THERE’S A METHOD BEHIND ONE VENTURE capital firm’s investments in an industry that has spawned headline-making bankruptcies, disappointing earnings, scandals and lawsuits.
Denver-based Meritage still focuses on the telecommunications industry, and it is actively seeking new startup companies.
Despite the industry’s travails, Meritage hasn’t lost a single company in its portfolio. It hasn’t had a company go bankrupt nor had to pull the plug on a firm due to lack of performance or lack of promise.
“I would challenge you to find another communications-oriented VC that hasn’t lost a portfolio company,” said Stephanie Smeltzer, a vice president at Meritage. “We have not.”
Smeltzer cites “impact investing” – focusing on just a few companies – as the key to keeping Meritage free of casualties. “We limit the number of board seats our investment directors and partners can sit on,” Smeltzer said.
“You hear stories of some VCs sitting on the boards of 15 to 18 companies. Here we’re limited to five, and most are only on two or three. And so they can give their full attention to those companies.”
In some ways the downtrodden state of the telecommunications sector has worked to Meritage’s advantage, as the firm has sifted through the rubble of telecommunications extravagance of the late ’90s and found some bargains.
Most notable among those was the purchase in June of the assets of the bankrupt e.spire, a Virginia-based company with local switching and fiber-optic assets in 36 markets spanning 19 states. Investors had poured $1.8 billion into e.spire, yet an affiliate company set up by Meritage – Xspedius Management Corp. was able to acquire the bankrupt firm’s assets for $18 million in cash and a $50 million note. The beneficiary of all this fiber-optic capacity was one of the companies already in the Meritage portfolio, Xspedius, a Lousiana provider of integrated voice, data and Internet services that focuses on the southeast region.
“We were able to get a built-out fiber network for pennies on the dollar,” Smeltzer said. “This infrastructure creates a huge competitive advantage. Those are the kind of exciting things you can do.”
Smeltzer credits Meritage investment director Jim Allen for swinging the deal for e.spire.
Allen, who once co-founded Brooks Fiber Properties and later sold it to WorldCom for $3.4 billion, serves as chairman of Xspedius. His experience is an example of the far-reaching talents that Meritage has brought together.
Stephanie Smeltzer
“The bankruptcy judge viewed Jim Allen’s management experience as such an important factor – because at the time the e.spire assets were losing $5 million a month,” Smeltzer said. “The judge determined that of all the bidders, Jim was the operator who could actually turn those into cash-flowing assets, and thus the assets would survive.”
So there is some advantage to working within a down sector in a depressed economy. Much of Meritage’s success has been achieved during the industry’s hard times, and is based on the experience of its founders, Jack Tankersley and Laura Beller, who launched the company in 1998. Tankersley previously co-founded the Denver-based venture capital firm Centennial Funds back in 1981. Beller was the CFO there. Centennial is still around, and, like Meritage, remains a specialist in the telecommunications sector.
Smeltzer, 34, who has an MBA from Harvard, joined Meritage two years ago. Previously she co-founded the corporate finance practice of the Arthur Andersen office in Moscow. For Meritage she provides strategic planning to the firm’s portfolio companies and performs due-diligence on companies Meritage is thinking about investing in.
She also sits on the board of two companies that Meritage has a stake in – Boulder-based data storage provider Exabyte Corp., and Trillion Partners, a provider of last-mile broadband connectivity and high speed Internet access for schools and municipalities. It is based in Austin, Texas.
Currently Meritage has $290 million invested in 10 companies and has another $185 million in reserve. It looks for both early- and late-stage companies, companies in bankruptcy and companies whose VC syndicates are no longer able to fund them.
It has a unique offering it calls a “fast-start” program, geared toward new companies for which it puts up $1 million and imposes strict growth milestones, then fully funds the company if the goals are reached. “We have money to invest and we are actively looking for investments,” Smeltzer said. “We encourage entrepreneurs to come and show us their ideas. Over the last three months we have gotten some of the best business plans we have seen in a couple years.”
Copyright Colorado Business May 2003
