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Another $250 million for Vonage

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By now Vonage was supposed to be on track for an IPO, that would have helped the company raise $400 to $600 million from public markets, and help fight a good fight with cable providers, phone companies and others with VoIP ambitions. Well, that (IPO) did not happen, so for now the company is going the route of raising convertible debt – a whopping $250 million – according to a report in the Wall Street Journal.

With this round of financing the company has raised a whopping $658 million from private investors. Is this proof that the company continues to burn cash as it competes with the giants? This is the last round before IPO, a line I have heard before.

The report indicates that the VC funds previously invested in the companyBain Capital, Meritech, 3i Group, NEA and a whole slew of others – and some hedge funds are investing in the company. Apparently, the value being put on Vonage is about $2 billion. Apparently that was the price tag when Sprint-Nextel was kicking the tires at Vonage and smartly, decided to walk away.

I don’t buy the $2 billion valuation, and anyone who is coming up with these numbers, and those buying into it ought to check the brand they are smoking. The math works out to about $2000 per subscriber, since Vonage has publicly said that it has about a million subscribers. The per-subscriber valuation could be lower if Vonage has increased the total number of lines to over 1 million.

The $2000 per line works out to about 80 months of revenue, or about 6.6 years of total revenues. And that’s using $25 a month plan as standard, which we all know is not sustainable. Given the recent price declines and the incessant commoditization of voice minutes, along with successful and aggressive rollouts from the cable companies, most Internet Voice Service Providers (aka SunRocket and Vonage) are facing heavy weather in the future. Another big issue hanging over the independents – an increasingly unfriendly FCC.

PS: Further thoughts later today.

14 Responses to “Another $250 million for Vonage”

  1. Scott Sajak

    Ok, here’s my theory. If Vonage gets over 2 million subscribers by May or June of 2006 they can consider themselves a brand.

    More important than anything is the cost of customer acquisition increases churn also increases, at some point they reach an inflection point with margin erosion and guess what? NO CUSTOMER LOYALTY Churn goes up, it’s cycle that the Long Distance Companies faced and RBOCS faced.

    Sprint got it right by private labeling thier service for the cable companies.

    Here’s my take, when Sprint spins off their local division a known fact and requirement for the Nextel merger, say in May or June of 2006, they (sprint local) will buy other local carriers including Vonage. They will probably have a market cap over $10 billion they could buy Qwest buy wireless service from Sprint Nextel and offer VoiP by buying Vonage.

    I am guessing that we should see a Vonage play sometime in the 3rd quarter. The way they spend cash they won’t have an alternative.

  2. I am not surprised with the fresh infusion of VC money in Vonage. My intuition says that the Vonage IPO is not going to come any soon.

    Vonage is busy improving the books to find a buyer or if it does an IPO as promised in last few rounds. The fact is, if Vonage goes to the market with its shares, the ‘bomb’ might kill it completely.

    I have also further analyzed what could be the real plot at my blog.

  3. I suspect they need this kind of money to create an MVNO. As a first step, this month they started selling Wi-Fi enabled phone with an ability to use not only at home, but at numerous WiFi hotspots. But, obviously, in order to sustain in business they need to offer a wider area connectivity (they need wireless). WiFi’s coverage is patchy and WiMax is still a couple years from now, so the only option left is to go MVNO’s path. Don’t you think they can actually go the VoIP/Mobile Convergence route?

  4. The valuations depend on not only the number of subscribers they have but also at what rate they are adding new customers. So guess VCs have lot more data than we do and hence they decided to open their wallets.

  5. I’m sure most of Vonage’s valuation is based on growth, and thus comparing a +/-$2000 per sub valuation for Vonage subs to Cable/DSL or other slow growth subscriber businesses is not very useful or relevant.

    That said, the points about Vonage having missed the easy sale, facing increasing competition, voice trending to zero and everyone just providing their own solution are dead on.

  6. Personally, I think the ship sailed on Vonage. they should have been the first mover in finding a buyer.

    Their whole advantage in the marketplace was price, add in e911 (if they bother to actually provide it) and additional taxes if the FCC gets their way (which they usually do) and Vonage will be toast.

    Voice is trending to zero, and the only advantage for VoIP will be as an additional service, not as a standalone product. Cable co’s and the big boys will provide voice for free as long as they can include bigger ticket items such as data and video.

    Personally, I believe their entire business strategy has been to do a customer land grab and sell out to the highest bidder. Now, an IPO wouldn’t be taken serious, and the players who would consider buying them can offer VoIP themselves, so why throw Vonage a bone?

    As a first mover, I think they could have made some money, but now…..good luck.