Vonage Dials in $35M VC Backing

VOIP upstart Vonage today banked $35 million in venture capital funding to continue building out its DigitalVoice broadband phone service.

Vonage, which sells SIP-based VOIP service to ISPs and broadband users, said the latest cash infusion included a $12 million investment from New Enterprise Associates (NEA).

NEA, best known for its health care sector investments, is the first major VC to hitch its wagon to the Vonage train. For the most part, the company has been bankrolled by CEO Jeff Citron, the serial entrepreneur who founded online brokerage Datek Online Holdings Corp.

Citron had spent the last six months beating the pavement in search of an equity financing partner but, as the market for broadband phone service became more crowded, interest in Vonage waned, according to sources familiar with the company’s plans.

Just last week, Baby Bell Qwest announced it
would test a consumer VOIP rollout in Minnesota. Similarly, SBC
Communications rolled out its own PremierServ offering for mid-level enterprise customers and Net2Phone launched its
first cable VOIP partnership in the U.S.

Industry watchers expect the competition to heat up even more in the
coming months. “We already know about AT&T, MCI, Qwest and Verizon. I predict literally dozens of ISPs [will launch VOIP services],” said Dave Burstein, who tracks the market for the DSL Prime publication.

Vonage has been in expansion mode, building out its services in most major U.S. markets but, as the customer base grows, Burstein believes the margins will thin out.

“The cost of terminating calls across the U.S. is about 1.2 or 1.3 cents a minute, so that if [Vonage] has heavy users, the costs are higher than you might think. The margins are less than expected, and after customer acquisition costs, it makes it hard to make a buck,” Burstein told internetnews.com.

Vonage has inked wholesale retail deals with EarthLink , Armstrong, Advanced Cable Communications and the Coldwater Board of Public Utilities. The company operates a flat-rate calling service that powers more than 70,000 phone lines.

Vonage also recently won a legal battle with Minnesota regulators, who wanted to charge the company the same fees as telecoms.

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