What Happens When Shark Tank Meets Venture Capital? Seriously.

Shark Tank’s Barbara Corcoran joined forces with serial startup founder, Phil Nadel. The result is disciplined venture capital.

Barbara Corcoran is among the most successful entrepreneurs in America, a master at judging founder talent, and one of the “Sharks” on the ABC show, Shark Tank.

So when she decided to launch Barbara Corcoran Venture Partners, it was no small compliment that she turned to serial startup maven, Phil Nadel.

Nadel has several successful exits including American Media Group ($130M in revenue) and Cambridge Capital Management Group, to his credit. He has invested in more than 60 early-stage companies and is a Wharton graduate.

I caught up with Phil recently while he was in between deal meetings and got his take on the tough questions entrepreneurs ought to think about as they steer their early stage companies towards an exit (I am a member of his syndicate, in full disclosure).

Barbara Corcoran of Shark Tank and BCVP Partners

How did your relationship with Barbara Corcoran start?

Barbara and I became partners over three years ago. We were talking about working together and AngelList announced their syndicate feature. I said to Barbara, “Hey, this is a great opportunity. Why don’t we start a syndicate so that individual investors can invest alongside us?”

What do you bring to her world and vice versa?

Barbara doesn’t have a lot of time to analyze and negotiate the deal flow and I bring due diligence skills and some additional industry breadth so it’s very complimentary.

Barbara brings tremendous business savvy, she’s a great judge of people, and very significantly, Barbara’s deal flow is astounding.

Can you compare Shark Tank to venture capital?

The companies on Shark Tank are typically early-early-stage, even mom-and-pop-type level. Let’s remember, Shark Tank is a network TV program first.

The companies that Barbara Corcoran Venture Partners looks at are post-revenue Seed rounds or Series A-stage. They’re further along, more developed, and have a much more robust business model.

What could technology startups learn from Shark Tank?

There are two important lessons our founders could take away from Shark Tank. I can’t over-emphasize the importance of understanding your KPIs (key performance indicators).

Entrepreneurs need to have to have the right data and know it intimately. You’ve probably seen on the show, the Sharks are not kind to founders who don’t know their numbers. It’s a real turn-off.

Any other lessons founders could take from Shark Tank?

You need to solve a real problem.

Founders need to understand that sometimes products sound great, may even have great technology, but are not necessarily solving a problem or making someone’s life easier. It becomes infinitely more difficult to sell.

Phil Nadel, co-founder, BCVP

You’re looking for companies to scale up hugely. How blunt do you have to be with founders?

In some ways, scalability defines our brand of venture investing. We want founders to be very clear about the scope of the addressable market.

The question we always ask, “so if you do everything right, how large could this get?”

Number two in terms of scaling, do they have a cost-efficient way of acquiring customers? Have they already tested that and can they continue to scale in a capital-efficient way?

With your huge deal flow, do you fear getting over-confident and missing a diamond in the rough?

You know, it’s difficult to pick winners, right? Yeah, occasionally, you hear an idea, and you say, “Well, I dunno. No one’s gonna buy that.” It could be arrogance or just not understanding the pain point, but I think that any active early-stage investor is guilty of those mistakes.

My feeling is you can’t have regrets about missed deals.

You try to learn. What should I have looked for? What were the signs that I overlooked?

When you pass on a deal is it because you were turned off by the person or the idea?

For me, it’s more frequently the idea. Also, keep in mind we are focused on post-revenue deals, so when we do miss, it’s usually because the deal was pre-revenue.

Every investor needs discipline, and one area where we are very disciplined is that we like to see revenue, some early evidence that someone’s willing to pay for the product or service.

What hot buttons do you look for in an entrepreneur?

Ideally, we like to see an entrepreneur who’s done it before. Multiple exits, multiple startups are preferred. Those entrepreneurs have a level of experience that a first-time founder just doesn’t have.

What is the single most important factor in making your investment decision?

A very big thing is traction.

We want to see month-over-month growth. We want to also see that they’ve already had some early indications of being able to scale, indications of repeatable paid customer-acquisition channels.

Then, we want to know they have a reasonable enough runway after the closing of the round to do some testing and some iterating and have wiggle room. Projections almost never work out, so you want the company to have some time to figure out a plan B.

What gets in the way of a company scaling up?

At the stage we invest, we often see some ups and downs because they’re trying to figure things out, and they’re also, generally, on very tight budgets. As they’re developing the product, and investing in engineering, and development, they may have to curb their spend on customer acquisition.

There are a lot of trade-offs, at an early stage.

Also, they may still have a limited number of customers, especially when you’re talking about enterprise solutions, so a loss of a single customer can have a dramatic impact.

Great wine grows in soil short on nutrients. Similarly, is a tight budget good for a startup company?

I think it is a good discipline for companies to operate on tight budgets, and I get concerned about companies that raise too much. There are all kinds of ways they can waste money.

What are the top reasons startups fail?

There are countless missteps that will doom a company, like spending too much, too quickly, and cutting your runway too short is towards the top of the list.

Conversely, what helps a startup succeed?

First and foremost, the right founding team where there’s a great deal of strong chemistry that gives them the confidence they can go through this harrowing experience.

A founding team that is truly a team, and not a group of people who just met.

Is product marketing much easier due to social media?

I would say marketing is easier but also very crowded. We all get a lot of tweets and posts, but attention span is so limited. It’s easy to push a button, and your message goes to thousands, but it’s difficult to get anyone to take action.

Google, Amazon, Facebook and Apple were started by co-founders. Are two heads better than one?

It’s difficult for a single founder to have such diverse skillsets that he or she’s able to do everything.

Having at least two co-founders allows people with complementary expertise to run the company, bringing different areas of expertise. Typically, you’ll have someone who’s experienced in sales and marketing, and their co-founder may be experienced in product development.

Sometimes a team of three is even better. But we also continue to invest in plenty of companies with sole founders, if we’re confident in their skillsets.

What do the strongest startup founders have in common?

The best founders are the ones who are brutally honest about their strengths and weaknesses and not afraid to share these with investors.

If you talk to a founder who leaves you with a sense of, “I can do it all,” that’s an automatic red flag.

What about passion?

Passion is not always obvious. A founder might start out passionate about something and they end up with a solution that doesn’t flow logically from that passion, but there is a connection.

We always try to get an understanding of why did the founders form this company? What drove them? Sometimes, it’s just, “I saw a great opportunity,” and sometimes it’s based on a deeper, burning passion.

Are you seeing more women as founders, and how does Barbara feel about investing in diversity?

We like investing in companies founded by women.

Although we are not seeing as many female founders as we would like or as there should be, and I don’t think the numbers are increasing as quickly as we would like, we’ve invested in several companies started by female founders including AptDeco, Barn & Willow, Educents, Wevorce.

Barbara certainly is very outspoken on the diversity issue. I think that she would advise women to take the plunge and consider starting a business of their own.

How much time does it usually take for an early stage company to exit?

We invest at the Seed, and Series A stage, typically, so you have to figure at least five to seven years, minimum.

What trends are you seeing in valuations?

In Silicon Valley, some of the companies are raising at crazy valuations. We consider ourselves to be a value investor in early-stage investing, if there is such a thing.

What is the difference between what you do and an amateur investor?

The main differences are around deal flow, being able to source deals from stronger entrepreneurs, having a basket of deals to look over and compare. Then, we get a really good handle on the cash burn both prospectively and track that closely in real time.

Add to that, there are the metrics, understanding their margins, customer acquisition cost and payback period, and we really try and understand how the company is going to scale.

A key mistake that amateur investors make is not having a sense of the runway. Sometimes, they will invest at such an early stage, the company isn’t raising enough money and they may not be able to raise or founders will have to take their eyes off growing the business.

I also think that amateurs often make the mistake of investing in just one or two startups. In order to have a reasonable chance to generate a solid ROI on your investment, you really need to build a diversified portfolio.

You’re investing in early stage companies. How can you be sure things are meeting expectations?

We encourage all of our portfolio companies to be as transparent as possible, but some of them feel uncomfortable sharing too much financial data because they’re afraid it’s going to get into the wrong hands.

But many are very transparent and share that information at least at a high-level, “Here’s our runway. Here’s our cash in the bank.”