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Vonage Raises $35M

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News Analysis
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11/24/2003
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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

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aswath
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aswath,
User Rank: Light Beer
12/4/2012 | 11:13:46 PM
re: Vonage Raises $35M
In the back-of-the-envelope calculation don't we have to include network operational costs? What happens if they have to start paying access/settlement charges (after FCC determines to that effect)?
materialgirl
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materialgirl,
User Rank: Light Beer
12/4/2012 | 11:13:43 PM
re: Vonage Raises $35M
Yup. And don't forget real estate, bla bla bla. HOWEVER, the secret to the VoIP money sauce is in the business plan. How do they define customer service, for instance? What ARE those settlement plans? What tarriffs will the FCC or other countries put on these folks? We all know how to DO VoIP. Doing it at a profit is another matter. That is the area to watch.
firstmiler
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firstmiler,
User Rank: Light Beer
12/4/2012 | 11:13:39 PM
re: Vonage Raises $35M
Material,

When you ask "how do they define customer service"? What is your point?

My guess is that like most virtual corporations they don't really have customer service to speak of. It is not part of their value proposition to be customer friendly, their model is to be leading edge and cheap. Little old ladies wanting service need not apply.

fm
DoTheMath
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DoTheMath,
User Rank: Light Beer
12/4/2012 | 11:13:38 PM
re: Vonage Raises $35M
firstmiler wrote>When you ask "how do they define customer service"? What is your point?

>My guess is that like most virtual corporations they don't really have customer service to speak of. It is not part of their value proposition to be customer friendly, their model is to be leading edge and cheap. Little old ladies wanting service need not apply.

---------------------

Exactly. I have used Vonage, and now I use zerocents.com, which is even cheaper. I am calling at least 2-3 hours a day, and these are great money savers. I really don't care for service - but in both cases, I have gotten through to their 800 numbers fairly easily, the couple of times I have tried. In the zerocents.com case, there was a glitch where my long distance didn't work, and it was fixed in 1 hour after I called their 800 number.

For comparison, my cell phone service was cut off due to a mistake on Sprint's part, and it took about 5 phone calls, and a lot of running around to get it restored. So customer service isn't great with the big guys.
alchemy
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alchemy,
User Rank: Light Beer
12/4/2012 | 11:13:34 PM
re: Vonage Raises $35M
I think Vonage is a bad investment. There's minimal barrier to entry for the service and you're competing on price. You resell cheap VoIP phones and buy and install a soft switch. All the calls end up being dumped to one of the many carriers with excess capacity... Level3, Sprint, MCI, or AT&T all spring to mind as companies that will write you a contract for an all-you-can-eat wholesale gateway interconnection. $35 million for Super Bowl advertising isn't going to help for something as price sensitive as best-effort VoIP.

The other problem with Vonage is that the ILECs and MSOs will end up traffic shaping P2P traffic to the point where the service is useless.
BobbyMax
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BobbyMax,
User Rank: Light Beer
12/4/2012 | 11:13:08 PM
re: Vonage Raises $35M
NEA's most of investments are likely to generate much revenue. Most VScs have typically 4-7 years to reap their benefits from investments in start-ups. There is a still a lot of skeptism about VoIP. Some businesses may use it, but that would not generate any signficant revenue. Generating false hopes by the potential VOIP service providers is a lie. Voip appears to be the lasr straw that will drown VOIP equipment vendors and service providers.
aswath
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aswath,
User Rank: Light Beer
12/4/2012 | 11:13:08 PM
re: Vonage Raises $35M
Take a look at http://192.246.69.231/jeff/personal/archives/000267.html and http://192.246.69.231/jeff/personal/archives/000247.html to read what Jeff Pulver says on this topic.
dodo
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dodo,
User Rank: Light Beer
12/4/2012 | 11:13:07 PM
re: Vonage Raises $35M
Gea

Haven't seen your posts for the past week?
technonerd
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technonerd,
User Rank: Light Beer
12/4/2012 | 11:13:04 PM
re: Vonage Raises $35M
VoIP will be a nice product deployed as a last gasp by the RBOCs, and it's not going to work. They missed their chance to add value to the networks when they refused to separate the wires from the services and really open the wires to all comers. The result was that consumer DSL has been very slow to take off, and is badly trailing cable modem and soon to be high-speed wireless.

Meantime, cellular is about to put the ol' silver stake through the heart of residential wireline. The instruments will be these:

1. Boxes that will plug into your indoor phone jack and route all calls to the cellular network. You stick your cellphone in the cradle of the device to accomplish the last-hop routing, and then use the existing telephone sets as you always did. Given that most cellular plans give people far more time than they use, the effect of these devices is going to be to allow people to use their cellular service for ALL calling for the price of their ceuular bill.

These devices will go on sale within a couple of months. The first ones will cost $125 and won't handle faxes or dial-up Internet, but the next generations will be cheaper and do more in the manner of everything based on silicon. Once the next generation or two is available (within a couple years) the penetration of ILEC wireline residential will fall very fast, very quick to less than 25%. This will blast a hole through ILEC financial statements and cause a crisis.

2. This will be abetted by the new portability rules that not only make it easier to switch between wireless carriers, but allow number portability between wireline and wireless.

Very soon, the average customer is going to say there is no reason to pay two phone bills. There has been only minimal wireline replacement by cellular to date because of reception issues and handset form factor issues, including the lack of dial-up Internet capability and the lack of extension phone capability. The device I discussed in my first point will alleviate all those issues, and the FCC rules will make the switching between last-mile modes seamless.

So where does VoIP fit in? Nowhere! The ILECs will offer it as an add-on service bundled with residential DSL, but because of the competition from wireless they won't be able to charge very much at all for it. In fact, they might have to offer it for FREE just to keep people connected to their wires.

This all could have been avoided if the ILECs hadn't fought the last-ditch battles against competition over the past few years, and if the CLECs hadn't most been fraud artists instead of innovative new companies intending to be in there for the long haul.

technonerd
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technonerd,
User Rank: Light Beer
12/4/2012 | 11:13:03 PM
re: Vonage Raises $35M
Correction in the very first line: I meant to write "niche product," not "nice product"
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