You’ve got the idea — what’s next? How do you turn that idea into a successful
business and secure the financing necessary to make it happen?
According to a panel of experts assembled by the Providence Business News the most viable pathway is a team approach — one that capitalizes on the expertise of accountants, lawyers, and perhaps, the expertise of others who have already tasted business success.
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The panel was part of “Rhode Island Summit: Financing Your Company,” hosted by the Providence Business News and broadcast live last Thursday night (March 29) on WSBE Channel 36. Bank Rhode Island sponsored the event.
The panel was comprised of Dr. Edward Mazze, dean of the College of Business Administration at the University of Rhode Island; William Jackson, Ph.D., a scientists, entrepreneur and the founder and chairman of Brown Venture Forum; Wayne L. Wilfand, a certified public accountant and founding partner of Sinel, Wilfand & Vinci CPAs, Inc.; James Hahn, a lawyer specializing in mergers, acquisitions and public offerings and a partner in the Providence firm of Partridge Snow & Hahn; and Donald McQueen, executive vice president and chief lending officer at Bank Rhode Island.
The premise of the discussion was to explore the best ways for entrepreneurs and existing small business owners to find the financing necessary to get a business off the ground or to grow an existing one. It also addressed the issue of venture capital — the existence of which appears to be growing substantially in Rhode Island — and whether women and minority business owners have the same access to capital as traditional borrowers.
Introduction by Franklin S. Prosnitz, editor, Providence Business News
“Business financing, a lot of people think, is a dull subject, but in reality it’s really what people can build companies on. Tonight we have a distinguished panel with us to talk about business financing, as well as a terrific studio audience, and let me introduce our panel.
“We have Don McQueen, who is from Bank Rhode Island. Don is the executive vice president and chief lending officer. We have Ed Mazze, dean of the School of Business at the University of Rhode Island. and we have Wayne Wilfand, who is a founding partner with the accounting firm of Sinel Wilfand & Vinci. I think I probably came close on that and Jim Hahn who is a partner and practices business law at the law firm of Partridge, Snow and Hahn; Bill Jackson, president and CEO of the Brown University Research Foundation and founder and chair of the Brown Venture Forum which is involved with a lot of start-up companies and venture capital. First I’d like to get the players straight a little bit and I’d like to understand what the individual roles are; so Wayne let me go to you and ask how does an accountant fit into all of this?
WILFAND: A CPA should be one of the first people that you talk to. In the state of Rhode Island small businesses are probably 90m percent of what the public sees; the Textrons and the larger companies, that is another level. When small business people come into our firm they’re looking to start up a business. They’re looking at sales that may be as little as $50,000, $100,000 and it can be 3,4 or 5 million dollars. That is the type of client that we look at and when they come in we sit down with them. You should come in with your dreams, but you should also come in with a business plan, or at least the start of a business plan, the type of product or the type of service that you want to provide and an idea of the amount of equipment, personnel, things of that nature that you are looking to do. And from there we start to put together a plan. Would it be a formal business plan or what I call a dream sheet or projection. It’s what your dreams are and you start off and you look at a plan that can cover anywhere from one to five years. Then you talk about where you’re going to get the money. In Rhode Island it’s several sources:
- Hopefully you have some savings
- Relatives
- Banks, The Small Business Administration
We look at all those aspects and then try to put together a package that has to go to the bank. Then along with the lawyer generally, we look at a team approach of setting up an appointment with the bank and then making the presentation.
PROSNITZ: Let me go to Jim and find out what your role as a lawyer is.
HAHN: The lawyer does a couple of different things. From the borrower’s side standpoint or the representation of the individual who is trying to start the business, we’re going to work with the accountant to identify the proper entity that you use, whether it’s a corporation or a limited liability company, maybe a partnership. Then we’ll work to set up the proper arrangements between the owners and perhaps key employees will help identify any ideas that may be the foundation of the plan.
I think it’s important for people to realize that there may be multiple roles that are played by different professionals.
PROSNITZ: (Introduces Ed Mazze) Please add a little bit and talk about if you can for me– really this is a team approach– when somebody goes about trying to get some kind of a loan or financing for their business.
MAZZE: Right, I like the idea that small businesses and small business financing is a partnership. Of course you have to start with a great idea and the partnership includes both professional help, such as the accountant and the attorney plus also the moral and sometimes financial support of your family and friends, but also you need to take into consideration as you look at this whole range of what goes on in financing, of knowing something about the type of employees you’re going to need, the type of suppliers you’re going to deal with, the type of customers that are out there; so even though we’re talking about financing, for small business financing or any financing you’ve got to know the business. And it is really critical to get professional help as you go through the process.
PROSNITZ: What I’d like to do now is kind of move us into the conventional. Bill (William Jackson) you know where you are in terms of venture capital and we’re going to come to a major segment that we want to talk about that in a couple of minutes. And Don (McQueen) we want to talk with you a little bit more about the conventional loan – about going to the bank. We’re in a different climate than we were in a year ago. We have some poor earnings reports coming around, a volatile stock market, we have interest rates that are coming down and we have banks that we understand that are tightening a little bit in terms of their lending procedures. Talk a little bit about what the climate is like today and what you may project a little bit for the future.
McQUEEN: Notwithstanding the gloom and doom that we read about in the newspapers and the decline in the stock market. I’m very optimistic about the business climate particularly in Rhode Island. Rates are quite low right now, so it’s a great opportunity for borrowers, who are looking to grow their businesses, to obtain financing or those who already have financing may own some property so it would be a good time to consider refinancing. So I think that, in fact, the climate is quite good. We are seeing increasing levels of backlog in our own pipelines not just ours but in other bankers in the capacity of myself in other institutions are seeing that our climate is strong. So I think that the foundation in Rhode Island where you’ve got the old economy, we aren’t quite moved into the digital economy quite yet and we’re a little bit insulated from some of these unknowns that we’ve seen nationwide.
PROSNITZ: Maybe before I turn to the audience I want to talk about a little bit maybe about some experiences that the audience may have had with conventional financing. Tell me a little bit about the role of the SBA (Small Business Administration). I don’t want that to get beyond us without discussing what its function is. I throw that maybe back to you Don and anybody else on the panel who’d like to jump in.
McQUEEN: Glad to. Borrowers have a lot of opportunities. A well established company may not need the support of the United States Small Business Administration or the Business Development Company or Ocean State. There are a lot of other organizations that can lend financing to a package being presented by a borrower that may have some weaknesses to it. Banks are very competitive right now. So anybody that has a business concept looking to grow a business but may not have the capital, may not have the expertise, there are still opportunities for them to go and obtain financing, whether it be through the SBA. The SBA is a very important factor in this community. It’s one of the most active districts in the United States. So there are a lot of avenues to obtain financing here. Recently, you will go to the bank first and they will offer you the choice of going to the SBA. Some people look at it sometimes negatively. The SBA and the banks work very closely. A lot of times you don’t even realize that you’re deali
ng with the SBA because the banks are the lead people involved with it. It’s a little bit more documentation but in some documents with the SBA, the turnaround, again if all the information is there, that’s the key, can be 72 hours on some of what they call Loan Doc Prep and it’s a facility that’s available and it’s a good method for a new company to start up or an established company that wants to grow for acquisition of equipment, buildings. It works well.
PROSNITZ: Let me turn to the audience and see if anybody has had experience relative to conventional lending that might want to tell us a little bit about their experiences. And I’m going to ask you even though I know who you are to identify yourself.
Sure. My name is Cheryl Watkins Snead. I’m president of Banneker Industries. We’re a supply chain management service provider in Lincoln, Rhode Island. I started my business 10 years ago and fortunately times have changed. I remember back 10 years ago when I went to try to get a loan to start my business I could not get financing from any of the banks. Maybe the credit union crisis had something to do with it at the time, but I really had to develop a history before the banks were ready to provide debt financing to my manufacturing firm. I guess that the question that I have to ask you, the panel, is times have changed from a banking standpoint and I think times have changed also for businesses. You’re not seeing as many of the brick and mortar businesses, you’re seeing a lot more service businesses that are supporting manufacturing. How do you go about looking at financing of companies that don’t necessarily have the collateral to put up to be able to secure loans?
PROSNITZ: Ed?
MAZZE: I think no matter what type of business you have, you’ve got to come in well prepared. I don’t think there’s a difference between service manufacturer and brick, or the new dot com companies. You’ve got to be prepared. You’ve got to have a good idea; you’ve got to have the type of business structure and business model that makes sense. I remember back when I was in banking we talked about credit, character and capacity, and that was a long time ago. Today we still talk about credit, character and capacity which means that no matter where you go nobody’s going to throw money at you. You really have to take time to make sure that you can get your message across to the banker so that the banker understands your business.
PROSNITZ: Cheryl, I’m looking at you since your start-up 10 years ago. Have you gone back for other financing?
SNEAD: Yes.
PROSNITZ: You have, and what have you experienced along the way different than what you experienced initially?
SNEAD: Well, I think the good news is that after 10 years I’m still in business. And that comes from the support. And years from now I plan to still be in business. But I think that developing a relationship with your banker and also sharing information in terms of strategic planning as you talked about the partnership I think that’s so important between the accountant, the lawyer and whoever’s going to help you from a financing standpoint. Because I think business owners in general, like myself, don’t necessarily have all the answers, but we have this great idea and vision of where we want our company to be 5 or 10 years from now. We just need support for the experts to help us get there. As you said, I think the same visions and goals I had for my business 10 years ago, I have similar goals for my business but I still need a team of experts to help me get there.
HAHN: Where did you come up with the start up capital to help you start your business? I’m sure there’s a good story there.
SNEAD: Interesting. I wound up with a partner outside of Rhode Island because I could not get financing as the sole owner of my business here in Rhode Island. Yet by taking on a partner, I was able to get financing outside of Rhode Island within 24 hours. So that’s how I was able to get our start-up capital. Fortunately I was able to build my business, make it profitable and successful so that I was able to buy my partner out in 5 years. I am the sole owner of my business.
PROSNITZ: Let me ask this of you, Cheryl and maybe ask the panel as well: Is it easier now in Rhode Island to develop that relationship with bankers?
SNEAD: Absolutely.
PROSNITZ: And is that partly because 10 years ago we were in a real crisis in this state relative to the credit unions and banks or is it because the climate generally has changed?
SNEAD: I think it’s a combination of both. I think in Rhode Island it’s very easy to develop relationships and it’s so important to do that whether it’s your bank, your accountant, or your attorney. And it’s only through sharing ideas and information, and for them getting to know who you are from a character standpoint that you’re able to grow your business.
PROSNITZ: Let me ask the panel. In Rhode Island we’ve gone through some real changes in banking. We’ve gone from a time maybe 10 or 12 years ago when we had Fleet in Rhode Island; we had Bank Boston, Hospital Trust before that and a lot more big banks that were headquartered there. Bank Rhode Island is an outgrowth of a Fleet merger with Shawmut, and Sovereign now is playing in New England but not headquartered here. Has Rhode Island suffered at all because these major banks have left or are we in a better position because now we have more moderate size players in this community?
McQUEEN: Well, I think mergers have created opportunities for smaller community oriented organizations to address the proportions of the market that haven’t gotten the attention that they need. I know that that’s true in our case. You’d have to ask the audience or the small businessmen, I think, whether they’re being better served or not. From a banking industry standpoint when two big banks get together it does create opportunities for smaller players.
PROSNITZ: Wayne, you’re dealing with the small businessman all the time.
WILFAND: I think from a client standpoint it is probably one of the strongest markets for dealing with the banks now. You’ve got smaller banks that are playing off the larger banks so there’s a tremendous amount of competition. You’ve got loan officers coming into businesses on a regular basis seeing how their clients are doing, also prospecting, looking for new business. If we call a bank and say we have a client interested in starting a new business, the first question they ask is how much are they looking to borrow, and then when can we set up the appointment. So I think it’s very competitive and the money is available. But you have to have the right idea, and the right plan and the opportunity.
PROSNITZ: So, Bill Jackson, you’re talking about, and let me come back to the two of you in a minute, but I’d like to get into some of the venture capital area as well. Bill, you’re dealing with ideas and dreams more than probably anybody else on this panel. I’ve seen some of the things that have come before the Brown Venture Forum and there are some wild ideas sometimes. Let’s talk about the venture capital climate for a moment here and let me go back to the same question that I asked Don, that we’ve had a change of the environment now; the economy has gotten a little bit tougher for the time being. Has that changed the venture capital climate in Rhode Island?
JACKSON: Well, it’s a tougher negotiation with your capital investor. First let me say, venture capital is just sort of an alternative to debt financing. A lot of companies are not able to do debt financing and, in fact, our worst story so nicely told: You took in a partner who owned a piece of your business; that’s, in fact, venture capital, where you’re selling a piece of your business as opposed to borrowing against the future performance of your business. So that kind of financing is really what you have to go to get the initial start up capital. Very often you get it from friends, family and– some people call it: 3F financing – friends, family and fools who’ll put money into a new venture and drive it forward. And then you were very fortunate. You were able to buy out that equity investor in your company and then become a 100 percent owner again. And that’s a nice story to tell. So how has that changed? Well, first of all I think that there’s more venture capital existing in Rhode Island today than ther
e has ever been in the history of Rhode Island or the history of the United States. More capital was raised last year than ever. Money is looking for a good home. It’s looking for places to go in high growth potential businesses that can make a return for that equity investor. People buy into a company like Cheryl’s to be able to get a return. I’m sure you didn’t buy him out for exactly what he bought in for. You must have made a profit along the way and that’s the venture capital gain: putting money in expectation of getting more money out. And there’s quite a bit available. I know of financings that are going on right now. The venture capital firms are being a little tougher with their negotiations because the climate is perceived to be tougher, but there is money available to grow a business.
PROSNITZ: Five years ago in Rhode Island venture capital was unheard of pretty much.
JACKSON: Venture capital for Rhode Island deals was unheard of. We happen to be the site of an enormous amount of venture capital. Providence Equity Partners, Fleet, now Navis has billions of dollars at work but it never got invested in Rhode Island companies. Now we’re seeing more of that: Zero Stage Capital from Cambridge has set up an office in Providence to invest in Providence deals and Rhode Island and has done so. They put money into Blue Streak in Newport. They put money into Spherix, a spin off from Brown University that I was involved in getting started. So there’s money to be had. A number of venture firms have started up; more are coming to town. We’ve got a new one: Village Ventures is just starting operations in Providence. Rex Capital started last year.
PROSNITZ: And many of these were not here.
JACKSON: They weren’t here two years ago.
PROSNITZ: We’ve had some people who have suggested that this is not a strong venture market and that’s a problem in Rhode Island. Your perception is, in fact, that that’s not true. One of the things you’ve also said that I think, in putting this into perspective, when we take a look at venture capital we should not be comparing ourselves with Route 128 or Cambridge but rather with communities that are more like us.
JACKSON:Right. Well, I think we’re doing very well. We’ve raised a record amount of equity capital. I think last year there was 80 million dollars in venture capital put into companies located in Rhode Island. That’s an unprecedented number. Sometimes we feel a little inadequate when we compare ourselves to the buzz of activity that’s going on along Route 128, but that’s a very tough comparison because that’s unique in the whole world. There’s maybe two other places like that: Silicon Valley, Route 128 are hotbeds that have this kind of activity, but it’s not that way in other smaller cities the size of Providence throughout the Midwest or the South and so on. So we’re doing very well.
PROSNITZ: Let me ask Wayne and Jim and Ed and Don as well. I presume Don that you don’t do any venture capital at Bank Rhode Island.
McQUEEN: Not in a conventional sense.
PROSNITZ: Maybe we can come to your unconventional sense in a moment. Wayne, people coming into your business, are you moving some people toward venture capital?
WILFAND: In a small business environment, when you get to the companies that have a major, let’s say, idea, where they’re in the early stages of developing, where they’re going to try to expand it into other market places, where they’re looking for 5, 10, 20 million dollars, the venture capital company has the funds that are available. The typical Rhode Island business is not the type of business that a venture capitalist may be looking at on the smallest scale, someone that wants to start a business; has an idea, wants to start a construction company, something like that. It’s more of a conventional method of going to the bank. One thing about venture capital and you can correct me anywhere along the line, they want to give you money. They also want to own a piece of your business, a very large piece of your business. So when we have people that are considering venture capital we sit down with them with their lawyer, because if you want to see a venture capital contract it’s quite involved and there’s a lot of
if’s, and’s, and but’s and not a lot of maybe’s. You have a lot of limitations. But if you are looking to expand in the areas where you cannot do so with conventional financing, and you really want to go big time, venture capital is an excellent way to go.
PROSNITZ: Jim, your experiences with venture capital and then Ed.
HAHN: Well, it really comes down to what the risk versus the reward is. And different kinds of businesses require different kinds of capital. A start up service business, the owner may be able to finance it by maybe they’ve acquired some equity in their home; maybe they can go to the bank and they’ve got a good credit rating to borrow enough money to have the capital to start the business and they own it all on their own. When you get into venture capital there are a couple of other ingredients that enter into it. Typically you’re going to have an idea that is proprietary. It can be protected either by a patent or because it can’t be duplicated it’s a trade secret, but there has to be something there in order to induce the venture capitalist to say, Yes, we’re going to bet 5 million dollars on the ability to develop this product, get it into the market place and create enough sales to be able to buy us out 3, 5 years down the road. They’re also going to be looking at people who have a substantial amount of experience, maybe not the person who came up with the idea but that person has to be able to put together a team so that the venture capitalist knows that the people who are involved in bringing this product to market have some track record of success in doing that. So you’re really looking at two different kinds of activities. We had one client who came in. It was a software development company and they had gone to the point of thinking about getting venture capital. We were able to have them talk to Bill, who was able to at least give them an idea of what was available in the market place for their business. They actually had a software product that they were making money on. They had the ability to generate enough cash to continue developing it on their own and they didn’t need to get into the venture capital deal that they were getting into because they were going to give away so much of their business. They were actually better served doing it at an incremental basis and in the end were better able to make more money themselves.
PROSNITZ: Ed?
McQUEEN: Well, it’s interesting. In Rhode Island, we have an interesting and important opportunity: The Economic Development Corporation and the Economic Policy Council are very much interested in attracting and keeping what we call serial entrepreneurs. These are individuals who constantly start new businesses. They bring the business up to a certain size and then they start another business. And there are all sorts of Slater grants allowing people to get together to come up with new technology and to provide the start-up funds. In other words you can take two oceanographers at the University of Rhode Island or a scientist at Brown University and a scientist at the University of Rhode Island and they now have opportunities to go after the dream and create a business.
PROSNITZ: How many Slater centers do we have now?
McQUEEN: I believe there are 4 or 5.
PROSNITZ: We’re talking about Oceanography.
McQUEEN: And there’s Manufacturing and Biotech and also the last couple of years in Rhode Island there’s been a change of the tax laws to attract some of these types of industries like biotechnology which is very attractive to the individual who has the dream and now has the opportunity to take the dream. Now that’s different than the typical individual who is starting a business. The typical individual who is starting a business is using their credit card; from the credit card they go to the bank and from the bank they go to the venture capitalist. It just sort of goes up a flight of steps. But there are so many magnificent opportunities now in Rhode Island to make your dream come true.
PROSNITZ: We’ve touched on two very important points, then, Don, I’ll get to you but I want to get some specifics out on the table on two programs. 1. The Slater Programs: We’re talking about grants in what level of financing usually from the Slater funds.
McQUEEN: Well, they could be at virtually any level because they get some start up funds. They get an advisory board made up business people, which is often very helpful. Lots of small businesses generally can’t afford professional help so they have volunteer business people who provide the type of expertise to develop the business plan. The students at almost all of the colleges in Rhode Island can also get involved in helping work with businesses in setting up business plans and then they get it up to a level where if they’re doing very well contacts are made with various venture funds.
JACKSON: Now, can I address some of that?
PROSNITZ: Yes, Bill.
JACKSON: I happen to be a director and founder of two of the Slater Centers.
PROSNITZ: You’re director and founder of virtually everything in Rhode Island.
JACKSON: Well, you know the pay is good. One is the Slater Center for Interactive Technologies which can be found on the World Wide Web at slaterinteractive.com. The second is the Slater Center of Biomedical Technology, which can be found at slaterbiomed.com. Both of these organizations make grants, loans, and equity investments in companies in the order of $75,000 to $100,000 to qualify teams that can come forward with a business plan that makes sense. The Slater Center for Biomedical Technology has been in existence for three and a half years or so. During that time we have founded over a dozen companies. There’s been approximately an 8 to 1 match of all the money that we put in that’s been matched by new venture capital coming in, federal grants and contracts and the like. So it’s had, I would say, an 8 to 10 million dollar impact on Rhode Island businesses. There are resources available to help improve business plans, be introduced to venture capital financiers, help in building teams, help in finding government agencies that will give grants to advance these things, finding space, setting up a laboratory. So I think that you can find about the other ones, I don’t have the Web addresses of all the other centers, if you go to the Economic Development Corporation’s Web site there’ll be a place where you can find out about the Slater Centers and direct links to all of them. I urge anybody who has a kind of high growth potential technology oriented business idea to look into these as an excellent source of start up funding.
PROSNITZ: Is there money in the governor’s budget now for more funds for the Slater Centers?
JACKSON: Yes, I believe it’s been cranked up a little bit, although it’s still tentative. It needs to be approved. I’m not sure exactly where that stands in the legislative process.
PROSNITZ: Bill, can you take a minute or two and explain a little bit about the Brown Venture Forum and what opportunities that offers for people with some dreams?
JACKSON: Well, the Brown Venture Forum is really a networking organization. Once a month we invite a company to come in and make a presentation about themselves to a group of investors and would be entrepreneurs who learn from them. We have a panel of experts who will critique the plan that the company has put together and perhaps introduce them to some venture capital investors. You can find out about that activity by going to brownventureforum.org. We have a Web site that will give you the Newsletter. I’d also recommend you go there to take a look at some of the service providers. Jim Hahn, for example, is listed as one of the resource people. Real telephone numbers of a guy like this. You can find resources, accountants, lawyers, banks, venture capital firms that are all part of our network that would be very much interested in hearing about your business ideas. The brownventureforum.org is the place to go.
PROSNITZ: Don, I didn’t get to you before and I think you wanted to add something.
McQUEEN: I just wanted to add on the venture capital front that there has been a lot of venture capital money that has been brought into the Rhode Island market and a lot of that is early stage venture capital dollars. These are not companies that are up and running and are making widgets or what have you. These could be mere concepts. The venture capital companies are willing for the right concept with maybe a technological bent to it. You may not have a dollar of revenue but you will have access to capital if your concept is a good one.
JACKSON: These aren’t the kind of companies you lend money to, so venture capital is really the key and I think I mentioned before, Spherix, started by a professor at Brown who had a great idea for delivering pharmaceutical preparations orally. We have set up a facility in Warwick. We have 4 million dollars of venture capital that’s gone in. The team’s being built. No revenues absolutely, although there’s a little bit of a kind of development money coming from a partnership with a major pharmaceutical firm, but those are the kinds of things that venture capital is needed for: building high growth potential companies to a high level of potential income – years away probably.
PROSNITZ: Wayne touched on, I think, a point that’s important: How much does a venture capitalist want of your company; how much control do they take of the company when you get involved?
JACKSON: Ah! A deep, dark secret. Well, let me start off by saying first of all it’s not necessarily good to own a 100 percent of your company. You may own 100 percent of a very small pie. And I guess the analogy I like to think of I’d much rather own a small slice of a very large pie than 100 percent of a very small pie. And that’s the thing, I think, the entrepreneur has to get over in thinking about. It’s going to take a lot of money to build a very significant company that’s going to have a lot of value in the future. So you’re going to have to give up some of that. How much are you going to have to give up? Well I would hope that you could give up less than half but it depends on how much money you need. I would say that certainly on a first round of venture financing you might give up one half or less. The venture capitalists know there has to be enough on the table to incentivize you to keep going forward and to make it big. They’re not going to take 70, 80, or 90 percent of your company. What’s left for you? Why would you want to do that kind of deal? So I wouldn’t be fearful of the process. I would say that a good venture capital firm and there are some that are operating in Rhode Island understand your needs and understand your need to be motivated. So it’s really kind of meaningless to talk about the percent you wind up with.
PROSNITZ: But it’s not always a great story and people have to be very careful when they enter it.
JACKSON: Well, it can be not a great story if things don’t work out well. I’d say the worst scenario is one in which perhaps you give up a piece of your company to an investor but then you don’t achieve your goals and you need more money. Then you’re going to have some very tough negotiations and you’re going to wind up with a smaller and smaller fraction of that pie.
PROSNITZ: We did have a worst case scenario in Rhode Island with a company called tradesafe.com in which, in fact, the investors took over the company eventually, and the dreams are somewhere in cyber space I think.
JACKSON: Right, well, it’s a dead company. There are lots of those around these days.
MAZZE: Frank, one of the other things if you’re going to deal with a venture capitalist is you have to understand that they have an exit strategy. In other words most venture capitalists don’t plan on staying with you as long as most people think as a partner. Many of them go in with the notion that after a certain amount of time they want to go out and do other things. A lot of times an entrepreneur doesn’t realize that. You’re not getting a partner for life in many cases. You’re getting a partner for a very short time.
PROSNITZ: Jim, you wanted to answer.
HAHN: Well, the only thing I was going to add is now in terms of dealing with a venture capitalist as would be the case in dealing with a financial institution part of the role that an attorney plays is making sure that the entrepreneur knows what the business deal is that they’re getting into and what some of the pitfalls are. As Wayne says there are some very complicated agreements that are going to be signed and the venture capitalists are really pretty much up front in terms of letting you know what their expectations are out of the transaction and what their exit strategy is and how they foresee enabling you to get to the point where the company will be able to buy them out. I think the other thing to remember and Bill mentioned this earlier in connection with the company that you noted, the company went down the tubes. Venture capitalists recognize that when they put money out some of the deals are not going to make it. So as a result they’re lending into a group that’s high risk and they expect to get
a higher return. It’s part of the whole market principle of capitalism.
PROSNITZ: Go ahead Bill.
JACKSON: I just wanted to talk a little bit about exit strategy and so on. The game that you play as a venture capital investor is you put money into a company in anticipation of taking a lot more money out. I mean if I put a million dollars into a deal that Jim is starting up, I’m going to make sure that I have a pretty good shot at getting maybe 5 million or 10 million dollars out sometime within the next 5 years or so. And if Jim can’t show me a scenario that leads to that why would I want to put my money in, because it’s a high-risk deal. So I have to have a way of knowing I’m going to get an exit strategy or a way to get my money back out again so I can recycle that money.
PROSNITZ: We’ve talked about conventional loans; we’ve talked about venture capital and Ed what else is out there, what other opportunities are there for Rhode Islanders; what other kinds of financing?
MAZZE: Well, there are things as I said before. One is the credit card which you know, I urge people to look at carefully because
PROSNITZ: Thirty-six percent interest!
MAZZE: It’s difficult to pay back. Then there are businesses that want to become parts of regional and national franchise systems where the franchiser could provide capital. There are in certain places certain foundations that actually provide seed money to new businesses. Credit unions, home equity loans – the list really could go beyond anybody’s greatest imagination. In fact, creative financing means really going out and hunting. Don’t let the first person say no and go home and say I’m not going to do this anymore. You just keep going out there and you may, you know, before friends, relatives and fools – these folks exist. And you have to work as hard at getting financing as in building the business.
PROSNITZ: Is there someone that can take that individual and walk them through all those steps, can help them? Is that the accountant? Is it the lawyer?
MAZZE: Well, it’s really everybody on the panel. I mean it’s interesting that everybody on the panel could play a role. All of the educational institutions in Rhode Island from the University of Rhode Island to Rhode Island College, to RISD, to Bryant College, all of them are teaching entrepreneurship in one way or another. All of them have faculty. They have Continuing Education folks that know something about entrepreneurship. Read the Providence Business News.
PROSNITZ: I do occasionally.
MAZZE: I hope so.
PROSNITZ: In fact, I do every week.
MAZZE: Just by reading you’re going to learn. There’s so much information available in libraries. There are so many government agencies that have readable material so that you could sit down but I still think at the end of the day it is so important to talk to an attorney; it is so important to talk to an accountant and it is critically important to build a relationship with a bank.
PROSNITZ: Let me move into another area and that’s minority and women lending. And whether or not for a minority lending or a woman owned business to be able to get a loan out there, to be able to get the /financing that they’re looking for. Anybody willing?
McQUEEN: Well, it shouldn’t be any more difficult.
PROSNITZ: Well, let me move away from the theory but to the reality.
McQUEEN: I think that there are a lot of opportunities for financing whether it be inority, women or man owned businesses. That’s why we have the SBA. That’s why we have the Rhode Island Economic Development Corporation. That’s why we have OSBDA. That’s why we have the BDC. A business should be able to stand on its own foundation. If it has weaknesses for whatever reason there are alternatives to take that business and obtain the financing that it needs. The important part is that it has been able to sustain revenues. It’s been able to show that it can maintain a control on expenses, and reinvest earnings back into the business.
PROSNITZ: Wayne, in your experience in dealing with minority and women clients who look for financing is there any different treatment of those individuals through any of the financing vehicles that you deal with?
WILFAND: I think you have to look at the fact of the makeup of the work force today. Women are at or more than 50 percent. When you go to a bank now the chances of getting an all-male panel or to meet with a one sex, so to speak, group of individuals at any institution now is very slim. We look at whether it be a male or a female, it virtually makes no difference if they have experience in the area. You talked earlier about a service business. One of our clients is a woman owned service business. There are no assets. They provide a service. And it’s one of the leading companies, strong revenue stream and it’s owned by a woman. It’s a process today where there should be no difference whether it be a man or a woman. And the banks look at it in the same way because frequently you’re dealing with a female loan officer. So I think that any woman or minority that wants to go into business that is not one hurdle that they have to ago over.
PROSNITZ: Let me turn back to the audience and see whether we have any questions from the audience.
CAROL MALYSZ (Executive Director of the Center for Women and Enterprise in Providence): Well, I’m looking at an all male panel and as a female I’m hearing what you’re saying about there not likely being any difference as a woman owned business approaching professionals like you. However, the reality might be quite different and I’m wondering within your own organizations or other organizations that you may be aware of what advice would you give to a woman owned business in Rhode Island as far as accessing debt or equity capital or getting some of the services you talked about. Are there specific resources that you may be aware of within your own firms or outside of your firms?
MAZZE: Well, of course, at the university better than 50 percent of our students and a large percentage of our faculty and many of our outreach people are women and minorities who are out there and these are perfect individuals to talk with in terms of experiences. I know at the banks if you go through an annual report today and you look at the officers, the officers of the bank don’t look like all of us up here. The advice that I would give is get as much information as you can from as many people because at the end of the day information is power whether you’re a woman or a man, whether you’re black or white. You’ve got to get that information so you can walk in and play on a level field.
PROSNITZ: What experiences have you had that you can share with the panel?
MALYSZ: Well, as a matter of fact, we have a new organization within the state, that’s funded by the Small Business Administration and Fleet Bank and now Bank Rhode Island, which is called The Center for Women and Enterprise of which I am the director and while the reality is that information is important and experience and track record there are still some subtle things that happen because of the lack of a track record of many of the women start up businesses that we see and in our own particular clientele about 60 percent are start up. Since women owned business are growing at a rate of 38 percent nationally and are expected to be 50 percent of all small businesses in the country by the year 2005. We still see some subtle kinds of messages that come across about the inability to get started because of the lack of track record; because of financial situations like divorce or temporary setbacks that people are facing where they cannot access debt or even equity capital so we’re hoping that it will become a reality that it’s an even playing field but we still have a little bit of a way to go.
JACKSON: Can I make a comment on that? I met recently with a group in Boston at Fleet Bank who were most enthusiastically looking for women and minority businesses because of certain mandates on the larger banks to be reinvesting into their communities they have a specific need to find businesses of that sort and I’m wondering whether you’ve had any experience approaching that group say at Fleet for example. It’s almost an advantage to be a woman or a minority approaching that group.
MALYSZ: Well, Fleet is a strong supporter and has its own program called the Women’s Entrepreneur Connection and that particular group is devoted and has financial resources devoted to helping women owned businesses start and grow in the New England region. So we’ve been working very closely with them, but I think it’s important for the women owned businesses that we see in Rhode Island to become more visible and to become a stronger economic force.
PROSNITZ: Let me ask about other programs that might be geared toward minorities or women or might be geared toward entrepreneurship and at the universities in particular. I know, Ed, there are things going on at the University of Rhode Island.
MAZZE: Well, I think what we try to do is prepare individuals to get together the best business plan. You know, it’s interesting before women got involved in small business to the degree they are today, 9 out of 10 of every new business failed. So men did a terrible job. So I hope women are going to be a lot more successful than men. And I think the business plan is critical and we do run special programs. I think where women are at a disadvantage, and I think it’s changing rapidly, the subtle thing is the networking. It’s knowing who to talk to; knowing how to get in to see the individual who makes the decision. And I think we have learned particularly at a university and then in our other lives whether we’re in the financial services industry that a woman, an Afro American, an Hispanic or a white person, they can all be very profitable customers if you treat them the way you’d like to be treated. I think that’s very critical. But there are special programs geared for women and I’m hoping that your organization comes to the universities and we can partner these programs because that’s so critical to our students. As I said over 50 percent of women — I’m teaching an honors course this semester called The Business of Business, there are 10 students, 9 of them are women. So I’m just hoping we could serve as models and that they could challenge us and really be the future business leaders not only in Rhode Island but in a global economy.
PROSNITZ: We’re hearing about programs for women. What about programs particularly for minorities? Jim?
HAHN: Frank, I think that one thing people want to keep in mind, this would apply for women as well as other minority groups, there are some governmental programs where if you have a minority owned business you’re entitled to either special pricing or to a set aside, and those are programs that are set up to enable Minority business to compete especially at the start-up stage. It’s important if your business might be selling into the governmental sector for you as part of your business plan to look and see what kinds of programs might be available to you under those scenarios.
PROSNITZ: We’ve got about 5 minutes left to the program and we’ve covered a lot of ground. What I’d like to do instead of my trying to summarize this because you’re much better at it than I am is to really maybe go down the panel a little bit and if you’re talking to a potential borrower, what’s the best message they can carry out of tonight’s program?
McQUEEN: Well, I think the message I’d like to convey is that this is a great market if you are in business; there are a lot of opportunities to help your business grow. There is access to capital; banks are willing; finance companies are willing and there are lots of other organizations that we’ve talked about tonight that have the programs available to make that a reality. I’d also like to reiterate the importance of utilizing a team concept when presenting a proposal to a financial institution for financing, using your legal counsel, using your CPA to put together a well prepared presentation. I think presentation is critical to lend credibility to what you’re trying to get. If you come in with it in a handwritten format it’s not going to get a lot of attention. If it comes in it’s well laid out, it has financial projections, it’s got a business concept and it has a lot of thought and energy put into it, I think it would have a high degree of possibility of being accepted and taken forward.
PROSNITZ: Ed?
MAZZE: Don’t let five no’s stop you. Learn from every no and get as much professional help as you can whether you pay for it or get it for free. Just keep moving forward.
PROSNITZ: Persistence.
MAZZE: Persistence.
PROSNITZ: Wayne?
WILFAND: One of the key things is the documentation that you bring with you when you go to the bank. As simple as your last couple of years’ tax returns, your personal financial statement and your business plans. They all have to go in together because when your loan is processed it goes from the loan officer to another department into an approval committee so it’s a process where they need your information. It does have to be well defined, a nice package, short and sweet and to the point so that they don’t have to spend a lot of time looking at it; but being organized and thorough makes a big difference when you’re dealing with the bank.
PROSNITZ: Jim?
HAHN: I’d like to reiterate Ed’s point about persistence. And also give it perhaps a little longer time horizon. I think that anybody who wants to get out there and start their own business, part of what they want to do is think about what the skills they’re going to need in order to run that business and maybe they’re not going to get the loan today but maybe they need to change their job to develop another skill. Then change their job again to develop another skill. And while they’re in the process of doing that over a period of several years, they’ll be starting to build the resume that gives them the experience and fills in some of the holes that would otherwise be there and result in an immediate no. The lenders will also see that planned approach and that gives them confidence that they’re going to be able to get repaid.
PROSNITZ: Bill?
JACKSON: I would like the entrepreneurs had to be good storytellers. They have to be able to tell the story to the banker that makes the banker think that they are definitely going to get their money back or they have to be able to tell the story to the venture capital investor, or the equity investor that makes the equity investor think that they’re going to get a lot of money back if they put a million dollars into a company, they’re going to get many times that back. So a good story telling starts with having a good plan, a written document and having a good, short pitch that gets the juices flowing and gets people excited about this new business opportunity and you ought to be excited about this business opportunity if you’re going to make it go.
PROSNITZ: So it all begins with a dream and from there we go in whatever direction it takes us to the bank, to the venture capitalist using all of the professionals involved and with an incredible amount of persistence in getting to that point where that dream becomes reality. And we’ve heard some great stories out here. Cheryl in her business of 10 years ago that started with her dream and is still going strong 10 years later and is going to go strong in another 10 years from now; and in all of the dreams that we’ve talked about. The key points, and help me if I’m wrong,:
- Persistence.
- Take a look at your professionals as a team and put it together
- Rely upon friends, family and fools
- Just pursue until you find the correct financing.
Have I missed anything? I want to thank our panel: Don McQueen, Bank Rhode Island, Ed Masse, University of Rhode Island, Wayne Wilfand, the CPA firm, and Jim Hahn of the law firm, Partridge, Snow and Hahn, Bill Jackson, Brown Venture Forum for providing us with a lot of really good information tonight and to our audience which has been really terrific. Just to remind you, this is the first of three of our summits. The next one is going to be on May 24th and we’re going to be talking about a Business Vision for Rhode Island and we’ll have a terrific panel that will help us go through that and tell us whether or not we have the leadership and how we develop that vision that’s going to bring us to that next step, the next place in Rhode Island. I want to thank you all for being with us tonight and viewing us. I want to thank the audience again and the panel. We’ll see you again May 24th.
