How does Shark Tank make a profit

Shark Tank is one of the most popular business and investing related shows on TV.

The show combines negotiation, finance, and salesmanship in a one-hour program where “sharks” (financiers) compete with one another to finance a business in need of funding. These businesses are typically very small businesses or fresh startups.

Shark Tank is some of the best exposure a business owner could ever get. Following an appearance on the show, business owners report that their sales skyrocket, often to the tune of several times their ordinary sales pace. But getting your business on Shark Tank is far from free.

What it costs to be on Shark Tank

The New York Times finally exposed how much entrepreneurs give up to be on the highly popular show. You ready for this?

Business owners have to give up 5% of their business or pay a 2% royalty on operating profits (presumably in perpetuity) to the producers of the show and ABC.

Is it worth it? Probably. The show pulled 7 million viewers per episode. Assuming that you can sell your product to just .1% of viewers (1/1000), you’d rake in an additional 7,000 sales. Heck, if 1% of viewers went to your website while the show aired, the buzz would be incredible – thousands of new social shares on Facebook, Twitter, as people send your site to others who may be interested.

I don’t think these are particularly unreasonable guesstimates. For one, 77% of TV viewers report that they frequently use a computer while watching television.

Secondly, people who watch Shark Tank are inherently more interested in discovering new businesses and products than people who watch Dancing with the Stars or American Idol.

Shark Tank is genius

The show is obviously one of the most commercialized shows in existence. All the while business owners pitch their financials, they’re also pitching their businesses. Plus, the show is heavy on in-content advertising, promoting T-Mobile every chance they get. It’s almost funny how poorly they try to fit T-Mobile phones into the show.

The producers and ABC are certainly raking it in. Some businesses report generating millions of dollars in revenue after the show. Others won’t disclose, which says to me that they’re doing really, really well. The producers and ABC are grabbing equity stakes of 5% or 2% royalties on all operating profits for any business on the show.

The show cannot be that expensive to produce. There’s no special effects, no big-name stars on the show, nor is there a story line to write out for each episode unless, of course, Shark Tank is just a scripted scam.

“Why didn’t I think of that?”

I’m envious of the producers. A low-budget show has extraordinary ratings and huge success on TV, but the kicker is in the royalties and equity agreements. If you could grab 5% of a startup that recently aired on TV in front of millions of people at NO COST TO YOU, you’d have to be killing it.

It’s still pretty early in the show’s life, so what’s to say the producers won’t claim 2% of operating profits from the next Google? Google makes about $50 billion in operating income each year! 2% of that haul is $1 billion.

Nice work, Shark Tank!

P.S. My favorite Shark is Kevin O’Leary. The guy is a value investor through and through, preying on businesses that have something of exceptional value like patents as defense against the competition.

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