[Editor’s note: Dan Caruso is CEO of Zayo Group, a telecom company based in Boulder. Zayo has grown into a company with revenue of $1.1 billion and an enterprise value of $6 billion. Zayo and Caruso are giving back to Boulder, although as Caruso admits, it took a little time before he “got it.” This story is cross posted on Brad Feld’s blog. He’s the “Brad” in this story.]
“Fiber in Downtown Boulder?” was the title of an e-mail sent to me by Brad, after he had heard from one of his CEOs that Zayo is constructing fiber in Boulder. “If true, how can I help?” he continued.
Years ago, when I first met Brad, I didn’t “get” him. I had recently left Level 3 Communications (NYSE: [[ticker:LVLT]]). I was one of the day one execs of LVLT, as well as an early member of the management team of MFS Communications. It is understandable that I considered myself to be an accomplished entrepreneurial-minded executive. Yet I felt so disconnected to Brad and the culture around him. It took me several more years to understand Brad, and during this time I developed a deep appreciation of his passion for entrepreneurism. I was drawn to his unique ability to promote ideas, create awareness, and fuel momentum. I sought to mimic his propensity to leverage social media.
“How can Brad help?” I pondered.
“Help me create more awareness about the contributions that Zayo is making toward the Front Range entrepreneurial community.”
Brad, entrepreneurial as ever, delegated the task back to me. “How about you write a post for my blog?”
Sensing an opportunity, I responded “How about I write two?” This is the first. The next one will describe our extensive fiber build across the Front Range.
I will provide a quick synopsis for those who prefer a two-paragraph summary. In late 2006, Zayo was a pure start-up headquartered behind Nick and Willy’s [a restaurant in Boulder] on 8th and Pearl. Today, Zayo has eclipsed $1.1 billion in revenue and $600 million in EBITDA, leading to an estimated enterprise value in the vicinity of $6 billion. We have three offices in Colorado, with our headquarters on the second floor of 29th Street Mall. In addition to directly employing 250 people across the Front Range, we indirectly employ many more related to our multi-million dollar fiber build across the Front Range. Dozens of recent graduates of Colorado’s university system are Zayo-ites.
Boulder is an incredible entrepreneurial community, and I enjoy being immersed in it. I am excited to see this innovative energy spreading across the Front Range, through Startup Colorado and other initiatives. I am proud that Zayo is a vibrant example of our community’s robust startup ecosystem.
For those who prefer a slightly longer version, here is the Zayo Story in a nutshell.
In June of 2006, we sold what remained of ICG Communications to Level 3. The ICG team went to Level 3 as part of the transaction. I didn’t.
Two years prior, ICG was a public company preparing for its second bankruptcy. My group was the only that offered an alternative to Chapter 7/11. We paid them $8.7 million and took them private. By the time we sold to Level 3, our total proceeds to equity owners and management were $225 million. For those without a calculator nearby, that’s a 25X return in two years.
Nonetheless, I was out of a job.
Though ICG was headquartered in south Denver, we opened up a small satellite office on 8th and Pearl—right behind Nick and Willy’s. In the sale to LVLT, we kept a portion of this office. One by one, many of my colleagues extracted themselves from Level 3 and pondered “what now?” By late 2006, we formed Communications Infrastructure Investments. Today, CII d/b/a Zayo Group.
Our investment thesis was simple. Bandwidth was busting — and this would continue beyond our children’s lifetimes. Fiber was the workhorse of the Internet—and nothing would alter its importance for as far as the eye could see. Most importantly, drinking too much tequila leads to a hangover that makes it hard to look at—let alone taste—tequila again.
Point 3 requires more of an explanation. The late 1990s saw a fiber tequila party that started out wild—investors poured money into start-ups and fiber networks were constructed throughout the land. Way too much fiber tequila was gulped, and the ensuing telecom meltdown caused a hangover of epic proportion. As we hit the early 2000s, investors and strategics felt their stomach’s gargle at the sight of a fiber-labeled tequila bottle. You know that feeling?
Our ICG experience gave us different perspectives. First, many fiber networks had consolidated into a handful of platforms. The balance between supply and demand of bandwidth was rapidly improving.
Second, we saw an opportunity to be a consolidator of the remaining fiber properties. We called these fiber orphans—companies whose roots dated to the telecom boom but which had not yet been consolidated into a nationwide platform. These companies somehow navigated their way through the meltdown. By 2007, they were doing quite well. However, the tequila hangover persisted and few investors or strategics were paying attention to them.
Third, we developed a thesis around “Bandwidth Infrastructure”, a term we coined. We did not desire to be a traditional telecom company. Instead, we sought to provide raw fiber, wavelengths, Ethernet, IP, and technical space to those entities that needed a whole lot of bandwidth. Circa 2007, this was considered a ridiculous approach. Even today, we are sometimes poked by rivals for our infrastructure approach.
Between 2007 and 2013, we acquired 25 companies. We now have over 80,000 route miles of fiber, mostly in the U.S. and London. Our fiber is connected to nearly every significant colocation, hosting, and carrier hotel facility. Our biggest customers are the wireless carriers and big content/Internet companies. We raised $2.7 billion of debt and $870 million in equity in three rounds. Our initial investors have not sold, though they are enjoying a 4 – 5X mark. Our equity IRR has averaged around 50 percent since inception.
Zayo is in this for the long term… the very long term. My aspiration is to be at the helm of Zayo for a few more decades. Zayo will be to bandwidth what Amazon is to the cloud and what Equinix is to colocation. Zayo will foster the development of additional start-ups, either within Zayo or as spawning-offs. The bandwidth supplied by Zayo will positively affect the lives and livelihoods of countless people throughout the world. As Zayo continues its quest, it will bolster Boulder and the Front Range’s reputation as a top tier center for entrepreneurship and innovation.
