Subject line: [Flawless Financials] Jack Tankersley Interview Flawless Financials the Financial Forecasting Online Newsletter from Minotaur Financial and David Brode January, 2004 Sent monthly to over 400 subscribers. Please pass on Flawless Financials to those in your network. To leave Flawless Financials, follow instructions at bottom. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * This month: Jack Tankersley Interview * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * So what do investors really want? To get one perspective, Flawless Financials turns to Jack Tankersley, the founder of Meritage Private Equity Funds and one of the most experienced venture capitalists in Colorado. Meritage, with more than $475 million of committed capital under management, invests in communications ventures including broadband service providers, Internet infrastructure, and outsourced communications services. We recently met up with Mr. Tankersley and got his views on what investors want, among other interesting issues. Q. What is the profile of the ideal investment for Meritage? A. We invest in communications businesses and have a strong bias for companies with recurring revenue models. We invest in either early or later-stage companies for which the market opportunity is big. Our philosophy of impact investing means that we have to see the path for each investment to return more than $50 million. Q. In an initial PowerPoint presentation or Executive Summary, what financial and economic information do you look for? Are there specific measures or ratios you consistently focus upon? A. In a PowerPoint presentation, we always like to see summary P&L, balance sheet, and cash flow statement information; an executive summary should have the statements themselves in short form. At first pass of a business plan, we're always going to look at the revenue growth trajectory, the longer-term margins, and of course, how much debt and equity capital the plan calls for. Another calculation we like make is the number of customers the company has to have to achieve the revenue target shown in the last year of the forecast. Q. Do you reject plans quickly based on the financial forecasts? If so, what are your "deal breakers"? A. Yes, wildly unrealistic revenue projections are often hard to get past. A more consistent deal breaker, however, is that the opportunity is just too small and doesn't meet our impact investment standard. Q. What convinces you that a company will meet its revenue projections? A. I can't think of a time when we have ever been convinced that a company WILL meet its projections. Our investments are made by assessing the risks in the revenue plan and assessing: a) the probability that management might hit its numbers, b) the probability that the plan will be missed by a significant margin, c) the probability that the deal could fail and we could lose all our money. Our rate of return hurdle is an "Expected Value" rate of return that explicitly accounts for the fact that there is at best, a 10-15% probability of management hitting the numbers. Q. How do you get comfortable with forecasted profit gross margin and EBIT margin? Are there specific rules of thumb that you apply? A. We primarily evaluate margins based on our long experience in the industry. We will also look for similar companies and compare margins. If margins seem a bit incredible, we find ourselves asking how is this company going to achieve what no one has before? Q. For the last deal you funded, how did the company ask for funding? Did they name the amount they were looking for up front? Is that the amount Meritage funded? Did you provide the initial term sheet or did they present terms first? A. We were introduced to the company by an entrepreneur we've backed before, and although the total capital sought was known, the moving parts included an as-yet-undetermined commitment from existing investors, and a new investor with an existing circle. We knew how much of the round we wanted and required in order for us to participate; we asked for it and got it. Terms were already on the table, however we negotiated the changes we needed. Q. What do you like best about being the Managing Director of Meritage? A. The best part of our business is working with top-notch entrepreneurs and helping to build successful businesses. More information on Meritage can be found at www.meritagefunds.com. Until next month, all the best, David Brode – Minotaur Financial Removing Financial Issues as a Deal Roadblock * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * NEWSLETTER ARCHIVE AVAILABLE Make sure to visit the Minotaur Financial website for the Newsletter Archive at http://www.brode.net/resources/ * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * http://www.brode.net mailto:David@Brode.net 1919 14th Street, Suite 510 Boulder, CO 80302 (303) 444-3300 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * ABOUT DAVID BRODE I’m a financial modeling specialist. Over the last fifteen years I’ve completed dozens of models and certainly thousands of versions to support corporate development, M&A, strategic planning, and debt and equity transactions. These models have raised over $1B in debt and $100M in venture capital and private equity. Over time I’ve consistently revised software tools and work processes to get the job done quickly and well. If you have a financial forecasting issue, I’d love to help. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * (c) 2003 Minotaur Financial, All rights reserved. You are free to use material from the Flawless Financials newsletter in whole or in part, as long as you include complete attribution, including a live web site link. Please also notify me where the material will appear. The attribution should read: "By David Brode of Minotaur Financial. More articles on financial forecasting can be found at http://www.brode.net " * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Are you struggling to convince others to do a deal which you think is a no-brainer? To discuss how you can take numbers off the table as a deal roadblock, call (303) 444-3300. I'm very accessible and glad to help. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * DO YOU LIKE THIS NEWSLETTER? You are welcome to share this email with colleagues who would benefit from better numbers. Your feedback is always welcome and appreciated. Write in to mailto:feedback@brode.net. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * PRIVACY POLICY: I never rent, trade, or sell my email list to anyone for any reason whatsoever. You'll never get an unsolicited email from a stranger as a result of joining this list. To SUBSCRIBE FREE to this newsletter, send an email to mailto:subscribe@brode.net. And you'll get Minotaur's Financial Forecasting White Paper in the deal. To be REMOVED from this list, send an email to mailto:remove@brode.net. (Please note that this message needs to come from the email address that originally subscribed. If you need help determining this, please email mailto:David@Brode.net.)