All company founders know they need to raise capital. But few realize that as investors multiply, they need care -- even if they're family

Money. When you're building a business, especially a fast-growing business, it's on your mind all the time. And why not? Most companies can't grow without a periodic infusion of money to help them survive inevitable cash-flow crunches, as well as to invest in new technology, staffing, and market opportunities.

But in a world with limited financial resources, especially for start-ups and small companies, cash-strapped business owners are typically forced to raise all that money a little bit at a time from a variety of people and institutions. At first, funds come from relatives and friends; then business associates, customers, or suppliers may get involved. As companies establish records of growth and profitability, owners gain access to banks, professional investors, and other sources of capital.

Company builders usually wind up with a patchwork quilt made up of different financing pieces. Coordinating those capital relationships isn't simple, given all the other management demands involved with a fast-growing business, but it's essential. That's because only those companies that figure out how to keep their investors satisfied, well informed, and committed to a teamwork approach will be able to rely on them for support when unexpected crises and opportunities arise -- as they always do.

To get an idea of just how tough it can be to manage growth capital, just ask Matthew Oristano. As the chief executive and major shareholder of People's Choice TV, based in Shelton, Conn., a $25-million pioneer in the wireless-pay-television industry, Oristano has struggled for eight years to raise the cash necessary to carry out a high-stakes, fast-growth strategic plan.

The challenges he faces in building and managing an adequate capital base are, admittedly, extreme. Few start-ups require the kind of early, intensive investments of capital that People's Choice has depended on in its bid to acquire and develop wireless-cable-broadcasting licenses in key cities across the country. To make matters worse -- much worse during the company's early years -- the industry itself lacked credibility with bankers and investors, who doubted wireless cable's viability against cable and TV-network competitors.

Although Oristano's capital challenges were great, there are many similarities between his quest and those of so many other entrepreneurs, including the constraints that he faced raising growth capital at a time when his revenues were limited and his profitability was nil.

Oristano's original source of capital, as is the case for so many business owners, was his family. He had worked since the mid-1970s for the family business, a cable-television company with operations in the United States and England. When he became convinced of a higher profit potential in wireless pay TV, back in 1987, his family ultimately decided to sell the business and invest some of its proceeds in his new venture. Other relatives had invested in the core family business, and so became investors as well. The funds helped Oristano investigate the potential acquisition of People's Choice TV, a small company whose chief assets were a handful of wireless-cable licenses and "a lot of skill in acquiring those licenses," according to Oristano. (Wireless cable transmits satellite television channels to small receiving antennas via superhigh frequencies; the advantage for customers is a 20% to 30% cost savings over hardwired cable competitors.) Matt Oristano assumed the position of chairman of the newly acquired company, with his father serving as vice-chairman. "We were the ones actively involved in the company's growth and operations. When it came to the other family members, we treated them as investors and shared the same kind of information with them that we would with any other investor," Matt says.

That has worked well, says Matt's brother Mark, a sportscaster and actor who resides in Dallas. "I'm definitely not a businessperson, but my brother and father have done a beautiful job of building People's Choice TV. They tell me what I need to know and every once in a while answer a question of mine if I don't understand a report they send me."

Tip: When you're dealing with family investors, Matt Oristano says, "it should be clearly defined which family members are actively involved in the business and which are involved only financially. To avoid confusion or misunderstandings, everything should be documented the same way any other financial relationship would be."

Some start-ups can manage with the growth capital gathered from family and friends, but Oristano knew that People's Choice needed much more money. A bank line of credit would have been ideal, but Oristano had two strikes against him: bankers' traditional anxieties about funding start-ups and their doubts about his industry's potential. Instead, he turned to a group of wealthy private investors, many of whom came from Wall Street and were ready to bet on wireless pay TV's potential.

Rather than loosely channeling their funds into his company's coffers, Oristano coordinated a formal structure to handle the $6 million of early-stage capital raised from both his family and the private investors. He set up a limited partnership, dubbed Omni Microwave Television. His private investors jointly held an approximately 50% stake, while the Oristano family owned the rest.

Tip: When you're coordinating outside investors with family investors, it is essential, says Oristano, to treat everyone the same way -- or at least to attempt to do so. "We always sent family members the same financial reports or other documents that our other investors received," he says. "Sometimes my relatives would say, 'Enough. All I need to know is that things are going well.' But sometimes they'd want more information, and I'd respond to them the same way I would to anyone else."

By the middle of 1989 People's Choice held licenses in a handful of major cities, including some on-air Chicago stations that generated about $1 million in revenues. "We weren't yet looking for additional financing," says Oristano, "but we were approached by the managers of a public company called Graphic Scanning, who proposed making a major investment in our company."

To Oristano -- whose company was still rejected by bankers and still far from profitable -- the opportunity was too good to resist. Graphic Scanning wanted to invest $9 million in cash, as well as some other assets, in return for a one-third ownership stake, to be sold through a private placement.

Tip: Oristano followed two important procedures. First, he investigated the prospective investor's finances and its goals for People's Choice. Second, he consulted with his existing investors to make certain they were amenable to the deal.

Oristano's family and outside investors welcomed the new capital relationship with a company that possessed $150 million in cash on its balance sheet. "Cable companies were quietly spreading the word among bankers and Wall Street investors that wireless pay TV could never succeed -- because we would never get access to the programming they controlled. We all felt we were lucky to find a company that believed in our prospects enough to make a major investment," Oristano recalls.

He now had three distinct groups of investors to keep satisfied. "But we tried to communicate with all of them in the same basic way, which was by keeping them aware of our financial results and important developments, and answering their questions whenever anyone wanted more information."

Then came the nightmare.

In June 1990 Graphic Scanning's managers came to People's Choice with an astounding request. "They asked us if we had any spare money that we could invest in them," Oristano recalls. The situation quickly spiraled out of control as it became apparent that Graphic Scanning had spent its way through its cash supply and faced an uncertain future.

Tip: What Oristano learned -- the hard way -- was that effective communication with investors is a two-way street. That includes staying on top of any developments with your investors that might affect their long-term support for your growing, occasionally rocky, business venture.

"To be candid, a lot of people here wrote off this investment at various times, especially during the Graphic Scanning incident," says Jon Rather, chief financial officer at Walton Corp., an investment company in New York City that was one of the original Omni investors. "If it were not for the relationship of trust we had built with Matt, we might have pulled out. But we felt, first of all, that he was very honest about the problem. He came to us and told us that for whatever reason, the transaction did not work out as we had intended, but that we could still salvage some economic benefit. He didn't duck the issue, but he also told us about the good things that were going on within the company."

"We all agreed that the worst thing for the company would be the sale of our stock on the open market to just anyone as part of a liquidation of assets," Oristano says. If that had happened, new investors might not have shared the long-term growth commitment held by People's Choice's earliest investors, which could have produced a dangerous rift in the company's capital structure.

"It took a lawsuit, but eventually we won the right to purchase back our stock for $1.7 million in two-year notes," Oristano explains.

Back to just two basic investor groups -- his family members and his original private investors -- Oristano knew he needed to broaden his capital base. Again, he turned to those first groups for assistance in achieving a level of stability by adding bank financing.

A traditional bank loan or revolving line of credit, using People's Choice's assets as collateral, was still out of the question. So was a loan based on the company's financial performance, since its revenues were slight and its red ink was plentiful. But Oristano, with the active involvement of his original investors, came up with a solution: "Our various shareholders, including Omni, put up financial assets of their own that we were able to use as collateral to get a $6-million-plus revolving bank line of credit."

Winning that additional support from investors, of course, required new concessions from Oristano and his company. Those took the form of warrants, which gave investors the right to purchase more stock. "It was worth it," Oristano says. "Our company still wasn't in a position to qualify for a standard bank loan."

Tip: As Oristano and his early investors recognized, building a track record as a good banking customer is an important milestone in any company's financial development. It might take some unusual steps to win your first credit line, but if your early backers can help, all will benefit from your company's increased credibility.

The addition of a banking relationship added a new wrinkle to the company's communication challenge. "Banks have very specific things they care about, such as your making your payments on time, staying within your financial covenants, and sending them th e specific financial reports they want," says Oristano. In contrast, communications with family and private investors were more flexible and could focus on whatever information Oristano himself considered significant.

"Obviously, we shared important developments -- good or bad -- with all our capital groups," Oristano says. "But we had to be prepared to follow up in different ways for each financier."

That has been a challenge. As People's Choice acquired more broadcast licenses, Oristano felt it was time to invest in the technology, programming, and marketing efforts to get one market area operational: Tucson. To raise the $5 million or so he expected that would cost, he wooed local wealthy families as potential investors.

After that attempt failed, he concentrated on the efforts of an investment-banking firm to attract institutional investors. His early backers agreed with the plan. Although institutional investors would undoubtedly demand a high rate of return on their investments, they would also enhance the company's ultimate prospects for a public stock offering, which had become one of Oristano's financing goals. The involvement of the institutional investors would help establish the company's financial credibility in the event of a later initial public offering in much the same way that the banking relationship had.

Tip: Institutional investors have high expectations, in terms of both the financial reports they'll want to receive and the payoff they'll expect. BCI, the investment group that gave People's Choice $4.5 million in mezzanine financing, charged 13% interest and asked for stock warrants, which eventually made it a major shareholder. With those types of requirements, Oristano made sure his family and early private investors agreed with BCI's inclusion and that all supported the long-term goal of an IPO.

When Tucson went on air and immediately generated revenues, People's Choice gained credibility among potential investors. That process was accelerated by Congress's 1992 passage of the Cable Industry Consumer Protection Act, which guaranteed wireless-pay-TV companies access to the same programming cable companies enjoyed. Finally, banks were willing to lend to People's Choice on the basis of its own assets. The company did an IPO in 1993, raising $26 million. Other financings have followed.

Meanwhile, People's Choice receives as many as 15 to 30 calls a day from private investors, public shareholders, and bankers. "One staffer handles telephone inquiries from the investing public, while our vice-president of finance and I are responsible for our various relations with our bank and different investment groups," Oristano explains.

Different reports are now prepared for different investor groups, all under the supervision of the company's chief financial officer. Some of those reports are specifically requested by People's Choice's bank; others are required by the Securities and Exchange Commission for the company's public shareholders. "Our private investors frequently telephone with specific questions about one development or another. Our public shareholders," he adds, "focus on whether our stock price is going up or down."

Relations with those who have supplied him with capital have become complicated -- a fact of life for most entrepreneurial companies as they broaden their reach into the capital markets. But as his company has grown, Oristano has learned the advantage of communicating effectively right from the beginning. His conclusion: "You can only expect your creditors and investors to work together to support your company's goals if they know that their own individual needs have been met."


If you're running a fast-growing company, here are three capital errors to avoid:

1. Don't take your financing projections too seriously. A good rule of thumb, instead, is to assume that entrepreneurial companies always need more than can ever be foreseen (if only because they are growing so rapidly). Be sure to plan ahead by constructing a flexible and expandable capital base.

2. Don't expect logic or simplicity in the capital structure that evolves at your company. That's just not achievable when business operations and prospects are changing so rapidly. "You've got to be flexible about putting together the best deals that are available to you at any particular moment," says Matt Oristano of People's Choice TV.

3. Don't take rejection from bankers or investors too seriously. When you're running a cash-hungry start-up or growth company, you've got to be prepared to be turned down by almost everyone, except perhaps your mother. "I think of myself as an actor who might go on 25 auditions before he gets a single role," says Oristano. There is one bright spot: today's failed financial pitch might get better results next quarter, once you've logged some new growth. At People's Choice, for example, Oristano made a pitch to wealthy individuals that failed in Tucson but worked out beautifully in Houston.


If you're in the market for growth capital, here are some concepts you should understand:

Limited partnership. This is a financial arrangement in which partners' liability toward their business's creditors is limited.

Mezzanine financing. Think of this as bridge or transitional money that helps entrepreneurial companies build to a level of growth that permits a public stock offering.

Private placement. A private placement involves the sale of stocks or bonds to wealthy individuals, pension funds, insurance companies, or other investors. It is done without a public offering or any oversight from the Securities and Exchange Commission.

Revolvers. No, we're not suggesting suicide. This is another term for a bank line of credit, which enables companies to borrow and use funds as necessary, usually with a one- to two-year payback requirement.

Warrants. These are the sweeteners that make most private-placement deals fly. They are securities that permit early-stage investors to purchase stock in a company at prearranged, attractive prices once it goes public.

For more essential terms and fund-raising strategies, see Every Investor's Guide to Wall Street Words, a paperback guide by David L. Scott (Houghton Mifflin, 1988, $8.95).