Cbeyond Looks Past VCs

It’s time to add another name to the growing list of telecom start-ups that have recently raised staggering amounts of venture capital without so much as a single paying customer.

The benefactor of VC largesse this time around was Cbeyond Communications LLC, an Atlanta-based organization that netted $141 million in just its first round of financing.

Telecom veterans Madison Dearborn Capital Partners led the oversubscribed transaction with a $55 million investment. Additional participants included Morgan Stanley Dean Witter Private Equity, Battery Ventures, Vantagepoint Venture Partners and the issuer’s founding management team.

Perhaps more important than who got involved on the first round is that the company expects it to be the final round as well. In other words, the Series A financing was closed with the expectation that it would double as a mezzanine transaction.

“This deal is for a lot of money, and it will fully fund us up until a liquidity event,” said James Geiger, chief executive of Cbeyond. Geiger did not provide any further details regarding the date or nature of such an event, except to say that it would likely occur within the next two years.

The company plans to use proceeds from the deal to help deploy its integrated suite of open-architecture telecom services to small and midsized businesses in 25 top-tier urban markets. First up on the radar will be a fourth quarter launch in the company’s home base of Atlanta. Geiger said that the entire build-out should take 24 months.

Despite published reports to the contrary, the Cbeyond deal is not the largest first-round venture funding for a telecommunications start-up. Indeed, a larger Series A deal was done just this past March when Grande Communications of Austin, Texas raised $231.8 million (PEW March 13, p. 1).