Vonage Raises $35M

VOIP service provider Vonage Holdings Corp. announced a $35 million funding round today, led by New Enterprise Associates (NEA)'s $12 million contribution (see NEA Invests in Vonage).

The new funding, which takes the company's total to $65.3 million, also includes contributions from about 20 individual investors, including senior management, says Vonage CFO John Rego.

The funding round indicates the hot VOIP market is suddenly getting even hotter. Vonage is not the only VOIP service provider to have raised money in the past week (see Net2Phone Raises $58.5M). It's a sign that VOIP services are moving into the mainstream and that the world's major service providers are now taking it very seriously (seeRBOC VOIP Coming in 2004, Biz Users Fancy VOIP, Says BT, and Carriers Say VOIP & SIP Are Hot).

Vonage's new investment is to fund further expansion, including coverage in all 50 U.S. states, further expansion in Canada, and an initial push into Europe. Rego says that its initial European service will be in the U.K., with Switzerland to follow, and that the service should go live with local number availability in the first quarter of 2004. Rego says Vonage is close to signing up some partners in Europe for call termination and sales and marketing, though he can't name any names at present. Expansion into the Asia/Pacific region would be "three or four years down the line," adds the CFO.

Vonage, which currently has nearly 72,000 customers and about 200 on staff, markets its SIP-based services to consumers and businesses that have broadband connections. It sells its flat-rate services (between $24.99 and $49.99 a month) both directly and through partners such as cable companies.

And the company is so confident of its growth potential that Rego believes it will reach profitability in 2004 and end that year with 300,000 customers and about 400 staff (see Vonage CFO Sees Profits Ahead).

A back-of-the-envelope calculation shows that Rego may well be on the right track. Even if all 71,000 current customers were on the company's lowest monthly tariff of $24.99, that would still bring in $21.3 million in annual revenues, though some of this would be retained by its channel partners. And with a relatively low headcount, employee costs -- if you use an average of $100,000 per head -- would stand at about $20 million a year. Even counting other costs, especially extensive marketing of the services, the CFO's target of profitability next year looks to be achievable if Vonage can expand its user base as fast as it believes it can.

But while Vonage is blazing a trail in the world of upstart VOIP service providers (see Vonage CFO Sees Profits Ahead) and making a name for itself through an aggressive marketing and public relations campaign (see Never Mind the VOIP… ), the company is also showing signs of getting a bit too confident before it has really made the big time (see Vonage CFO Overdoes It). It's due to face increasing competition as the traditional service providers, particularly the RBOCs, launch their own VOIP services. Then there's Skype, the free Internet service that, unlike Vonage, does not require a phone number or a connection to the PSTN.

Clearly, high-tech and healthcare investor NEA has not been put off by any of this. The VC firm, which has $5 billion worth of investments under management, is no stranger to the telecom sector, or even VOIP. Including Vonage, it has money in 38 communications companies, including Corvis Corp. (Nasdaq: CORV), Juniper Networks Inc. (Nasdaq: JNPR), Laurel Networks Inc., and Procket Networks Inc.. Its other VOIP interest at present is in IP Unity Inc., a media and application server vendor (see Media Servers on the Move and Siemens Funds IP Unity).

— Ray Le Maistre, International Editor, Boardwatch

(20)  |