"The entrepreneur must know the product before pursuing financing."
By Rhonda Miller PBN Staff Writer
Daniel A. Murphy is vice president of sales and marketing for Ocean Capital, the small-business lending division of Home Loan Investment Bank, FSB, where he is responsible for overseeing marketing and small business lending activity in New England. He has 14 years of experience in banking and finance, including positions in New York in the commercial mortgage-backed securities department of Societe Generale and as a fixed income analyst for Lehman Brothers.
Murphy is one of the founders of Hatch Entrepreneurial Center in Providence.
He is on the board of the Manton Avenue Project, RI Jobraiser and Rhode Islanders Sponsoring Education and serves on the loan committee of the Providence Economic Development Partnership.
Murphy has a bachelor’s degree in business economics and organizational behavior and management from Brown University.
PBN: Your venture, the Hatch Entrepreneurial Center, offers seminars on traditional and alternative forms of funding for startups. Is the center shedding light on new or different information on funding that isn’t offered by other organizations in Rhode Island?
MURPHY: The Hatch Entrepreneurial Center hosts guest speakers from various industries and areas of expertise. When a startup finance or banking professional addresses the audience, they are usually not speaking about new or different forms of financing startups, rather disclosing the various options between angel investors, private equity partners, venture capitalists, banks, and friends and family. They weigh the benefits versus the costs associated with the funding alternatives.
PBN: Strategies for obtaining financing, without giving away control of your business, is one topic presented by the Hatch Entrepreneurial Center. What are some of the guidelines on that subject, as far inexperienced entrepreneurs who have to make critical decisions early in the process of launching a company?
MURPHY: Since a majority of people who come to workshops at the Hatch Entrepreneurial Center are likely to be entrepreneurs without prior business ownership experience, the focus is on preparing the borrower for the financing process. The entrepreneur must know the product before pursuing financing. The entrepreneur must know the value of the product or service, where and how it will be marketed and the demand for the product. If the product is not generating revenue, the perception is that the product has no value. So the key to obtaining financing is to know what you have, the value of the product and the amount of money necessary for a successful launch. If you cannot demonstrate the businesses capacity and ability to repay the debt, the investor may deny the request – or approve the request subject to the entrepreneur relinquishing control, thereby reducing the entrepreneur’s percentage of ownership of the business in order to mitigate the risk of providing capital. If you are seeking capital, and you or your startup has no assets, collateral or revenue, how are you going to pay back the loan? A common mistake an entrepreneur makes is seeking funding without finishing the business plan. In that case, the investor does not have the benefit of reviewing a comprehensive business plan containing financial projections, accompanied by assumptions to document how they determined their growth. The business plan provides the opportunity for the entrepreneur to validate the product or idea feasibility, industry knowledge and the value of startup. The investor will investigate the product or idea further and perform a feasibility study. If the idea or product is not feasible, the investor will not finance the product or idea because the investor does not see the potential of the product. The Hatch Entrepreneurial Center can help entrepreneurs connect with professionals and mentors who can assist them in making these critical decisions for the startup.
PBN: There’s a substantial amount of startup activity in Rhode Island and it’s gaining momentum. What’s your view of the environment for funding startups in the Ocean State? Is there a phase at which it’s most difficult to get funding here that may cause entrepreneurs to leave or other areas of the U.S.?
MURPHY: There are five stages of funding: seed stage, start-up stage, second stage, third stage and the bridge or pre-public stage. In today’s challenging economy, obtaining financing for any small business can be an arduous process, especially for startups. The environment for funding start-ups is heating up as we emerge from a bitter winter. Rhode Island is strategically positioned between two large sources of venture capital financing, Boston and New York City. There is also financing available for high-tech, high growth businesses in Rhode Island. While there are venture capitalists located in virtually every U.S. city, Silicon Valley is the epicenter of venture capital financing, where private equity capital is provided as seed funding to earl -stage, high-potential, growth start-ups. Venture capitalists also provide growth funding, commonly referred to as Series A funds, which is often in anticipation of generating a return on their investment through IPOs or trade sale of the company. Based on my conversations with local entrepreneurs over the past six months, the frustration has been obtaining the second stage of funding.
PBN: Your role as head of Home Loan Investment Bank’s small business financing division, in addition to your new venture as co-founder of the Hatch Entrepreneurial Center, puts you in close communication with many entrepreneurs and owners of existing companies. What do you see as one or two critical elements to improve the likelihood of early stage businesses in Rhode Island getting on solid financial footing?
MURPHY: I speak with small business owners and entrepreneurs on a daily basis. Every small business and startup is unique and there is not a simple one-size- fits-all solution that can be applied to all businesses. Smaller startup ventures do not require large sums of money, so the entrepreneur typically relies on loans from friends or family, personal bank loans or crowd funding.
One way to improve the likelihood of an early stage business getting on solid financial footing is to know your personal financial position before you start operating your business. The small business owner must know the difference between their personal and business assets and liabilities. Your inability to distinguish between personal and business liabilities may jeopardize the growth of the business. Another way improve the likelihood of an early stage business getting on solid financial footing is to understand what the lender is looking for when they are considering a financing request. If you do not have a strong personal credit history, lack collateral or cash flow to repay the debt, then the lender is less likely to approve the loan request. The six C’s of credit are: Credit- personal credit score and history, Conditions - the use of loan proceeds, Capacity – the ability to repay the debt, Capital – cash and assets invested by the borrower, collateral – hard assets to secure the loan request, and Character -personal impression. Lastly, the business owner needs to know the difference between wants and needs. For example, you may want to borrower $100,000 to acquire new equipment, hire an additional employee and execute a new marketing strategy, but your business cannot afford to repay $100,000. So you need to borrow less money. You need to reassess your plan based upon what your business can afford and need to stretch each penny as if it were your last, which may result in being approved for a smaller loan size, but the business will have the capacity to afford the debt.
PBN: One of you goals is helping entrepreneurs get access to capital that’s affordable and makes it possible to sustain a new business until it reaches a certain level of financial stability. Banks and financial institutions have overhead and investors generally want to see a return on their investment, at some point. Are you working on any out-of-the box plans to increase access to capital for startups?
MURPHY: I am working with a few individuals now to provide venture capital financing for start-ups seeking financing. One of the areas I am trying to address is the lack of funding for start-ups seeking the Second stage funding. More ambitious start-ups that need substantial funding typically turn to angel investors, which are private investors who use their own capital or venture capital financing to provide capital, as well as additional expertise where the venture is lacking, such as marketing or legal.