Founded in 2001, Vonage is currently the biggest VoIP company in the world. More interestingly, on May 5th 2006, Vonage issued its’ IPO prospectus. For those that not familiar with VoIP (Voice over Internet Protocol), it is a new technology that uses the internet as the backbone infrastructure for traditional telephone calls. It allows its’ users to make and receive phone calls as they do traditionally, while transparently replacing much of the role of the traditional phone company.
The technical idea itself is an ingenious one, and it seems like Vonage has been able to successfully make the leap from early adopters to the early majority (borrowing from Geoffrey Moore’s terminology in Crossing the Chasm). It’s revenue has risen from 19MM in 2003 to 270MM in 2005. Unfortunately, Vonage doesn’t seem to be watching its cash flow, and has been running higher and higher net losses since its inception.
Now that I’ve talked briefly about Vonage the company, I have to say that its’ propose IPO reeks of the dot com bubble. Once again, VCs are attempting to push a startup that is still cash flow negative out into the market in order to make a quick escape. Let me lists the reasons why I think this is a disaster in the making.
- VCs have given Vonage more than 660MM of funding. Now clearly VCs have no intentions of losing 660 MM, which is why it’s absolutely scary to see this in the prospectus: “Our stock price may decline due to sales of shares by our other stockholders”…
- Vonage is still cash flow NEGATIVE. In fact, it’s so negative that the prospectus itself warns: “Our significant losses to date may prevent us from obtaining additional funds on favorable terms or at all … We do not fit traditional credit lending criteria … the terms of our senior unsecured convertible notes contain significant restrictions on our ability to raise additional capital.”. Seriously, WTF
- Jeffrey Citron, the out-going CEO (and current Chief Strategist), is an absolute ass. Hell, he got banned from the brokerage business completely by the SEC for his last startup (Datek Online).
- Mike Snyder, the in-coming CEO, is a major contributor to the 2 billion dollar accounting fiasco at Tyco according to the Wall Street Journal. (Even with Snyder at the rein, Vonage’s balance sheet is STILL cash flow negative?!?!)
- Vonage has been throwing its marketing dollars down the drain. Normally, companies with significant first mover advantage should be able to equate their brand name with the entire product category.
- Underarmor – Athletic wear
- Ipod – Mp3 Player
- Xerox – Photo Copier
- Post-its – sticky notes
Since Vonage has utterly failed to brand itself as “The next generation Phone Company”, it has actually been running a marketing campaign for the entire VoIP industry. (I’m sure Sunrocket is thanking Vonage for all the free marketing).
- The telecom companies are currently trying to remove net neutrality. In fact, some have already started to prioritize their own packets over others, causing unacceptable VoIP performances for any provider other than their own.
When I look at all these reasons holistically, I see a company with bad management, bad finances, and bad marketing with vulture capitalists not far behind trying to recoup their investment. Does this look like a good investment opportunity to you?
