Shark Tank wrap up 2 - How does IP build a scalable business?

Published: 
16 February 2015

Did you catch last night's Shark Tank episode?

Which of our everyday Aussies looking to start, grow or even save their business was your favourite?

  • the food of the future, breeding edible insects for human consumption
  • the Throat Scope, shining a new light on medical technology
  • the aerial vehicle, Lambdatron
  • the dog lover putting a new spin on feeding time and bringing her Bento Pets nutrition to the masses, or
  • the backyard inventors Conveyor Tray, sharing the load of a common workplace problem and revolutionising the way we work.

After just two episodes of Shark Tank, it's clear that investors look for protection of your idea, namely IP rights, and a scalable business. So what exactly do they mean by 'scalable', and how does intellectual property help?

A scalable business has two components. Firstly, it must have a large potential market, and something that differentiates your product from a crowded market place, much like how Bento Pets nutrition brought her business to the masses by creating a pet food that could be eaten by not only dogs but humans too. There has to be real opportunities to make a huge return. Secondly, the business must be able to grow quickly without burning through too much cash or ‘working capital’. If there was one take away from the Shark's in Sunday's episode, it would be: know your numbers, market and product.

Working capital is the amount of money tied up in the business in order for it to function (eg manufacturing costs). Innovative new companies have many risks, and early investors will only want to gamble the minimum amount of money for the maximum possible return. That means they look for:

  • high profit margins, meaning you have money left to cover your fixed costs. Fixed costs are expenses that have to be paid by a company, regardless of any business activity.
  • low cost of goods sold, expenses of materials for your business. In the case of last night the edible bugs proved too costly in its production of goods.
  • the shortest possible time between paying suppliers and generating sales, market interest.

Software and other IP intensive companies, like last night's Lambdatron and Throat Scope, tend to fit nicely into that picture. Once the innovation is made and protected, it can be replicated at little or no cost.

So how does IP help? All other things being equal, IP intensive companies rely less on working capital. IP allows innovators to focus on where they add the most value; innovating and then later marketing their product. The inventors of the PB Automotive Conveyor Tray don’t necessarily have to manufacture their product. Like we saw last night, they could license their IP to other companies, such as Holden or Toyota already operating in that market.

In many ways, control is more powerful than ownership. Having your IP protected allows you to pick and choose which assets are more profitable for you to own, license or sell.

And it doesn’t stop there. The inventive entrepreneurs keep on coming. Tune into episode 3 of Shark Tank next Sunday 22 February 2015 8.00pm on TEN. What will the Sharks take a bite of next?