Vonage Raises More VC
Can someone explain to me how Vonage manages to raise an addition US$105 million in venture capital? Each time this company convinces investors to pony up more cash, you have to be impressed by the selling powers of Vonage CEO Jeff Citron. With apologies, however, to VOIP advocate Jeff Pulver, Internet telephony is still an early-stage business where prices are already declining - before the major carriers and cablecos get really serious about jumping into the fray. I guess investors must look at Citron's track record - Datek Online and Island ECN - and figure he's a good bet for yet another financial windfall. To Vonage's credit, it got out of the gate first and has more than 200K lines. This means it is generating about US$6 million a month of revenue, and, given its modest expenses, probably making an operating profit or a bottom line profit. The big question is whether Vonage's business is sustainable? Will it be able to maintain its momentum or, at the very least, its current size when the major carriers decide to make the big push into VOIP? Personally, I think Vonage's investors have made a big bet - US$208 million to be exact so far - the company will be acquired by a carrier hoping to make a big splash into VOIP. If this scenario is likely, how much would Vonage be worth? If you use US$100 million in annual revenue as starting point, what's the price to sales multiple? 8X8 Inc., which has 17,000 customers, has a market capitalization of US$74 million. This works out to US$4,352 per subscriber. If Vonage is given the same multiple, it's currently worth US$1.5-billion. The next step is estimating how much equity Vonage has sold to raise US$208-million. If it's 20%, investors will break even at the current valuation. Of course, Vonage will sell at a healthy premium to 8×8 because it has a dominant market position and a more established and credible brand. Vonage also more growth potential if VOIP meets the gung ho expectations of the major consulting firms such as Frost & Sullivan. With US$105-million of new capital, Vonage will continue its aggressive expansion strategy in the U.S. and overseas. If the company can execute and grow to let's say 500K customers, it's value could easily double. Then, it will only be a matter of time before Citron cashes in big time again.
