Mark Cuban and Other 'Sharks' on What Makes a Hot Business Idea

U.S. News spent two days gathering intel from the panelists on ABC’s reality show about what makes a hot business idea.

DALLAS, TX - DECEMBER 25: Owner Mark Cuban of the Dallas Mavericks stands with the NBA trophy before a game against the Miami Heat on opening day of the NBA season at American Airlines Center on December 25, 2011 in Dallas, Texas. NOTE TO USER: User expressly acknowledges and agrees that, by downloading and/or using this Photograph, user is consenting to the terms and conditions of the Getty Images License Agreement.
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Lani Lazzari, an 18-year-old from Pittsburgh, wowed all of the sharks with her entrepreneurial zeal when she described a line of all-natural exfoliating scrubs, called Simple Sugars, that she started developing when she was 11 to treat her own eczema. While other kids were jabbering on Facebook or going to the movies, Lazzari was researching the properties of creams and oils for scrubs that have racked up more than $55,000 in sales so far. "I love the story," O'Leary—perhaps the surliest shark—gushed. "The Kumbaya moments. I want to cry."

But the business plan made him want to cry, too. "The cosmetics industry is the most competitive on earth, because the only products that have higher margins are illegal," he instructed her. "You've found a niche position, but to scale it is going to be very, very challenging. There's nothing proprietary, it's a brand nobody's heard of yet, and it's so simple that, well, an 11-year-old can do it."

Lazzari stood her ground. "When I hear 'no' I'm just not talking to the right person," she retorted. More funding, she insisted, would allow her to hire some salespeople and sign bigger contracts. Still, many small business owners have learned the hard way that bigger competitors will happily squash young upstarts if all they need to do is copy a clever new set of products. A technology edge, a celebrity endorser, or a hot brand can help prevent that—but also can be prohibitively expensive.

What does impress the sharks, and many venture capitalists in places like Silicon Valley, is a well-researched business plan that anticipates what might go wrong and accounts for the way bigger competitors might react to a newcomer trying to grab market share. "This is all about risk management," Cuban explained. "You've got to do everything in your power to reduce your risk, and 98 percent of that is about information. You can't get it all, but there are so many things you can do to get information about your industry or your competition."

Researching them on the Internet is an obvious place to start. Interviewing possible customers might yield insights on market opportunities and competitors' vulnerabilities. The more data you can gather on the size and contours of your target market, the better prepared you'll be when investors start peppering you with questions.

What's your personal story?

Sometimes the final decision to fund may come down to intangibles that don't show up on balance sheets. Carole Foster of Los Angeles came on Shark Tank looking for $200,000 to help expand her food business, which sells frozen "gumbo bricks" that serve as the stock for a meal serving up to eight people. She had one big point in her favor: A starter deal with the wholesale giant Costco to sell her bricks at a few of its stores. But when Cuban asked how she did her accounting, she admitted, "Not very well. I need the business acumen. I don't have that."

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"Your product is great, but your business is not investable yet," O'Leary told her. Then Foster explained that to keep her operation going, she and her 12-year-old daughter had been living without a home of their own, alternating between temporary arrangements with family and friends. Instead of paying rent, she said, she put every available penny back into the business. Meanwhile, six brothers and sisters took orders and made deliveries, to help keep the gumbo flowing.

O'Leary took it all in, then declared, "That's what makes America great. People like you willing to work their ass off."

For a brief moment at least, it seemed that Foster might have tamed a shark.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.