Venture capital, disaster loan keep Texas company on the growth trail: private investor, post 9/11 disaster loan give PeopleSolutions needed boosts.

* The ripple effect of the Sept. 11, 2001, terrorist attacks almost sank PeopleSolutions Inc. of Dallas. Several major clients canceled contracts, leaving the young firm overstaffed and overextended.

PeopleSolutions, a human resource management outsourcing and consulting firm, was forced to lay off 75 percent of its staff. "I had to say goodbye to people who had been with me since the beginning," says Ed Rankin, chief executive. "Sept. 11 was a painful time for us in many ways."

The firm, No. 277 on Inc. Magazine's 1999 list of 500 fastest-growing companies, went from 100 percent annual growth to negative growth, and from 80 employees to 18.

Today, PeopleSolutions is back in the black, on its way to posting $5 million in; revenue for 2003.

PeopleSolutions' success during the economic slowdown comes from a combination of savvy management, timely outside investment and governmental assistance.

In the aftermath of the terrorist attacks, the U.S. Small Business Administration approved more than $1 billion in Economic Injury Disaster Loans. People Solutions received $600,000, which it used for operating capital and debt restructuring.

This wasn't the first time the SBA played a pivotal role. Earlier loans from a fund licensed by the SBA provided crucial capital.

Rankin started PeopleSolutions in 1994 with $500 in the bank and a plan for helping companies analyze and outsource human resource functions.

Rankin focused earnings on increased productivity and customer service. "We didn't spend money on fancy furniture or trappings," he says. "We spent it on good people and smart technology, plus customer support and service."

But growing the company proved difficult. Cash flow was slow and inconsistent. So Rankin learned to ask clients for deposits, established a relationship with a major bank and opened an initial line of credit.

PeopleSolutions began posting more than 100 percent growth each year, yet remained undercapitalized and unable to seize the deals that would provide breakthrough growth.

By 1999, PeopleSolutions was in what many financial analysts call "no-man's land"--too small to interest traditional banks or venture capitalists and too big to ask friends as Rankin puts it: "Got an extra million dollars I can borrow?"

To his surprise, Rankin received a letter from someone offering a million dollars--"and it wasn't Ed McMahon," he says. A Houston firm, Trident Growth Fund, was contacting Inc. 500 companies, looking for investment opportunities.

Trident is a mezzanine fund, providing $1 million to $2 million in growth capital and buyout capital for qualifying small businesses. Privately owned, it is one of many Small Business Investment Companies licensed and regulated by the SBA. SBICs use their own capital, plus funds borrowed at favorable rates with an SBA guarantee, to invest in small businesses.

Trident thought PeopleSolutions might be a wise addition to its investment portfolio.

"The first thing we look at is management," says Trident Manager Larry St. Martin. "Ed is a seasoned professional with a good track record." Trident's other considerations for possible investment are the fundamentals of the business model, exit strategies, growth rate, cash-flow history and health of the particular industry.

"We think PeopleSolutions is a well-managed company in a good, growing industry," says St. Martin. "Continuing to spur their growth results in higher profits for everyone concerned."

Rankin negotiated with Trident for several months. "They didn't really offer us a million dollars in the first phone call," says Rankin. "They did all the due diligence of the discovery process and really educated me on what was possible."

In 2000, the negotiations resulted in a 5-year loan of $1 million, with deferred interest and payments. A Trident partner joined PeopleSolutions' board.

As PeopleSolutions continued to fulfill earnings expectations, Trident loaned an additional half-million dollars in 2001, and $250,000 in 2002.

Rankin has used the money in personnel and technology acquisitions, including Portenta, a communications software tool.

"Without the loans, we would have had to contract in size and scope," says Rankin. "I think we'd still be in business, but on a much smaller scale."

The SBIC program's purpose is to fund success stories like Ed Rankin, says Lee Mercer, executive director of the National Association of SBICs. In 2001, NASBIC named PeopleSolutions its Portfolio Company of the Year.

Rankin acknowledges the significance the SBA, SBIC and Trident have played in his company's success. "I've been able to bring in a top-notch executive team. To be able to have the financial leverage to attract that kind of talent and really take the company to another level is quite gratifying, and humbling."

Small Business Investment Company Program

What: Privately owned investment firms licensed by SBA provide venture capital and startup financing to small businesses. Most SBICs are owned by small groups of investors. Some are owned by banks. Some are corporations with publicly traded stock. The two primary criteria for licensure are qualified management and sufficient private capital.

How: An SBIC may provide loans independently or in cooperation with other lenders. SBICs have great flexibility in financing options and can provide funds for growth, modernization and expansion. SBICs may invest only in qualifying small businesses as defined by SBA regulations.

Stats: SBICs had an average financing size of $510,00 in fiscal 2002. The SBA reports $2.7 billion in financing to 4,004 firms and 91,400 jobs retained or created in fiscal 2002.

First step: For a list of SBICs, visit www.sba.gov/INV/operabic. html

PeopleSolutions Inc.

Chief executive: Ed Rankin 12740 Hillcrest Road Suite 110 Dallas, TX 75230 [phone]

www.peoplesolutions.com

Year founded: 1994

Annual revenue: $5 million projected for 2003

Employees: 18

SBIC loans: $1 million in 2000, $500,000 in 2001, and $250,000 in 2002

Loan terms: First was 5-year loan, with deferred principal and interest. Trident maintains equity position and a seat on board

Sample clients: Texas Instruments, Mary Kay Cosmetics, TXU, CompuCon, HKS