Living on the edge Featured

9:53am EDT July 22, 2002

Marcus Ruscitto was playing golf at a resplendent country club in California’s Napa Valley in the summer of 1997 when the call came that sent his life and his company on a wild ride over the next several months.

It’s a ride most entrepreneurs take — a ride that continually carries you to the edge of corporate sanity. It’s a ride that, again and again, drives you to the edge of success or failure as you take breathtaking chances on a road wrought with dangerous twists and turns. And it leaves casualties. But it’s a ride you have to take to avoid the certain death of your venture.

It’s a ride Ruscitto knows well, thanks to a driving test that would prove to be pivotal in the survival and success of this now-weathered young entrepreneur and his growing company. This is the story of that ride.

But make no mistake. As Ruscitto would be quick to affirm, it’s only one experience on a journey that requires the gumption to ride again and again as he lives on the entrepreneurial edge.

Ruscitto and some of Stargate Inc.’s other top brass were attending a trade show when they got word on the golf course from the owner of USA OnRamp, a local Internet-access competitor that Stargate had been seeking to buy: Another company was poised to snatch it.

Stargate’s deadline for raising the necessary capital was at hand. Worse, the company had put up more than $100,000 in hand money that it stood to lose if the deadline passed without a deal. Still, this was an acquisition Stargate considered crucial if it was going to carry out its ambitious business plan.

“They apparently got an offer from a company that was quite large and had the ability to pay immediately,” says Ruscitto, now 29 years old.

Ruscitto’s heart sank. He didn’t let his cohorts know he was thrown off his axis, but inside he was shaken. The news meant that, after months of negotiations, a well-heeled competitor was ready to take the prize that Ruscitto believed Stargate needed to become more than just another Internet service provider.

“A company with a flat growth curve is not where I wanted to be,” says Ruscitto. “That whole deal was what the business plan was all about.”


Make-or-break deal

Prior to that deal, Tom Certo, CEO of USA OnRamp’s owner, Gemini Holdings, and Ruscitto considered themselves friendly rivals in the same emerging industry. They chatted periodically about the future of their respective ventures. They discussed options: a merger, either with each other or another company; acquisition of one by the other; or taking on equity partners.

By the summer of 1997, Pittsburgh-based Gemini Holdings decided the time was right to sell, and Stargate was convinced it was time to buy. USA OnRamp offered Ruscitto an operation with a downtown Pittsburgh presence, a benefit, since Stargate was based in far away Belle Vernon. USA OnRamp brought to the table a skilled labor force of 25 employees, which would double Stargate’s size. It was also its biggest local competitor.

With a large cable company calling on USA OnRamp, Stargate would face an opponent that likely would end up being the proverbial 900-pound gorilla.

The deal wasn’t dead, but it was in serious danger. Gemini Holdings would give Stargate a chance to raise the cash to make the deal work, but Certo wanted something in return and a cushion against anything that threatened his company’s plans for divestiture of USA OnRamp within its timetable.

Gemini’s proposal: Stargate would put in escrow a substantial chunk of cash — more than $100,000 — to extend the deadline for a chance to raise the money to finance the acquisition. If the company failed to get the deal bankrolled within the assigned period, Stargate forfeited the money.

Stargate, like many fast-track technology companies, was long on potential but short on cash, and Gemini Holdings was asking it to give its interest in USA OnRamp some teeth.

“I think they were thinking along the lines of a bird in the hand is worth two in the bush,” says Ruscitto. In any case, Stargate would have to act quickly.

While Ruscitto was convinced he could raise the cash, putting up the earnest money posed a problem.

“We had to beg, borrow and steal the money,” says Ruscitto.

Stealing the money is, of course, hyperbole, but Ruscitto is serious when he says he had to put the company on the line to land USA OnRamp. Failure to close the deal, Ruscitto says, would have threatened the company’s future.

“To languish would have been a best-case scenario,” Ruscitto says. “That was really almost putting the whole company on the table.”

But Certo and the other shareholders at Gemini Holdings had made up their minds. Their best bet was to let go of USA OnRamp, and if they gave Stargate more time to make the deal work and it failed, the delay could put an eventual sale too far into the future to coincide with Gemini Holdings’ own growth plans.


Of youth and ambition

Stargate, an up-and-comer in the Internet provider industry, had grown rapidly since Ruscitto cashed in $100,000 in stock to launch it in 1995. The company arose from the tinkering of his younger brother, Michael, an adolescent techno-wizard who, while in high school, grew impatient with sluggish Internet connections and decided to build his own.

Although Marcus had scant knowledge of the Internet, he soaked up articles from magazines and technical journals, and the brothers formed a venture to sell Internet access services while still in their parents’ Peters Township home. They quickly outgrew their space and moved to a building the family owned in Belle Vernon.

The company grew, but Ruscitto knew that if their fledgling venture were to be taken seriously, it would have to have a presence closer to the Golden Triangle. Growth through acquisition, he believed, was the track that would take the company to prominence in an industry beginning to take off.

When an opportunity came to acquire USA OnRamp, Stargate saw it as a chance to solidify its hold on Western Pennsylvania and become the region’s top Internet service provider.

But Ruscitto met with resistance, not the least of which came from his accounting advisers at Ernst & Young.

“They told me there was no way we would get it together that quickly,” says Ruscitto.


Finding the money

Lining up the meetings to make presentations was itself a laborious task. The company faced numerous cancellations and scheduling conflicts.

“It was almost like cold calls and rejection combined

with the tremendous deadlines,” Ruscitto says. “Every day that ticked away you were closer to that escrow being closed on.”

Ruscitto made seemingly endless presentations to prospective investors, explaining again and again the company’s vision and why the acquisition was the right move. Some appeared eager, only to back out when it came time to come up with the money. Some simply said, “It’s not the right deal.” Others said, “Come around later.” And still others responded, “Maybe we’ll come in on the second round.”

But Ruscitto knew there would be no second round if there wasn’t a first.


Wearing the game face

Ruscitto was feeling the pressure as the days ticked by, but did his best to keep anyone from seeing the strain he was under.

“Even though it was probably eating him up inside, he never really showed it outwardly,” says Shawn McGorry, Stargate’s COO (see sidebar).

When it looked like the wheels were about to fall off, Ruscitto would simply say he had no other option but to get the financing together, says McGorry. Without it, the company was in danger of going under.

Throughout the quest, there was a business to run. The closed-door meetings, the moods of t he executives and the fluidity of the Internet market fueled speculation in Stargate’s work force. Confidentiality and competitive restrictions shackled Ruscitto and the key people on the inside track from keeping the employees informed, but they told them as much as they could.

“We tried to be as honest and forthright to our employees as we could possibly be,” McGorry says. They asked for patience and trust that what the managers were doing was for the good of the company.


A successful landing

Finally, the prime investor prospects were winnowed down to one, Pittsburgh investment banker RRZ Capital, which ultimately took a 45 percent stake in Stargate.

But these deals typically are slow to wrap up. On Nov. 16, the day the escrow was due to close, RRZ reportedly was close to coming across with the financing, but a few crucial details remained unresolved. Stargate and RRZ invited Gemini Holdings to a meeting and told the principals that, subject to due diligence and the numbers working out as they were represented, financing would be available. Certo and Gemini agreed, and by January, the sale closed.

Certo knew he had set the bar high, and realized that it would be tough to pull off the financing in the time allotted.

“I was pleasantly surprised,” he says.” I will admit I had my doubts.”

Certo wanted to give Stargate a chance, given that they had worked on the deal for a considerable amount of time. According to Certo, the fact that Stargate was working with a local investment group meant that it would be more likely to pull off the deal.

Stargate’s employees, too, demonstrated their confidence in the company. On the morning after the announcement that the deal was on, employees treated the top managers to a champagne breakfast at the Belle Vernon headquarters.


Always on the edge

Since the USA OnRamp deal closed, Stargate has moved on to other tasks. Any venture faces its share of growing pains, and Stargate won’t escape at least some of them. Melding two company cultures and networks and moving into a new headquarters in the Strip District have been big efforts, and not without casualties.

A few employees, uncertain about where they fit into the new structure or uneasy about the move to Pittsburgh, moved on to other jobs. And in light of what the company has planned for its future, including an initial public offering in the next two years, there could be a lot more dizzying changes.

Ruscitto claims that Stargate turned cash positive in August of last year. Moreover, the growing company landed a $15 million line of credit from Fleet National Bank of Boston that allowed it to recapitalize and arm a war chest for more acquisitions, such as its purchase of Pittsburgh Online in June. And Ruscitto says others are on the horizon.

With some distance between Stargate and the watershed event that has been so critical in its subsequent development, Ruscitto says he sometimes wonders what the fuss over the USA OnRamp deal was all about. Still, the memory of the discomfort it caused is enough to make even this veteran risk-taker wince.

“I really don’t want to go through that too often,” Ruscitto says.

How to reach: Stargate Industries at (412) 316-7827 or www.stargate.net; Gemini Holdings, (412)391-0404 or www.gemhold.com Ray Marano (rmarano@sbnnet.com) is associate editor of SBN.