How Are Shark Tank Companies Valued?

There are several important factors that go into helping the investors on Shark Tank decide whether or not they want to offer an entrepreneur a deal, as well as what the terms of the deal should be in order for it to be a lucrative one. 

The factor you’re probably most familiar with is the pitch, which is what most of the show revolves around, but valuations, or dollar values that tell what a company is actually worth, also play a critical role.

Understanding how Shark Tank valuations are determined can give you a better idea of what’s going on in the Sharks’ heads when they’re evaluating a potential deal and making counter offers or negotiating the terms of deals.

‍

How Do the Investors Calculate Valuation on Shark Tank?

On Shark Tank, valuation is often presented as a straightforward calculation, but it is influenced by a variety of factors that go far beyond mere numbers. But before we go into what those factors are, let’s back up for a second and take a look at the two types of valuations on Shark Tank: ask valuations and deal valuations.

The ask valuation is the valuation given to an entrepreneur’s company, which we can easily determine by looking at the amount of money a business owner is asking for and the percent of equity they are offering in return.

For example, if an entrepreneur walks onto Shark Tank asking for $100,000 in exchange for 10% equity, this request implies a $1 million valuation, since $100,000 is 10% of $1 million.

When an entrepreneur makes an ask and pitches their product or service on Shark Tank, the Sharks immediately start assessing whether the implied valuation, the ask valuation, aligns with their own perception of the business’s worth.

Among other things, they consider financial metrics, such as current revenue, profit margins, and growth trajectory. This approach, though simplified for television, involves deeper scrutiny of the business’s potential to scale and generate returns.

The deal valuation is the fair business valuation that the Sharks think a business should have. We can tell what the deal valuation is whenever a Shark makes an offer.

If a Shark accepts an entrepreneur's offer, then they agree with the ask valuation. On the other hand, if they make a counter offer, we can calculate the deal valuation from that.

For example, let’s say a Shark makes a counter offer to an ask of $100,000 in exchange for 10% equity, offering $100,000 for a 20% stake. This would mean that the Shark thinks the company should have a valuation of $500,000 instead of $1 million, since they are asking for twice the equity for the same amount of money.

‍

Factors Influencing Valuation on Shark Tank

Now, let’s examine several key factors that influence the Shark Tank valuation process, each of which contributes to helping the Sharks decide whether or not to invest in an idea and, if they choose to offer a deal, what deal valuation they offer or agree on.

‍

Business Model and Revenue Streams

The business model, including any existing or planned revenue streams, is a central factor in any Shark Tank valuation. 

Sharks analyze how a company makes money, carefully considering its revenue streams and pricing strategies. 

Subscription-based business models, for instance, often attract higher valuations due to their potential for recurring revenue. Diversified revenue streams, such as those from multiple products, can also be a positive indicator of high revenue potential, suggesting stability and multiple avenues for long-term growth.

If you watch enough Shark Tank, you’ll notice that one of the first questions the Sharks ask is usually something along the lines of, “How much money have you made?” 

Based on the entrepreneur’s answer to this question, the Sharks can do some very quick math to help them determine the company’s valuation. This is known as valuing a company using an income-based valuation method.

If the company isn’t yet making money, the Sharks might use a market-based valuation method, which involves comparing the company’s business model to similar companies already in existence to determine a valuation based on revenue potential.

‍

Market Size and Growth Potential

The Shark Tank valuation formula also involves looking at market factors, especially market size and growth potential. A business operating in a large, rapidly growing market is generally more attractive to investors. 

The Sharks look for indications that the market is not only substantial, but also expanding, offering ample room for the business to grow and capture more market share over time. They evaluate industry trends, customer demand, and potential market penetration.

As you probably know from watching Shark Tank, some of the products or services are, shall we say, a little bit “out there,” so the Sharks also consider marketability when determining valuations. After all, market size and growth potential don’t mean anything if you can’t successfully market the product!

Competitive Landscape

Of course, the competitive landscape is another important factor in determining a company’s valuation on Shark Tank. 

Understanding the competitive landscape helps the Sharks assess a company’s positioning and potential longevity. They consider the number and strength of competitors, the company's unique selling propositions, and potential barriers to entry. 

A company with a strong competitive advantage, such as a patented technology or a unique product, is likely to command a higher valuation, whereas a company that’s just making a different version of something that already has tons of versions out there, like a cooler or a sponge, probably isn’t going to receive a high valuation. Of course, there are always exceptions to this rule (like Scrub Daddy).

‍

Founder's Experience and Team 

Lastly, the Sharks consider the founder's experience and the strength of the team as additional vital components in the Shark Tank valuation equation. 

Sharks look for entrepreneurs with a proven track record, industry expertise, and a clear vision. A strong, well-rounded team can execute the business plan effectively, increasing the likelihood of success. 

The Sharks often ask questions about the team's background, skills, and cohesion before landing on a final deal valuation.

‍

Why Shark Tank Valuation Isn’t How To Value a Startup in Real Life

It’s important to keep in mind that, while the deals are real, Shark Tank provides a dramatized glimpse into the investment process, with valuations determined on air in a limited amount of time and with a limited amount of information.

In reality, the startup valuation process is much more nuanced and time consuming. It involves comprehensive due diligence, market analysis, and negotiations that extend beyond the show's format.

In fact, these are all things that happen behind the scenes after a Shark Tank deal is made on air, which is why many deals never get finalized — new information can come to light during the due diligence process that causes deals to fall through or, at the very least, have their terms renegotiated based on a more accurate valuation.

Here are some other reasons why the Shark Tank valuation process is not as accurate as in real life and doesn’t fully represent how real startup valuations work:

‍

Simplified for TV

Shark Tank drastically simplifies the startup valuation process for entertainment purposes. In real-life scenarios, investors conduct extensive due diligence, examining financial records, legal documents, and market research before agreeing on a valuation.

‍

Negotiation Dynamics

The fast-paced, high-pressure environment of Shark Tank that gives the show its name often leads to valuations being influenced by negotiation tactics and the immediate impression of the pitch. 

In the real world, venture capital investors take a more measured approach, taking their time to consider data and accurately determine a valuation to be sure of the viability and strategic fit of a deal before making an offer.

‍

Wide Public Audience

The presence of cameras and the potential for national exposure can skew valuations on the show. Companies might receive higher valuations due to the perceived marketing benefit of appearing on Shark Tank, which isn’t a factor in typical startup investment discussions.

‍

Emotional Influence

The Sharks’ personal biases and emotions can impact their on-air valuations. In real-world investments, decisions are more data-driven and less influenced by immediate personal reactions.

What Is the Highest Valuation on Shark Tank?

The highest Shark Tank valuation ever was for LARQ, whose founder Justin Wang came onto Shark Tank asking for $500,000 for 1% equity, giving the company an ask valuation of a whopping $50 million.

LARQ is a self-cleaning water bottle, which uses UV-C light to kill 99.99% of the bacteria inhabiting the bottle in a matter of seconds.

Upon hearing the incredibly high ask valuation, the Sharks immediately burst into laughter, but it wasn’t over yet.

After Wang’s pitch, the Sharks began questioning the founder about why he gave his company such a high valuation, starting with Robert Herjavec asking him about the market opportunity. Wang was ready with data about the growing reusable water bottle market.

Lori Greiner then followed up by asking Wang about the UV light cleaning technology used in the LARQ bottle. He explained how the optical system worked, highlighting that his co-founder holds a PHD in physics from Caltech university to lend credibility to the technology.

The Sharks then moved into discussing the competition, learning from Wang that LARQ was the first self-cleaning water bottle to launch on the market and already had about 10 patents covering its technology.

Next, Kevin O’Leary asked the literal million-dollar question, “Why is it worth $50 million?”

Wang replied that the company had done a little more than $5.5 million in sales during its first year, and more than $9 million over the last year. He projected growing that revenue to $14 million for the next year.

After further discussing the company’s financials and watching some more demonstrations of LARQ’s technology, Daymond John was the first to opt out of a deal. But Kevin O’Leary kicked negotiations off by making a counter offer of $500,000 for a 4% stake, which would give the company a $12.5 million valuation.

Lori Greiner was next to make a counter offer, offering $500,000 for a 5% stake, representing a $10 million valuation.

Herjavec was the last Shark to propose a deal, offering LARQ $500,000 in exchange for 3% equity and 2% in advisory shares, giving the company a valuation of approximately $16.7 million.

After considering the offers, Wang came back with his own counter offer of $1.5 million for a 4.5% stake and 1% in advisory shares, representing a valuation of $33 million.

O’Leary, Kerjavec, and Greiner made yet another counter offer, jointly offering Wang $1.5 million for a 6% stake (2% to each investor) — a $25 million valuation.

Wang still wasn’t happy with the offer on the table, leading to more negotiations, with Herjavec now backing out. 

Ultimately, Wang made a joint deal with O’Leary and Greiner for $1 million in exchange for 4% equity, giving LARQ a deal valuation of $24 million.

The LARQ pitch stood out not only for its record-breaking valuation request, but also for the intense negotiation dynamics.

‍

Failed Shark Tank Valuation Story

The Skinny Mirror pitch on Shark Tank was memorable for another reason  — it was a totally failed Shark Tank valuation request and one of the worst Shark Tank pitches in history.

Skinny Mirror’s founder came onto the show asking for $200,000 for a 20% stake, giving her company an ask valuation of $1 million.

The Sharks immediately shut her ask valuation down, highlighting the fact that her mirror technology, designed to make the person standing in front of it appear slimmer, didn’t have any patents and that anyone could simply buy that type of glass.

Kevin O’Leary quickly shooed her out of the Shark Tank, calling her business a “sham” and forbidding the other Sharks from investing in it.

You may also want to read our article on the 15 Worst Shark Tank Pitches.

‍

Wrapping Up

Understanding the Shark Tank valuation formula provides insights into how the Sharks assess potential investments, demystifying some of their decision-making processes and teaching viewers how to calculate valuations on Shark Tank.

Beyond the entrepreneur's pitch, key factors such as their business model, market potential, competitive landscape, and experience play crucial roles in landing on a final valuation. 

Keep in mind that the ask valuation represents the entrepreneur's proposed value for their company, while the deal valuation reflects what the Sharks believe the business is truly worth based on the limited analysis they’re able to do on the air. 

It’s also important to remember that Shark Tank drastically simplifies the business valuation process for entertainment purposes, and real-life startup valuations involve extensive due diligence and more data-backed negotiations before an investment deal is ever offered.