We were particularly enthused to announce our investment in PeakColo earlier this week.   Peak is a leading provider of cloud computing services, focused on the infrastructure as a service (IaaS) layer of the cloud computing value-chain. Peak serves large enterprise customers, which it recruits through a white-labeled channel strategy leveraging the existing enterprise account relationships of value-added-resellers and other enterprise IT channels. The Company maintains computing centers in Denver, CO, Seattle, WA and the United Kingdom. As a side-bar, Peak’s Seattle, WA presence is hosted in our data center portfolio company, Digital Fortress’ Seattle area data center.

PeakColo fits nicely into our Fund III Growth Equity profile as evidenced by the Company’s substantial growth over the past couple of years which was accomplished while the Company maintained a breakeven EBITDA position. As indicated in the Company’s press release announcing the investment the funds will enable Peak to meet growing customer demand in the Company’s current geographic markets and also enable the Company to expand into additional markets.

Since the formation of our Fund III, we’ve had a stated objective to add a cloud-computing investment to the portfolio. Our investment in PeakColo is the result of proactive efforts to make that happen. Over two years ago, our colleague Tom Simonson identified PeakColo as a prospective investment in the sector. He and Derek Pilling cold-called on CEO, Luke Norris, to learn more about PeakColo’s business.  At the time, Luke Norris, the Company’s CEO was narrowing the Company’s execution focus but had not yet built the business to the minimum revenue scale required to meet our investment criteria. Adding to the positive tone of the initial discussions, we learned that Mark Hughes (previously an executive at InFlow, the Chairman of Digital Fortress and a Fund III entrepreneur’s fund investor) was on the Board of Directors of PeakColo.

Over the next two years, Derek and Luke had breakfast nearly every other month; Luke running business challenges by Derek; Derek providing counsel and helping Luke to refine Peak’s execution focus. During this time, several other investment firms, including much larger private equity firms took a run at making an investment in or acquiring PeakColo. We waited patiently for the Company to prove its model and for the other prospective investors to disqualify themselves. This summer, when PeakColo delivered a 100% year-over-year revenue growth trajectory and reached the scale to qualify as a Meritage’s Growth Equity criteria, Derek brought Luke in to present to the Meritage investment committee and we delivered a term sheet shortly thereafter. The completion of our investment in PeakColo affirms that our model of establishing and maintaining relationships with successful entrepreneurs coupled with a clearly defined set of investment criteria works exceeding well.

Core to our thesis about the PeakColo investment is the fact that the information storage and computing requirements of most all enterprise customers are growing rapidly. Further enterprise customers are increasingly adopting cloud computing solutions which meet their needs for scalability, redundancy and security. Finally, we believe Peak’s white-labeled go-to-market strategy is unique and brings the potential for massive scale is the Company’s channel partners activate demand in the market.

Luke and the Company have established mutually beneficial relationships with critical infrastructure, software and equipment vendors who frequently invite Luke to share the PeakColo story at industry events. For example Luke recently presented alongside Dave Hitz, one of the Founders of NetApp, to over 5,000 CIO and IT executives at VMWorld 2012 in San Francisco.  As part of our checkings I met with Dave Hitz and he shared his support and enthusiasm for PeakColo.  He also shared his belief that PeakColo’s offering was in great demand by medium sized enterprises allowing CIO’s and CFO’s to rent storage and compute capabilities based on their current needs rather than making large capital investments in storage and compute infrastructure potentially years in advance of full utilization.

We were pleased to lead the structuring and syndication of the PeakColo investment. Once Meritage and PeakColo were aligned on a mutually acceptable investment structure we shared the opportunity with Sweetwater Capital, led by Bill Marraccini. Bill and his firm are equally enthusiastic about the prospects of the Company.  As you may recall, Sweetwater Capital is currently a co-investor in Digital Fortress, and previously co-invested with us in the successfully exited Fund III Company, NewPath Networks. Jack Tankersley will join me on PeakColo’s Board and will serve as its Chairman.   Both Jack and I look forward to working with Luke, and alongside Bill Marraccini to make PeakColo a wildly successful business.

My Partners and I announced our investment in Datavail this past week. We’re excited about the company and its prospects and at a very superficial level I am pleased to finally join the Board of a company headquartered within a 35 minute drive from my home. While we don’t select our investments based on location, Datavail board meetings will be significantly more convenient, and easier on my body, than flying to wonderful cities like London, Tokyo or Seattle!

Our Growth Equity portfolio is focused on companies where the risk is isolated to execution; the cut and thrust of driving a proven product with a clear value proposition into a meaningful market opportunity. Datavail fits squarely into this definition. Success in this stage of company comes from having world class executives develop and execute on a clear growth plan (organic and/or inorganic), while maintaining margins and operating leverage.

I first met Mark Perlstein in January around the annual VCIR conference. What struck me most about Mark was his business agility and clear headedness about his business. Like a quarterback who knows his playbook cold, and who likes to drive his team to perform within a defined game plan, Mark outlined his vision for Datavail to me with a clear headed determination to win. This is not the first rodeo for Mark. Prior to being asked to take the reins at Datavail he served as the President of Ciber’s IT Outsourcing division where he was instrumental in tripling revenues to levels in excess of $100 million.

Since joining Datavail two years ago, Mark has added world class executives around him and refined the sales execution plan and regional market launch strategy. In August, Datavail was included on the Inc. 5000 list of the fastest growing private companies in America (ranked number 1,842) and 35^th among the 89 metro Denver companies that made this year’s list. In July 2012, Datavail announced its acquisition of Seattle-based Blue Gecko and the Company is executing plans to launch a market presence in New York. It was easy for me to buy into Mark as a leader who could deliver results.

During our discussions over the months that followed we developed a shared understanding of where the Company could invest to drive further growth, while improving operating efficiencies. Through that process I grew confident that the Datavail team, under Mark’s leadership, had a clearly defined execution plan where effort would be channeled to business activities that would impact the outcome. That sealed the deal for me and my partners backed the investment into Datavail.  The existing investors, including Boulder Ventures and Montis Capital, stepped up in support of the company.

Looking forward, we expect the company to drive into the Seattle market off the Blue Gecko acquisition, launch NY by year end, and launch several additional markets in 2013, and continue to evaluate additional opportunities like Blue Gecko as they come into focus.

Meritage portfolio company and media services provider Access Media 3 (”AM3″) received $30 million in funding from ORIX Venture Finance and Petra Capital Partners. This financing supports AM3’s organic and acquisition-based growth initiatives, including the company’s recent expansion into the Mid-Atlantic region.

The company addressed both sides of its growth goals in 2011, expanding into the Florida telecom market with the acquisition of Peoples Choice Cable in Boca Raton while also setting company records for organic sales. AM3’s dramatic growth landed it on the 2011 Inc. 500 list of the fastest growing companies in the U.S.

AM3 supplies triple-play (TV/internet/voice) services to multi-dwelling unit properties in Florida, Georgia, Illinois, Minnesota, Tennessee, Virginia, and Washington D.C. The Company serves more than 50,000 subscribers in more than 500 properties.

We’re pleased to let you know that our portfolio company, Crisp Media, has completed a $6 million growth equity financing led by EDB Investments (“EDBI”). You can read Crisp’s full release here and TechCrunch’s reporting on the financing is here. Based in Singapore, EDBI is a leading strategic investor focused on assisting operating companies in their efforts to expand into the Asian Pacific (”APAC”) region.

Over the past year, Crisp has established itself as the leading mobile rich media vendor in North America. The Company has struck strategic relationships with nearly every major online publisher in North America, including Yahoo!, CNN, The Weather Channel, ESPN, The Wall Street Journal, MSN (Microsoft). In addition, the Company has established a strong reputation within the agency and advertiser communities for its ability to deliver large mobile rich media buys, that are served from a single technology platform reaching smartphones, tablets and other connected devices. The Company’s outstanding campaign execution has resulted in repeat advertising buys from some of the largest brands in the world including Toyota, Ford, Sprint and others.

Many of Crisp’s customers (both publishers and agencies) market globally. To date, Crisp has executed a number of global campaigns, serving these campaigns from the Company’s North American operations. With increasing global demand for Crisp’s platform, particularly in APAC, the Company embarked on a plan to establish operations in the APAC region, culminating in EDBI’s strategic investment. EDBI’s investment will not only provide Crisp with the capital to facilitate this expansion, but will also offer the Company critical contacts in the APAC region, accelerating the Company’s market entry.

We welcome EDBI in joining Meritage and Intel Capital in Crisp’s investment syndicate and look forward to working with both EDBI and management to establish Crisp as the leading global mobile rich media platform.

Separately, the Internet Advertising Bureau (”IAB”) mobile working group has decided that its work to standardize how rich media advertising is integrated into mobile application environments will be based on ORMMA.  ORMMA (open rich media mobile advertising) is an open standards initiative of which Crisp Media is a founding member.  Xavier Facon, Crisp’s CTO, has been instrumental in launching ORMMA and establishing this vendor-agnostic approach to delivering in-app rich media ads as an industry standard in very short order.  This emerging standard will serve all participants in the mobile ecosystem well, including publishers, advertisers, and rich media vendors like Crisp.  Kudos to the ORMMA members for doing something that is good for everyone in the industry.

We have always believed that successful investors differentiate themselves by contributing to the value creation process at each portfolio company. As a result, we stay close to our roots, focusing our investment efforts on technology-based service enterprises that leverage recurring revenue business models. While this focus is well-defined and enduring, our investment charter has historically offered us tremendous flexibility regarding the developmental stage of the companies in which we invest.

We are grateful for that flexibility, because it has enabled us to construct diversified portfolios targeted at the investment stage(s) where we see the best risk/return ratio. That said, we are constantly refining our stage orientation to ensure proper alignment with current and long-range market conditions, the objectives of our Limited Partners and the skills, interests and intellectual assets of our firm.

Recently, we have narrowed our stage orientation to focus exclusively on Growth Equity opportunities. We believe that Growth Equity investment is an investment style unto its own, separate and distinct from venture capital and leveraged buyout investments as traditionally defined.

So what is Growth Equity? Definitions abound, but in our view Growth Equity investments should exhibit the following characteristics:

Proven Value Proposition and Economic Model

Candidates for Growth Equity investment typically operate in a quantifiably large market with a proven value proposition and economic model. These businesses know how to sell their product/service and how to identify their target customer and understand the economics of customer acquisition. With this foundation in place, growth-stage businesses can deploy investment capital at the use(s) of proceeds that generate the highest return on investment.

This cannot always be said of venture investments, which often wander in the woods and must “pivot” before discovering a market, or leveraged buyouts, which must focus on repayment of debt to create equity value.

Attractive Risk-Adjusted Upside Potential

Growth and value are concepts that are inextricably linked in the financial markets. It is a well-known axiom that the faster a company is growing, the higher the multiple it commands, and vice versa. It is obvious but worth emphasizing that growth-stage businesses create incremental value by growing revenue and profitability. Growth potential is unbounded (except by market size and competitive dynamics) and so Growth Equity investment return potential is unbounded as well.

The same can be said of venture investments, although exit value is often tied more to “strategic value” (which can be fleeting) than financial value. While it is easy to recall high-profile acquisitions of venture-backed companies with unproven economic models, these exits are very much the exception to the rule. Growth Equity returns are more predictable because base exit value is tied explicitly to growth and financial performance, with the added upside potential of strategic value. Buyouts on the other hand often create value through cost-cutting and by reducing debt. As a result, traditional buyout returns are often bounded, as there is only so much cost cutting and debt repayment available to a given company.

Limited Risk of Capital Loss

We make Growth Equity investments in companies that have created a baseline of value and are typically unlevered, so that the preferred equity is not subordinate to debt. If the investment is priced right, the investment need only maintain its value in order to return capital to preferred shareholders.

This is distinct from both the venture capital asset class and the buyout asset class. In buyouts, the equity is typically subordinate to debt, creating a default risk that could wipe out equity. One need look no further than this past business cycle to see how leverage cuts both ways. In venture, the company must typically grow into its valuation by hitting development and/or performance milestones, which if not achieved can render the equity worthless. Venture is about harnessing home-run potential, but with that upside comes higher loss ratios.

We think Growth Equity will offer investors the best risk/return ratio over the coming decade and likely beyond. Does this mean that we think the venture capital and buyout asset classes are doomed? No, quite the contrary, we think that some firms will thrive in both of those categories, although many will also fail. The same can be said of Growth Equity. We are committed to making Meritage a leader in the growth equity segment of the private capital markets. We think we are well suited to accomplish that goal.

The Founders Club, (www.founders-club.com), a unique venture capital equity exchange fund, announced that it has accepted an undisclosed angel investment from the partners of US venture capital firm Meritage Funds. Meritage VC Ryan Pollock has joined the Technology & Cleantech team of Venture Advisors at the club. The partners of Meritage Funds invested their own personal cash as part of The Founders Club angel round and join a powerful syndicate of other VCs, fund of funds VC investors, CEOs and entrepreneurs in the US and Europe.

Andrew Romans, founder and general partner, said: “The commitment of the partners at Meritage Funds with a personal investment demonstrates that seasoned VC veterans in the US see value in the club. The Meritage founders have a very strong investing track record in the USA and Europe over the past 30 years. With over $600M of assets under management and a unique model for combining operating and venture talent, Meritage is an ideal addition to our ecosystem. The investment by the Meritage team, and the addition of Ryan Pollock as a Venture Advisor, represent an important beachhead into the US market as we build on the club’s existing relationships with the best Founders, CEOs and Venture Capitalists worldwide.”

Ryan Pollock of Meritage said: “We have been a sounding board for this innovative ecosystem since Andrew first came up with the idea. Now that The Founders Club is a reality, we wanted to join as both participants as well as investors.” Pollock continued, “Meritage has always brought a global perspective and network to the entrepreneurs it backs. Our participation in the club fits with our approach to venture investing and we believe membership in the club will provide us with access to a powerful international group of respected entrepreneurs and fellow VCs who have uniquely aligned their incentives to collaborate.”

The Founders Club is an established family of funds where VC backed entrepreneurs agree to invest a percentage of their future equity returns into one of The Founders Club funds in return for fund ownership and membership in the club. There is no cash cost to join. Members only contribute cash from proceeds at the time they sell or liquidate their equity position in their company. Each fund comprises between 20-30 high potential venture backed portfolio companies, thereby affording any single entrepreneur a strategy to create wealth while accomplishing portfolio diversification. Portfolio companies are selected by committees comprised of Venture Advisors from premier venture capital firms in the US, Europe and Israel. Entrepreneurs accepted into the club on this basis have access to other members as well as the venture capitalists serving on our Venture Advisory committees.

The Founders Club is currently accepting the final few members into its two existing portfolios, namely: Healthcare & Life Science Fund I (biotech pharmaceutical, medical devices, healthcare IT & services) and Technology & Cleantech Fund I (classic ITC, mediatech & environmentally friendly technology).

Meritage is pleased to announce its investment in Access Media 3 (”AM3″). Meritage was joined by co-investor WP Global in this transaction. AM3 provides triple-play media services (high-speed Internet, satellite TV and voice) to the multiple dwelling unit (“MDU”) market. AM3 is highly focused on converting the large majority of its customers to bulk billing relationships with approximately 80% of its customers today falling into that category.

The capital raised by AM3 will quickly be used to execute on the Company’s aggressive strategy to grow through acquisitions and organic growth. AM3 is positioning itself as an intermediate aggregator. There are a significant number of small video, data and voice providers that are too small to be of interest to a large buyer, but sufficiently large to be a good target for AM3. To date, the Company has completed six highly strategic acquisitions including inVision Networks, SkyPix, the satellite assets of Tunnel Vision Technologies, Avvid, OnShore Networks and Grand Plaza. AM3 has grown from addressing the media needs of 3,000 customers to well over 26,700 customers and 32,700 Revenue Generating Units in less than 3 years. The infusion of capital will also allow the Company to accelerate its plans to continue delivering innovative products and services to its customers through its state-of-the-art back office infrastructure.

In addition to the fact that this investment is a perfect fit for Meritage’s Venture Growth strategy, AM3 is attractive because the Company is EBITDA positive today and has no debt. The management team is also a strong positive, as the CEO has had success in building and profitably exiting a large network-enabled service business through both organic growth and acquisitions.