David R. Henderson  

Friday Night Video: Mark Cuban, Humanitarian

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This isn't the usual Friday night video. Rather, it's a mention of an ABC-TV show that my wife and I watch every Friday night. It's called "Shark Tank." I highly recommend it. It's the highlight of our Friday evening.

Five investors who are ultra-wealthy--and Mark Cuban is the most well-known--watch various small entrepreneurs present their ideas and the five ask tough questions: what's your cost per unit, what's your retail price, how do you sell--on the web or through retailers--what was your sales revenue last year, if it's an invention, do you have a patent, etc.? One or some of the five often end up funding a start-up. Of course, their goal is to make money, as one of the investors, Mr. Wonderful, always reminds the TV audience and the budding entrepreneurs. But they understand that the way to make money is to produce something people are willing to pay for. When the deal goes through, both sides win.

I have one small objection: they're not sharks, not just in a literal sense (duh), but also in the figurative sense. They're helping these people by helping themselves.

One particularly interesting segment happened last week. A father and his two sweet teenage daughters wanted $30K for a 25% stake in their business. That's the lowest implicit valuation of a firm I've ever seen on Shark Tank. All of the sharks liked the idea but not enough to fund it. So the three started to leave, with the younger daughter holding back tears, when Mark Cuban said, "Wait, come back. I just can't let you leave." He pointed out that someone had helped him early in life and he wanted to do the same for them, so he would offer what they asked. Then, surprisingly, one of the other sharks, Lori Grenier, offered them $30K for 50%--on its face, not as good a deal at all. But what she would bring to the table was her knowhow for this particular consumer product. After huddling for a few seconds, the father/daughters combo thanked Mark but accepted Lori's offer. It was very moving.

This whole show is a beautiful illustration of free markets in action. As my friend, Ross Levatter, has pointed out, there's not much cronyism. The sharks aren't looking for people who are politically connected and, to the extent they think about politics, it's their worry about liability suits for risky products.

One other bonus for the participants: even those who don't get funded--and that happens a lot--get exposure. Sometimes "Shark Tank" does updates that look at how some of them have fared and occasionally they have done very well.


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COMMENTS (8 to date)
Krishnan writes:

Fascinating show indeed ... just saw one - and interesting how the ideas are dissected - (I wonder if the investors have had some reading material prior to the show/taping) ... difficult to follow the specifics in the time allotted for each team looking for money - but can see how if something is interesting/worth funding, how they compete with each other (equity, royalty, counsel)

Eric Falkenstein writes:

I like Cuban and find his insights often very insightful and profound...but it's interesting that he thinks High Frequency Trading should be banned, or some other extreme restriction (he said at one time that exchanges should be 'nonprofit').

This is a really naive reaction to something that he doesn't understand and thus appreciate, and so he simply assumes people there are doing something bad by making money. I worked in that field, and can vouch that it has increased competition, as evidenced by much lower spreads since the good old days when they weren't around. Anyone who thinks HFT is easy money and a rigged game, has hundreds of firms who are willing and able to hire that person and give them millions of dollars.

So, it's interesting how even capitalists--real entrepreneurs--don't trust the market. They don't trust competitive outcomes when they don't understand that market.

Hana writes:

The rubber meets the road.

As a serial entrepreneur I appreciate the Shark Tank. It gives investors an early frank view of their products or concepts. The real test for each of them at this stage is will somebody invest? The investment is a validation of the concept, not a proof of the concept.

Investors and venture capitalists are scattered across the political spectrum. Crony capitalism is not a function of left or right, it is an unfortunate fixture in all countries.

Brad writes:

Shark Tank isn’t reality! Everyone knows the way to get a project funded is to make a large but innocuous political donation, attend a few democratic fundraisers, and then ask a staffer from West wing to be your CEO. If your business involves green energy, manufacturing (preferably assembling something), or organic farming you can really score big. The best part is you can privatize all the gains and socialize all the losses. It’s a perfect scam, er I mean set-up.

David R. Henderson writes:

@Eric Falkenstein,
I like Cuban and find his insights often very insightful and profound...but it's interesting that he thinks High Frequency Trading should be banned, or some other extreme restriction (he said at one time that exchanges should be 'nonprofit').
Wow! I didn't know that.
So, it's interesting how even capitalists--real entrepreneurs--don't trust the market. They don't trust competitive outcomes when they don't understand that market.
Good point. And Cuban is so self-confident that I'm betting it doesn't occur to him that if he sees something he dislikes, it can't be the case that it's because he doesn't understand it. Humility is not in my list of his top 5 virtues.
@Brad,
Shark Tank isn’t reality!
Actually, I'm pretty sure it is.
Everyone knows the way to get a project funded is to make a large but innocuous political donation, attend a few democratic fundraisers, and then ask a staffer from West wing to be your CEO.
Actually, that's not the way; that's a way. And it's not the usual way. One problem with cronyism is that it's so expensive for the government that only a few cronies can make it that way. The rest of us great unwashed have to make our money the old-fashioned way.

Mike Huska writes:

Krishnan,
No, the "sharks" know absolutely nothing before the entrepreneur comes out. Nothing about the people or the product.
After they do a deal, they get a due diligence period of course, to confirm numbers, check backgrounds, etc. and sometimes the deals fall apart because the numbers aren't what was said, etc.
Th only thing you don't see is some of the pitches last as long as 2 hours and you only get to see 5-8 minutes.

Ross Levatter writes:

For more along the same lines, especially the point that "Sharks" is a misleading term, see this.

David C writes:

@Eric Falkenstein

I assume this is the blog post to which you are referring. If that's the case, you're talking past him, and not responding to his points. For one, he does not say to ban it, he says to tax it. He even specifically mentions not using regulatory changes to handle the problem. He never claims that HFT is easy or rigged. He feels that HFT increases volatility without improving efficiency within the market. This is a common theme on his blog where he writes quite frequently about changing the tax structure on stocks to encourage long-term investment.

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