As a top investor on ABC’s Shark Tank, Kevin O’Leary is known for his direct and sometimes abrasive approach with hopeful entrepreneurs. He is also the co-founder and chairperson of O’Leary Funds and the co-founder of SoftKey, all of which have helped him amass an estimated net worth of $400 million.
“Mr. Wonderful” (as fans have dubbed him on Shark Tank) shared with me some powerful insights, including what it takes to make it as an entrepreneur and investor, his one simple rule for when to let a business go and how his journey to become a self-made man started with a girl and an ice cream shop.
1) You started your career as an entrepreneur when you launched SoftKey Software Products from your basement. You had a big idea but no money, and you made it work. What tips or advice do you have for a company just starting out, and what is the single most important thing to do in those early days?
The key is to focus on sales, because you do two things simultaneously by doing that. Number one is you validate your concept. If you can actually get paying customers who are willing to buy your product or service, it proves you have the right idea in the first place, and now you just have to make it bigger.
It also provides you with the cash flow that you desperately need. What I would often do in those early days, particularly for customers who were asking for discounts or extended payment terms, was say, “Look, I’ll give you a discount if you pay me up front. I’ll work closely with you and support you and make you very important in our lives so that you’re rewarded for helping a small company grow.” And it worked!
I found that if the product was adequate for the market, or even better than the market wanted, we were able to sell it. I think if you are not willing to do that work—and it is the hardest work there is to get up in the morning with a small company and go get revenue—then you are not going to be a successful entrepreneur. It’s that simple. It’s all about selling. That is what the first two years are all about.
2) Tell me about your favorite investments on Shark Tank. What are the most important criteria you look for when making an investment?
Let’s take something really simple, like a commodity—like cupcakes.
We could do cupcakes no one ever heard of. They came on Shark Tank about four years ago now, and they are about to sell their millionth cupcake next week in Faneuil Hall in Boston.
The company is wildly successful, but all they did was take advantage of the fact that they were getting 8 to 10 million eyeballs a week as being part of the ecosphere of Shark Tank.
That meant that they were not only in syndication on reruns, but they were constantly featured in updates. They appeared on daytime television week after week after week because they were women entrepreneurs and they knew their business.
What’s really happening that people don’t think about very often is that Shark Tank takes your customer-acquisition costs to zero. You don’t have a cost to acquire customers anymore. What brings down most companies in their early years is that the cost of acquiring the customers is more than the customers’ lifetime value. And slowly but surely those companies go out of business.
Not so with a Shark Tank company. They have no customer-acquisition costs—as if you took 12-15% of the cost of running your business to 0%. That is why they are so wickedly competitive.
You can see that happening in another company I had, GrooveBook. When it was acquired by Shutterfly, it was a $75,000 investment that 11 months later was worth $14.5 million. That is because the company was wildly successful in acquiring customers for free and as a subscription service, and Shutterfly realized that they had grown so quickly and had such an advantage that they simply acquired them, took them out of the market. It gives you an idea of what the value of being a Shark Tank company is. In the case of that company, it was worth $14.5 million.
Even the CEO at the time said, “A Shark Tank company has an incredible advantage because people keep seeing the product.” It’s like the most powerful infomercial on the planet earth.
3) Startups are often faced with the question of whether they should crowd fund on a platform like Indiegogo or Kickstarter, use secrecy funding, an angel investor, a small business loan or even max out their credit cards. Which one do you suggest?
Sharks are putting less and less and less emphasis on crowd-funded campaigns. We don’t care that much whether a product outsold its goal by 1000% or not because it’s a product that that has not been tested by the market yet.
I’m far more interested in products that actually ship to customers where I can read reviews, where I can talk to customers that actually use the product.
So, while it is important that this new form of financing is available and we have applaud it as a Shark, I certainly don’t put a lot of weight on whether that product is going to be successful long term in the market.
I want to see a few thousand customers that actually bought it and have used it for a period of time, then look at the reviews online—and believe me, every product gets reviewed online. Then I know if it is going to be a success or not.
Next, I am interested in investing in the company. Then I’m interested in talking to the entrepreneurs who actually run the business outside of a crowd-funding campaign.
4) It has been said that you became interested in business because of your mother. What important lessons did you learn from her or during your childhood?
The most powerful lesson I learned was early when I was in high school. I got a job—my first job, actually, after school—at an ice cream store where I was a scooper for ice cream. And as it happened, the girl that I was interested in from class was across the mall selling shoes, and so it was really thrilling to have her watch me as a scooper.
My first day of work—I will never forget this—my boss, a woman, said to me, “Listen, when you are finished, I want you to get down and scrape the gum out of the Mexican tiles that are in front of the display where the ice cream was.” Because people would take their gum out and throw it on the floor before they would eat their ice cream, so it was covered in gum.
I said, “No, you didn’t hire me to do that. I’m not a floor sweeper,” because I was kind of nervous about the girl across the hall seeing me on my knees scraping gum.
I remember specifically that moment when she said, “Listen, you are going to do whatever I say. I am your boss and I hired you to do whatever I want you to do, whether it is scraping the floor, scooping ice cream, washing the floor, washing dishes…” And I said, “I’m not going to do that. I’m a scooper. I’m a professional ice cream scooper.” And she fired me.
I have never worked for anybody again after that experience because it taught me a very important lesson about the difference between running your own destiny versus being an employee.
I’m not saying being an entrepreneur is for everybody, because the amount of sacrifice that I gave up over the years is huge in terms of just time allocation.
But it has provided me with freedom in the later years of my life, which I really enjoy today. I have tried to find that woman three different times to thank you her for what she did for me, but I haven’t been able to.
5) How does an entrepreneur know when it’s time to shut down or let go of their startup?
It’s very simple. Thirty-six months. If you can’t make money after 36 months and there is no path to making money, it was a hobby, it wasn’t a business, and you have to take it behind the barn and shoot it.
6) How important is it to fail sometimes, and what important lessons does failing teach entrepreneurs?
It’s very important to fail. In fact, I prefer to invest in entrepreneurs that have failed once or more than once because the sting of failure is a very important motivator to getting it right the next time. You learn from your mistakes.
Great entrepreneurs are able to absorb the hit and move on with a callus that makes them even stronger. What doesn’t kill you makes you much stronger as an entrepreneur.
What I can’t stand is somebody who has never run a business telling me that they are worth a million dollars, but they haven’t sold anything. They have no idea what it takes to be successful. I generally don’t invest in them, no matter how good the idea is.
7) Are there any investments you wish you could redo or take back, and what did you learn from those experiences?
I don’t cry over spilled milk. Like every other venture investor, I’ve had disasters, but luckily I’ve had more successes than disasters so my focus is really, at the end of the day, to identify two things: Am I backing the right horse in the entrepreneur? And am I backing the right product or service? Is it a growing market?
For example, if you said to me, “Let’s invest in the detergent market,” even though you found a great entrepreneur, I wouldn’t even bother because the cost of gaining share in that market and the risk in trying to do so is prohibitively high, so it’s a stupid investment.
But if it is a new market that is growing and I have a great team running the product or service, I am very, very interested.
What I have learned over a long period of time is that the ones you think are going to be huge successes very often fizzle out, and the ones you thought would be mediocre end up being monster hits. You simply can’t know, and as a result of that I generally tend to invest in broad-spectrum opportunities.
Generally on Shark Tank I will look at 7 to 15 deals a year and try to get a broad portfolio, because I never know which ones are going to work, and then I work with my entrepreneurs to help them through the trials and tribulations of growth.
But not all of them are going to make it, and I know that. As an investor you have to know when to cut your losses. That is why, when I look back at my losers, I don’t dwell on them.
I learned from them and I try not to make the same mistake again. I know as an investor I am going to lose sometimes, but hopefully not that often. And luckily that has been the case.
8) How many Shark Tank companies do you have now?
I have a total of 33 private companies, and it’s hard to [separate out] Shark Tank. I get shown so much stuff on Shark Tank, and then as a result of being a Shark, that I have just bundled them into one giant portfolio run by a guy named Alex Kenjeev at O’Leary Ventures.
What I find so fascinating is that every day my phone rings in the morning and the afternoon with some disaster happening at one of my companies or some euphoric entrepreneur who just got some incredible upside occur to their business, but every day it happens both ways.
There are moments of euphoria and disaster every day. I’ve learned to just go with the flow. When you have that many companies, everything great is going to happen and everything horrible is going to happen every day.
9) Has being an investor on Shark Tank changed or sharpened your business acumen? Has it impacted how you make decisions and other business dealings?
It has changed how I structure deals. Today, obviously entrepreneurs that are in my portfolios talk to each other and the successes of Wicked Good Cupcakes and Groovebook have gotten out in the market, so a lot of people presume I will become an investor in their company because of who I am.
I’m noted as a Shark, so I can really help companies, because one of the greatest advantages of being a Shark is that everybody returns your calls.
So if I want to get to the CEO of an S&P 500 company because I am interested in pursuing something for one of my companies, I am going to hear back from that person, no matter where it is in the world, just because of the status of what Shark Tank has become. That is very valuable, and I don’t consider myself an ordinary investor.
People come to me and say, “Look, here are the terms I got from this VC or so-and-so, and you are going to invest on the same terms.” I say, “No I’m not. I’m Kevin O’Leary, the Shark, and I am going to set my own terms up. If you don’t want them you don’t have to take them, but I know my value to you—it’s immense. And if you don’t think that is the case, talk to any of my companies that I have dealt with, talk to any of my portfolio companies, any of the CEOs. They will tell you what I am worth to them. Take my deal or leave it. I’m not really interested in negotiating with you.”
10) Do you seed invest in companies or do venture capital outside of Shark Tank, or have you cut back on that?
No, I do both. I get shown about 3 or 4 deals a day now. If I see something interesting, I will forward it to the team at O’Leary Ventures and then see if one of them wants to look at it. Just because it wasn’t on Shark Tank doesn’t mean I won’t invest in it, but obviously getting 10 million free eyeballs makes it really interesting to do it through Shark Tank.
I can’t recommend companies to go on Shark Tank, because if they see me first they cannot get on the show, but sometimes Alex, who runs the whole team at O’Leary Ventures, sees a lot of stuff before I ever do because it goes to the website. When he sees something interesting, he will forward it to the show and never mention it to me, and I won’t ever know that was the case.
There is a good Chinese wall there. That’s the same for any Shark. We know we can’t talk to these entrepreneurs. If it looks like it’s a great deal for the Shark he will send it on to the producers. Maybe it gets on and maybe it doesn’t, but I think they had over 100,000 applications this year.
11) You have a pretty varied background: you are an artist and photographer, and you even play the guitar. Do you think this has helped you as an entrepreneur?
Absolutely. You think about the yin and yang of business versus the arts. Today is a good example: I’m preparing for the South Hampton Art Show, where I am displaying a series of photographs for sale to support teenage entrepreneurs, the Perry J. Cohen Foundation, who I sell my work for.
Art, photography, contemporary modern works, the things I collect and support—that is just sheer chaos. What makes a great photograph? It is in the eye of the beholder.
The pursuit of a hobby like that or business like that is completely different from what goes on when sitting in a boardroom discussing an income statement or balance sheet. I need both.
I find I am a better businessman because I spend a portion of my day working with the arts and enjoying them. To me that is the right balance in life: To support the arts, to be involved in them and to tune into that zone of your brain for some portion of the day versus how difficult and challenging the science of business is. Combined, it makes you much more powerful.