Tampa telecom company gets a $108-million boost

Switch & Data Facilities impresses enough investors to secure a state record for venture capital investment.

By ROBERT TRIGAUX

© St. Petersburg Times, published July 18, 2000

TAMPA -- In Florida's fledgling venture capital world, Stephen B. Kelly just won the lottery.

The chief executive of Tampa's Switch & Data Facilities Co. on Monday said his company secured $108-million in new financing from several venture capital investors. The size of the private equity sets a new venture capital record in the state, easily surpassing the former high of $67.4-million won by Miami's Yupi.com in the fourth quarter of 1999.

"This record infusion lets us accelerate our growth in the United States and expand in Europe," Kelly said in a phone interview from San Francisco.

The equity investment in Switch & Data is more than three times the size of the $33-million financing received in late 1998 by Tampa's Z-Tel Technologies, the former Tampa Bay record in venture capital (see list, 2E). Switch & Data, a 1997 start-up, provides 18 locations in metropolitan areas for telecommunications companies to set up their switches. The company locations are considered "neutral" territory because competing telephone or Internet service companies can place their switches side by side in a managed facility and rent just the space and equipment they need.

Since deregulation began in the mid-1990s, telecommunications companies seeking to enter new markets had to cajole entrenched local monopolies -- the "Baby Bells" or GTE -- to provide switching space in already cramped facilities. Complaints frequently ended up in the hands of regulators.

In the increasingly competitive telecommunications market, friction between telephone companies is common. Kelly likes to think of Switch & Data as the "Switzerland" of locations.

Especially considering the financial climate, the $108-million investment is a coup for Switch & Data. The stock market remains wary of initial public offerings. And venture capitalists have tightened the funding spigot to new companies.

Kelly said the new funding, part of the company's third round of financing, will let his company open 40 new facilities in the next year across the United States and parts of Europe. Facilities cost between $2.5-million and $3-million apiece.

The funds also give Switch & Data more flexibility on the timing of a possible IPO.

Venture capital analysts said Switch & Data's success in raising new money shows it is in one of the few hot markets for new financing: telecommunications infrastructure. (The other hot markets are wireless telecommunications and software that lets companies on different computer systems talk to one another.)

"This is the largest venture capital deal in Florida by far by an established company," said Martin Donsky, who tracks venture capital financing in Florida for PricewaterhouseCoopers in Tampa.

Switch & Data's strong management team has a track record that lets it command a large investment, Donsky said.

The company has added 80 workers since the start of the year and now employs 100. As a private business, it does not release revenues or earnings information.

One of the company's new customers is 2nd Century Communications, which sells telecommunications services to small businesses.

Switch & Data was started in New Jersey in 1997 but relocated to Tampa earlier this year. Kelly, 45, was introduced to Switch & Data after founder Jim Lavin, Kelly's former roommate at Stanford Business School, suggested he invest in the company. Instead, Kelly joined it. He now serves as CEO, and Lavin is vice chairman.

Kelly had been a Trammell Crow real estate executive and consultant who helped develop the Largo Mall, among other projects. But his fit at Switch & Data is not as odd as it might seem.

Part of Switch & Data's strategy is to find good real estate sites for its switch facilities. And Kelly is no stranger to telecommunications start-ups. He was an early investor in Z-Tel Technologies, which went public in December.

The $108-million in new funding comes from the following: Tampa's Seaport Capital (the successor fund to CEA Capital Partners) and Houston's Summit Capital Group, LLC, both previous investors and the biggest participants in this round; and new investors BancBoston Capital, DB Capital (a Deutsche Bank AG subsidiary), A.G. Edwards, American General Financial Group, Union Bank and the Tisch family.

Kelly said an original minority investor in Switch & Data is affiliated with the Tisch family -- former owners of the CBS television network -- and brought them into the latest round of funding.

Attracting $108-million was a five-month odyssey, Kelly acknowledged. "We had 40 to 50 meetings and presentations across the U.S. early this year and through the spring," he said.

What's the best news about the latest financing? Joked Kelly: "All the checks have cleared."

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