Editor’s note: Local Tech Wire’s initial Top 25 Companies List will focus on emerging firms in North Carolina – those selected to present at CED’s Venture 2002. Who are they? What are their products? Why should investors put money into their firms? And what do these entrepreneurs think of VCs? LTW is surveying the presenters to get the skinny about each, with Bandwidth.com leading off. LTW will feature another company each day — and some days two — leading up to the April 30-May 1 showcase.Henry Kaestner and David Morken are no strangers to the fund-raising game. The co-founders of Bandwidth.com have plenty of experience with other networking and online businesses. And they are ready to cut to the chase at Venture 2002.

“We love them,” Kaestner says of venture capitalists. As for what they would consider fair in a term sheet, he says only: “Good question.”

The company that is trying to be for businesses looking for the best price and fastest installation in bandwidth what Expedia or Priceline is for the traveling consumer wants $1 million. Broadband wants to use the funds in order to beef up its software. And they are ready to make a deal.

Kaestner and Morken say Bandwidth.com has what investors want these days: unique products, generating cash, what they believe is good management, and an exit strategy that isn’t focused on going public — something that’s growing increasingly rare.

Using proprietary software called BOSS (Bandwidth Operating Systems Software), they guarantee businesses the best price for connectivity among other services. Their target is small- to medium-sized businesses that need high-speed bandwidth and want a broker rather than deal with Internet Service Providers or telephone companies.

‘Real revenues’

Kaestner insists they have found a lucrative niche.

“Our company is posting real revenues today from our growing organic business (buyers who come to us directly through our Web site) and we will be cash flow positive in the third quarter,” says Kaestner, who is Bandwidth.com’s chief executive officer. (Morken is president and chairman.)

Revenues were $800,000 in 2001, but Kaestner expects that figure to top $10 million this year.

Both founders have experience relative to the online networking business they established. Kaestner formerly was CEO of Bandwidth International in London and also ran Chapel Hill Broadband, where he brokered “dark” or unused fiber optic capacity. So he knows networking. And Morken, a former attorney in the Marine Corps, helped build efiling.com for tax filing.

They launched Broadband.com in 1999, and their Web site partners list reads like a “Who’s Who” of the telecom world. And Kaestner says he and his partner are especially proud of the fact that a potential competitor, Insight.com, chose to partner with them.

Q&A with Bandwidth.com:

Here are Bandwidth.com’s answers to LTW’s survey as provided by Kaestner:

Times are tough. If you had only one chance and one paragraph to convince an investor, how would you answer this question: “Why should an investor choose your company?”

Bandwidth.com has changed the way businesses buy and manage Internet connectivity. We have developed proprietary software and service offerings that power the bandwidth buyer, the technology distributor, and the carrier. Our proprietary system called BOSS (Bandwidth Operating Systems Software) has automated pricing, contracts and circuit installation monitoring thus enabling us to pursue leveraged distribution relationships with larger sales organizations. We have effectively increased our sales force from 12 to 1,200 with the consummation of an exclusive distribution deal with Insight.com, a direct distributor of technology products. This will effectively triple our monthly commission figures and we expect to bring in annualized agency fees of $10 million by the end of the year. Our company is posting real revenues today from our growing organic business (buyers who come to us directly from our website) and we will be cash flow positive in the third quarter.

What makes your company unique? Do you have a proprietary and/or a patented technology? Please explain why it is unique and what the status is of any patent filings.

At the most basic level we are to Internet connectivity what Expedia is to business travel. As agents for the major telecommunications carriers, we provide an IT buyer with pricing from up to 15 carriers including ATT, Qwest, Sprint, WorldCom and Cable&Wireless. Selection is ultimately just the beginning, and while the extent of our selection is unique, our key differentiator comes from our service offering and the scalability of our systems. An example of our service offering includes the Installation Advantage, which promises get circuits installed faster than those ordered from the carrier direct. Other than quick installation, the most significant part of the Installation AdvantageSM is the Installation TrackerTM which allows a buyer to see online each step in the provisioning process as it happens. We offer similar features in our Trouble Ticket AcceleratorSM and our Circuit Monitor which tracks the performance of an installed circuit.

What makes your product(s) and/or services unique vs. your competition? (Who is your competition, and what do they offer?) If you have no competition, why not?

We guarantee a best price on all the carriers that we represent and can now offer instantaneous local loop pricing from more than 10 of our carriers (including the majors), the only telecommunications provider to do so. Our competitors include companies such as BandwidthMarket.com, BandwidthPlace.Com and BandwidthFinders.com, none of which offer our selection, our services, or (and most importantly) our systems, which provide for automated pricing, contracts and installation from the carriers. The best evidence of the worth of our systems is that while Insight investigated offering Internet connectivity themselves (and keeping all of the margin), they ultimately concluded that the most effective way to offer their customers Internet Connectivity was to do so as subagents of Bandwidth.com.

Does your company already generate revenue? If so, how much? Are you cash flow positive?

Bandwidth.com generates in excess of $250,000 in contracted agency revenues monthly, this will increase dramatically as the Insight relationship ramps up. As mentioned previously, we expect to see monthly agency fees of $800 – $900,000 by year-end. Due to the nature of our receivables, we are not yet cash flow positive but will be in the third quarter (This forecast is based on organic growth. Insight could move up our cash flow positive date by as much as 45 days)

What is your target market? What is the size of that market in terms of dollars? What share of that market do you believe you can win?

Our market is the small to medium sized business; companies with between 50 and 1,000 employees (Insight has 25,000 customers in the 100 to 1,000 employee range). The market for Internet Connectivity for these companies is well into the billions. We hope to win more than our fair share of customers directly through our website and we are close to winning additional large (more than a $1billion in sales) distributors that are interested in replicating our relationship with Insight.

What will you do with the invested funds? What is the timeline for product delivery? If you have existing products and services, how will additional funding help you expand your company, if that is the intention, or will you develop new products?

We will invest in additional technology, most significantly adding to the robustness of BOSS thereby allowing for increased functionality and simultaneous users. While systems capacity currently exists for the new Insight relationship with more than enough room to spare, we need to supplement it in order to roll it out to additional relationships.

What do you want from an investor other than money?

Knowledge of, and contacts in, the telecommunications industry.

Why will investors be impressed with your management team?

We’ve started and sold successful companies — we’re also remarkably good looking.

What is the exit strategy for the investor from your company? Are there potential strategic alliances with larger companies? Do you wish to take the company public? Or do you wish to grow the company and either sell it or acquire other companies?

Our desire is to have the profits of a Fortune 1000 inside of seven years and as such we should be an excellent public markets opportunity. In the more near term it is very likely that we will be pursued by either a large distributor that we work with (such as Insight–ticker symbol, NSIT) or other publicly traded distributors that we are pursuing, all of which trade at market caps that are far less than their annualized revenues due to their low margins. As our margins are significantly higher and our customer (and the contacts within the relationship) is the same we would be a perfect fit and a boost to their multiple with our accompanying margins.

What do you want to see in a term sheet? What would you consider “fair”?

Great question.

How do you really feel about venture capitalists and bankers?

We love them.

BANDWIDTH.COM: THE FACT SHEET

TYPE OF COMPANY: Provider of Internet Connectivity

ADDRESS: 2530 Meridian Parkway, 2nd Floor, Durham NC 27713

PHONE NUMBER: (919) 806-4571

WEB SITE: www.bandwidth.com

MANAGEMENT TEAM MEMBERS: David Morken (Chairman and President), Henry Kaestner (CEO), Matthew Kramer (CTO), Lance Condray (CFO)

BOARD MEMBERS: Morken and Kaestner

INVESTORS: Privately funded by the two principals with a minority interest to friends and family.

COMPANY MISSION STATEMENT: To be the leading provider of business Internet connectivity.

REVENUES: $4million in annualized contracted agency fees on $25 million of sales

YEAR ESTABLISHED: 1999

NUMBER OF EMPLOYEES: 31, 25 full time plus 6 college interns