How did I achieve a financial outcome far better than the norm? When I launched Zayo, I decided I must document my core management philosophy and beliefs, which would be my guardrails for not repeating mistakes of the past. The result was eventually published as the Zayo Owner’s Manual. A modified 2014 version is included in the appendix.
I observed the industry didn’t have a reliable methodology for measuring value creation. Standard accounting approaches were more than unhelpful; they were destructive. So I developed my own approach to measuring and holding ourselves accountable for value creation. I consider this my most important innovation, and I hope to see it adopted by others. The appendix also includes my “Equity Value Creation” methodology.
Lastly, I was innovative in my use of systems, Salesforce.com, in particular, and data, which is all important in operating a Bandwidth business. Together, systems and data allowed us to achieve industry-shattering Profitability margins of 50 percent while quickly and fulsomely integrating dozens of acquisitions.
I would be remiss if I didn’t include the other factors that led to success. I was an insecure badass, a rough-around-the-edges, southside Chicago guy who wouldn’t tolerate a life of being average. I was the Bear of Bandwidth.
The big takeaway from the Bandwidth fiasco was that the leaders were not focused on durable cash flows. Accounting gimmicks, misleading disclosures, and other bad behaviors were used to fool investors. Eventually, places to hide were too hard to find, and a steep price was paid.
Buffett likens a bubble to a fairytale: “Akin to Cinderella’s Ball . . .,” a Boom is an elaborate party. Bernie Ebbers found himself on the cover of BusinessWeek with the headline “Telecom Cowboy.” Jim Crowe was showcased in USA Today alongside Warren Buffett, Bill Gates, and Walter Scott. The New York Observer glorified ICG’s Shelby Bryan as “tall, smooth, and charming—seductive.” In 1999 I danced to a live performance by KC and the Sunshine Band at a Level 3 Christmas party while driving around in a yellow Ferrari with Level 3–inspired license plates.
Buffett continues his analogy by saying the party guests delay their departure because “they hate to miss a single minute of what is one helluva party,” while investors “continue to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future.”
Just as Cinderella knew her carriage would turn into a pumpkin and her horses into mice, the Bandwidth Boom executives and investors knew their party would come to a devastating end. However, unlike the Bandwidth CEOs, Cinderella knew an important detail—she was able to watch the hands of the clock as they ticked closer to striking midnight. “The giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands,” Buffett explained. The Bandwidth Boom partiers didn’t know when the Bandwidth Bust would hit.
In the wake of a Bust, a new opportunity, like the proverbial phoenix, rises from the ashes. Savvy entrepreneurs jump in, buy assets on the cheap, and through fundamentally sound business practices, create new fortunes.
Bandwidth wasn’t the first and won’t be the final Boom, Bust, and Resurgence cycle. The smashing together of AI, quantum, blockchain, augmented reality, genomics, and robotics might already be fueling a new Gold Rush. The pattern of Boom, Bust, and Resurgence will repeat itself.
Heed the words of the Oracle from Omaha. Be greedy when others are fearful. Be fearful when others are greedy. Know there are no hands on the clock. Leave the party before midnight.
And always remember, Cash Flow is King.