Producer Learned to Parlay His Faith in Himself

Ask Cleveland O’Neal how he finances the growth of his production and distribution company, Connection III Entertainment Corp., and he replies, “I think I can,” quoting the line from the children’s classic “The Little Engine That Could.”

O’Neal says the story offers three lessons for people who want to launch or grow a business:

* You can’t give up.

* You must have clear goals in mind.

* You can’t deny the obstacles that face you, but you can’t fear them either.

O’Neal, 42, a broadcasting and film graduate of Boston University, launched Connection III in Los Angeles in 1987, tapping his own savings to get it off the ground. The company develops, produces and distributes movies, TV shows and music; among its credits are the 1996 film “Phat Beach” and two television specials, “The Garage Club Halloween Special,” which aired on the Fox Family Channel on Oct. 25 and a Christmas special, “Santa Is Lost,” that will air on the same channel in December. In 1995, Connection III put together the first African American after-school special on network television, “What About Your Friends?,” which aired on CBS and which won two Emmy nominations and an NAACP Image award for outstanding children’s series or special.

The company employs a small staff of permanent employees--five people at most, including O’Neal--and brings on freelance people, including production crews, as needed for specific projects. O’Neal said he expects revenue to reach into the low seven figures this year and for it to grow at 15% or more over the next three to five years.

Early on, O’Neal said, he understood that starting a business and growing it are two different things. The first is, by and large, a do-it-yourself affair, and the second something rarely done without outside help. But O’Neal also faced an obstacle common to privately held small production companies: a lack of assets such as inventory and receivables, the things most bankers will expect to see, which means getting loans will be a bit trickier.

So O’Neal did what many in such a situation do: He gave his lenders personal guarantees, including putting his house up as collateral.

He made do with small loans in five-figure amounts at first, then more later on, as his needs grew along with his ability to service the debt.

He also took care to establish close relations with his bankers and to educate them about his business, he said.

“For us, getting working capital was high on the agenda out of clear necessity,” O’Neal says, “and slowly but surely we got smarter at getting it. I maintained outstanding personal and corporate credit to qualify us for our bank lines, and I cultivated my bankers.”

In dealing with his lenders, O’Neal stressed the unusual aspect of his production company’s strategy--namely that Connection III retains ownership of the properties it develops and produces so it can exploit every opportunity to generate revenue, including syndication and product licensing. O’Neal licensed “What About Your Friends?” to HBO after it aired on CBS in 1995, for example; he later syndicated it to a number of network affiliates and independent stations across the country.

In the end, he says, his lenders saw that the strategy gave him an asset not unlike inventory, with the difference that O’Neal generates more than one sale from each property.

“In a big-studio project in Hollywood, the producer is handsomely paid, but the studio owns the property,” O’Neal says. “I recognized early on that owning and not just producing entertainment properties offered almost unlimited revenue potential.”

Many bankers “don’t understand show business, so I showed mine that by retaining ownership of our properties, we could gain revenue from distributing and licensing the same product in different ways in a number of markets--and that gave us more than one source of cash to service the debt.”

O’Neal’s production costs are lower because he doesn’t use big-name stars for his movie and television productions; the hip-hop star Coolio makes a cameo appearance in “Phat Beach,” but everybody else in the movie has a fresh face. He also films in Canada, which lures many a movie producer with tax breaks.

What’s ahead?

Connection III needs to build up its library, O’Neal says, and to do this it requires more capital, perhaps some combination of debt and equity financing.

“We want to exploit our entertainment properties in the youth and family market via electronic media--the Internet and e-commerce,” O’Neal says. “My business model in the beginning was to own the properties we produce, and I’ve stuck with that vision.

“We’re doing our homework now so we can talk to lenders and investors about the future,” he adds. “The best place to make a mistake is on paper--because you can erase it and start over” before it’s too late.

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Juan Hovey can be reached at (805) 492-7909 or by e-mail at jhovey@gte.net.