Capital Steps

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."