Vonage - 35M Financing

November 24, 2003 -- VONAGE, the voice- over-Internet-protocol (VoIP) provider headed by Datek co-founder Jeffrey Citron, has a bundle of new cash at its disposal. The company plans to announce today that it has secured $35 million in new financing led by venture capital firm New Enterprise Associates.
"To get a transaction done with something involving the words 'Internet' and 'telephony' in the same sentence is really an accomplishment," Vonage CFO John Rego said.

Rego wouldn't say what type of valuation the company got on the deal, but he says Vonage's management still owns more than 50 percent of the company. Vonage will use the money for marketing and to expand service to Canada and Europe.

"We're in a growth phase right now, and it's a good time to get new capital. We'll be able to offer local numbers in all 50 states next year. We expect to be profitable by the end of Q2 in 2004," Rego said.

With over 71,000 customers, Vonage is the market leader among independent VoIP providers. But competition is heating up.

The Federal Communications Commission will begin the VoIP regulatory process next week, and what was expected to be a battle between the Bells and VoIP providers is looking more like an all-out offensive against any type of regulation - a clear signal that the Bells will get into the VoIP game in a big way.

With fewer jitters about a potential regulatory roadblock, Vonage is now looking to expand distribution of its service. The company already has deals with cable operators Armstrong and Advance, as well as with various retailers, and Rego said there are more deals in the pipeline.

"We will be announcing five new deals with cable companies shortly," he said.

The $35 million in new funding adds to the $30.3 million the company has raised since early 2001. But will it be enough to one day, as the company hopes, serve millions of customers?

"This is not traditional telephony by any stretch," Rego said. "One of the benefits of VoIP is that we don't have the capital expenditures associated with building out a network. We're taking voice and making it an application that rides over the Internet. The money can go very, very far for us."

Vonage hopes to exit 2004 with more than 250,000 customers, which isn't far-fetched considering the company started 2003 with only about 7,500.

So will Vonage be the third big success for Citron? After helping to start and then sell electronic-trading network Island and online brokerage firm Datek, Citron has kept a low profile at the helm of Vonage.

The Securities and Exchange Commission slapped him with a $22.4 million fine in January for allegedly manipulating the Nasdaq's small-order execution system. Citron did not admit nor deny guilt, but he has been barred from association with any broker or dealer.

But with Vonage and VoIP taking center stage in 2004, the limelight may well find Citron again.