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.