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blog/article/Royalty Deals in Shark Tank India: What They Mean & Why They Matter ?

Royalty Deals in Shark Tank India: What They Mean & Why They Matter ?

Feb 24, 2024

Shark Tank India is a popular business reality show where aspiring entrepreneurs pitch their ideas to a panel of wealthy investors, known as Sharks, who decide whether to invest in their ventures or not. The show is based on the American format of Shark Tank, which has been running since 2009.

The Shark Tank India show is currently in its third season and has seen some interesting and innovative pitches from various sectors and domains. One of the common terms that the Sharks use while making an offer to the pitchers is royalty.

A royalty deal is a form of investment where the investor receives a regular payment based on the performance of the business, without necessarily owning a part of it. The payment can be calculated as a percentage of revenue, profit, or gross margin, or as a fixed amount per unit sold. The payment can be made for a limited period of time, until a certain amount is reached, or indefinitely. A royalty deal can also be combined with an equity deal, where the investor also gets a share of ownership in the company.

For example, a Shark may offer Rs 1 crore for 1% equity plus 1% royalty until Rs 1 crore is recouped. This means that the Shark will get 1% of the company's shares and also 1% of the sales or profit until the initial investment is recovered.

How did royalty deals originate?

The concept of royalty deals is not new, as it has been used for centuries in various industries, such as music, publishing, mining, and franchising. The idea is to reward the creator or owner of an intellectual property, such as a song, a book, a patent, or a trademark, for allowing others to use or sell it. The royalty rate is usually negotiated between the parties, and can vary depending on the type, quality, and popularity of the product or service.

Royalty deals became popular in the American version of Shark Tank, especially by one of the Sharks, Kevin O'Leary, who is known for his preference for royalty deals over equity deals. O'Leary often argues that royalty deals are better for both the investor and the entrepreneur, as they provide a faster and more secure return on investment, and incentivize the entrepreneur to grow the business and increase sales. Some of the successful royalty deals that O'Leary made on the show include Wicked Good Cupcakes, Plated, and Groovebook.

How are royalty deals used in Shark Tank India?

Shark Tank India, which premiered in 2024, has also seen its fair share of royalty deals, as some of the Sharks have followed the footsteps of their American counterparts.

For Instance, Mayank Sisodia of The Honest Home Company, a home decor brand that uses natural and sustainable materials, got a deal of Rs 1 crore for 3% equity and 1% royalty from Amit Jain.

Tiggle: A company that sells customized and personalized gift boxes, such as birthday, anniversary, and festive boxes. The founder, Anuva Kakkar, secured a deal with Peyush Bansal, and Amit Jain, who invested Rs 50 lakh for 20% equity and 2% royalty until Rs 1 crore is recouped.

Out of the 51 pitches made so far, 11 have involved royalty agreements, and some of them belong to the consumer goods sector. The other sectors that have received royalty deals are healthcare, Saas: Software tech, Automobiles & Ancillaries.

Why do the Sharks ask for royalties - The Good and The Bad

The Good:

Royalty agreements can be beneficial for both parties in certain situations.

For the investors, royalties can provide a steady and recurring income stream from the business, regardless of its valuation or growth. Royalties can also help the investors mitigate the risk of losing their money if the business fails or does not perform well. Royalties can also incentivize the investors to provide more support and guidance to the entrepreneurs, as their returns are directly linked to the performance of the business.

For the entrepreneurs, royalties can help them raise capital without giving up too much equity or control of their business. Royalties can also help them avoid dilution of their shares in future rounds of funding, as the investors do not have a claim on the company's assets or profits beyond the agreed percentage. Royalties can also help them maintain a good relationship with the investors, as they do not have to worry about meeting unrealistic expectations or facing pressure to exit or sell their business.

The Bad

For the entrepreneurs, royalties can reduce their cash flow and profitability, as they have to pay a portion of their revenue or profit to the investors on a regular basis. Royalties can also hamper their growth and innovation, as they may have to focus more on generating sales or profit rather than investing in research and development or expanding their market. Royalties can also create resentment and distrust with the investors, as they may feel that they are paying too much or getting too little in return.

Conclusion:-

Royalty concept of Shark Tank India Season 3 is a new investment concept that has both pros and cons for the investors and the entrepreneurs. Royalty deals are a distinctive and often more appealing alternative to equity deals for both the Sharks and the entrepreneurs on Shark Tank India. These agreements can be a win-win situation for both parties if they are structured and well executed or a lose-lose situation if they are not. Therefore, royalty deals should be carefully evaluated and negotiated, taking into account the nature and potential of the business, the goals and expectations of both parties, and the market and competitive conditions. This is not a one-size-fits-all solution, but rather a flexible and creative option that can be tailored to suit different situations and needs.