Gobie H2O" water bottle with a built-in filter, entrepreneur Rusty Allen of San Diego did a demonstration for the sharks in which he filled one of his bottles with dirt, poured in water, attached the filter, and then drank the crystal-clear water that came out. It must have wowed his friends, but the sharks raised a few tough questions. "You're drowning in perceived opportunities," Herjavec told him, pointing out that other companies--including big ones like Brita--sell similar products. "Tell me one unique thing about your product. When you're small, you've got to know what's the one thing that makes you different." Allen countered that his bottle is good for the environment and also saves money, since it eliminates the need to buy disposable plastic bottles of water.

Michael DeSanti of Honesdale, Pa., tried to convince the sharks that there were millions of potential buyers for his "Squirrel Boss" bird feeder, which comes with a remote control the owner can use to send a nonlethal electric current through the feeder when a squirrel starts gobbling up the seed. The sharks found it to be an entertaining idea--but wondered whether millions of people would be willing to shock squirrels. "It's a quirky product," Herjavec told him. "We're just not seeing the business." DeSanti buffered his case by explaining how he might be able to lower the price and add features that would appeal to more people.

Does it target the right niche?

Entrepreneurs can also become so attached to their original idea that they lose sight of broader opportunities. Robert Gifford of Everett, Wash., pitched a line of modular, multifunctional furniture, which he called "Geek Chic" because of his own predilection for slide rules and protractors. The sharks liked the product, but challenged the positioning. "We have to take the geek out of it," Greiner insisted. "I don't know how that helps your marketing." The sharks suggested that he try to broaden the appeal, and make sure potential female buyers didn't get turned off. Gifford staunchly defended his geek label, confident he had identified an underserved niche.

Have you tested the market?

Any investor willing to fund a business is likely to ask for evidence of thorough testing in the marketplace. Dallas entrepreneurs Aimee Miller and Megan Carreker, who sought backing from the sharks for their upscale line of "Hip Chixs" jeans, got an earful on the importance of rolling out their products in more than just a few boutiques before asking for money. The Dame brothers of Boise, Idaho--Brooks, Tanner, and Taylor--earned some quick credibility with the panelists by explaining how their company, Proof Eyewear, already has a contract with retailer PacSun to sell thousands of pairs of its trendy wooden sunglass frames at prices starting at $90. "The good news is, in a down economy, you're getting interest in your product," John told them. "It's also good that you're in the only thing that's selling right now, and that's accessories."

[Read: How to Build a Creative Business.]

Is it scalable?

One of the trickiest moves for any startup is scaling the business from a small company with modest sales and a few employees up to an operation that can fulfill large orders, finance lots of inventory, and absorb the shock when something goes wrong. Getting over this hump is a main reason entrepreneurs seek outside financing, along with the kind of expertise the sharks and other investors might be able to offer. But many businesses aren't as scalable as their founders think. Established competitors can be powerful and ruthless. And a product that's popular among a small band of enthusiasts won't necessarily be a mass-market hit.

Lani Lazzari, an 18-year-old from Pittsburgh, wowed all of the sharks with her entrepreneurial zeal when she described a line of all-natural exfoliating scrubs, called Simple Sugars, that she started developing when she was 11 to treat her own eczema. While other kids were jabbering on Facebook or going to the movies, Lazzari was researching the properties of creams and oils for scrubs that have racked up more than $55,000 in sales so far. "I love the story," O'Leary--perhaps the surliest shark--gushed. "The Kumbaya moments. I want to cry."

But the business plan made him want to cry, too. "The cosmetics industry is the most competitive on earth, because the only products that have higher margins are illegal," he instructed her. "You've found a niche position, but to scale it is going to be very, very challenging. There's nothing proprietary, it's a brand nobody's heard of yet, and it's so simple that, well, an 11-year-old can do it."

Lazzari stood her ground. "When I hear 'no' I'm just not talking to the right person," she retorted. More funding, she insisted, would allow her to hire some salespeople and sign bigger contracts. Still, many small business owners have learned the hard way that bigger competitors will happily squash young upstarts if all they need to do is copy a clever new set of products. A technology edge, a celebrity endorser, or a hot brand can help prevent that--but also can be prohibitively expensive.

What does impress the sharks, and many venture capitalists in places like Silicon Valley, is a well-researched business plan that anticipates what might go wrong and accounts for the way bigger competitors might react to a newcomer trying to grab market share. "This is all about risk management," Cuban explained. "You've got to do everything in your power to reduce your risk, and 98 percent of that is about information. You can't get it all, but there are so many things you can do to get information about your industry or your competition."

Researching them on the Internet is an obvious place to start. Interviewing possible customers might yield insights on market opportunities and competitors' vulnerabilities. The more data you can gather on the size and contours of your target market, the better prepared you'll be when investors start peppering you with questions.

What's your personal story?

Sometimes the final decision to fund may come down to intangibles that don't show up on balance sheets. Carole Foster of Los Angeles came on Shark Tank looking for $200,000 to help expand her food business, which sells frozen "gumbo bricks" that serve as the stock for a meal serving up to eight people. She had one big point in her favor: A starter deal with the wholesale giant Costco to sell her bricks at a few of its stores. But when Cuban asked how she did her accounting, she admitted, "Not very well. I need the business acumen. I don't have that."

[See 10 Books Investors Should Read.]

"Your product is great, but your business is not investable yet," O'Leary told her. Then Foster explained that to keep her operation going, she and her 12-year-old daughter had been living without a home of their own, alternating between temporary arrangements with family and friends. Instead of paying rent, she said, she put every available penny back into the business. Meanwhile, six brothers and sisters took orders and made deliveries, to help keep the gumbo flowing.

O'Leary took it all in, then declared, "That's what makes America great. People like you willing to work their ass off."

For a brief moment at least, it seemed that Foster might have tamed a shark.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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