Before service providers can say show me the money, they need to understand exactly what venture capitalists and investment banks are looking for when they consider doling out funds. In the session Finance-able Service Providers: Finding and Securing Funds from Investors, panelists will discuss just what it takes to secure the public or private financing needed to expand operations or enter new lines of business.
Slated speakers include Kevin Coyne, CFO of FiberLight LLC; John Siegel Jr., general partner of Columbia Capital; Richard Smith, president and CEO of Eschelon Telecom; and Keith Wilson, CFO of PAETEC Communications Inc. Vik Grover, CFA: managing director of investment banking at Merriman Curhan Ford & Co., will lead the panel.
Eschelon Telecom is one of the few CLECs to have gone public successfully.
Approaching investors with a CLEC business model has been challenging and that is an understatement, said Smith, explaining that is because investors have been wary of CLECs historically poor performance and significant number of bankruptcies. The only way to win over skeptical investors, he advised, is to prove your execution abilities.
To do this, service providers need to maintain high-quality financial and operating metrics; a cleaned-up balance sheet; and they need to approach investors and convince them of their worth, Smith said. In this session, Smith will go over how Eschelon Telecom raised more than $240 million so other carriers can do the same.
Meanwhile, PAETECs Wilson also will highlight some of the privately held companys financial strategies. PAETEC last year started an IPO, but did not complete it because it was primarily driven by overall sector valuation multiples, which we view are still on the lower side.
Wilson said PAETEC primarily has dealt with banks as its source of investment funding. We have not had an equity need for over six years, said Wilson. He noted investors look for operational stability; the ability to generate consistent, free cash flow to service debt; and a companys ability to grow without taking on any undue risk in terms of geographic and product expansion. He said PAETEC has been approached by public and private investors, but the carrier turned them down because it does not need new equity participants as our investors are pleased with the performance.
He recommends other competitive carriers looking for financing also address risk management issues, which include regulatory, competitive and technological items. The biggest challenge PAETEC faced was finding the appropriate comparable benchmarks to structure our financings. The sector continues to be widely dispersed in terms of operational, regulatory and technical models. This makes it difficult to assess the appropriate structure for financings either debt or equity as compared to other transactions done in the market.
Investors, Wilson said, are just beginning to view the CLEC sector as better than distressed, which should bode well for carriers seeking financing.
Finally, FiberLights Coyne will talk about the feedback the dark fiber network owner has received from venture capitalists and investment banks. He said investors want a proven model; ROI discipline, and preferably a less capital-intensive business; a management team with past success as a team; understanding of the market and the niche opportunities in the respective markets; and appropriate incentive arrangements.
Service providers seeking financing further need to consider the high cost of equity and the risk inherent in non-cash pay structures, Coyne said. They also should keep in mind risks such as how long it will be until there is free cash flow and the potential penalties for missing expectations, as well as realize the cost of operation relative to competition.
FiberLight was in the midst of restructuring when it got funding and that sort of business model requires investors supportive of those changes, Coyne pointed out. The most important issue we came across was that most investors wanted to see a clear exit and/or positive cash flowing out of the business sooner than later, he said.