Lessons for Venture Capital firms from SunRocket

SunRocket, the standalone VoIP provider, has gone belly up. This is just the beginning – there will be more casualties among standalone VoIP providers. What’s interesting about SunRocket is that they raised $80 million from BlueRun Ventures (formerly Nokia Venture Partners), Mayfield Fund, Doll Capital Management and Anthem Capital Management, but only have 200,000 customers. That’s a huge amount of money wasted by Venture Capital firms!

I remember the professor (Hello Dr. M) from the Venture Capital class that I took at biz school emphasizing several times that Venture capitalists have “deep pockets but short hands” meaning that VCs have a lot of money but are very careful/stingy with it. Looks like the Private Equity firms that invested in SunRocket weren’t like that.

So let’s look at why anyone would plunk down $80 million. Now I can understand the Series A ($9.25 million in November 2004) and Series B ($25M in September 2005) because VoIP must have looked like a very lucrative opportunity in the 2002-2004 period when VoIP providers were springing up like mushrooms in the dark (the market potential is usually very rosy, but risky at the beginning) and it would’ve been important to get moving fast and get big fast (VCs love that!). Because VoIP features aren’t differentiating, it’s important to iron out kinks and fine tune the technology, customer service, billing, and marketing tactics early on.

But let’s look at the Series C. This is where the existing investors BlueRun Ventures, Mayfield Fund, DCM and Anthem Capital Management and new investors Varma Mutual Pension Insurance Company, The Grosvenor Funds, and Brú Venture Capital (BVC) plunked down $33 million on August 25 2006.

SunRocket has nearly tripled its number of customers in the first 8-9 months of 2006. This 200% growth must’ve looked really rosy when the market was projected to grow 65% (In-Stat, July 2006) to 100% (Telegeography, US VoIP 2006). However, the very high Customer Acquisition Costs for standalone VoIP providers should’ve been a BIG RED FLAG! Vonage’s marketing cost per acquired customer is nearly $275 and SunRocket’s shouldn’t be any different. Even if all the new money was spent in acquiring customers, this would’ve only got 120,000 new customers!

So, I don’t know what the VCs were thinking, especially during the Series C round, and especially the new funders. It’s a pretty sad story when VC firms plunk down $33 million for Series C (3rd round) and see the company go bust in less than a year!! I would also argue that there have been no game-changing events since August 2006.

The lesson here for VC firms is to continue to have “deep pockets but short hands”, do the proper due-diligence, and not get caught in the greed-trap.

Incidentally, Mayfield Fund appears to have deleted their pages on SunRocket. Gotcha!

5 reasons why VoIP providers will go Bust

Recent news has highlighted that VoIP service provider SunRocket has gone bust. This is no case of bad management – more and more VoIP providers will fall off the face of the earth in the coming months and years.

Before getting into the why and the who, let’s look at the different types of VoIP providers. Pure Play VoIP providers are those that provide VoIP via an adaptor to “bring-your-own-broadband” customers. Examples are Vonage, Packet8, SunRocket, Lingo, Netzero, Packet8, and Earthlink. PC-Centric VoIP providers are those that provide VoIP on PC platforms, typically as an extension to an IM client. Examples are Internet portal and PC messaging providers such as MSN Messenger, Yahoo! Messenger, AOL, Skype, and Google Talk. Facilities-based VoIP providers are RBOCs (the primary Local Phone companies) and Cable MSOs such as AT&T CallVantage, Verizon VoiceWing, Comcast Digital Voice, and Time Warner Digital Voice.

Being a Pure Play VoIP provider is tough, for the following reasons:

  1. Low barriers to Entry – It is very easy to become a VoIP provider. With an IP-PBX such as Asterisk, a bunch of T1 lines, call termination agreements, an authentication server, a web server for user management, software, anyone can start a VoIP service. As a result, there are many VoIP providers in the market, leading to much competition.
  2. High Customer Acquisition Costs – As easy as it is to become a VoIP provider, getting customers is a difficult task. A lot of people don’t know the company or have reservations about VoIP. Second, Pure Play VoIP providers have no brand recognition or trust relationships with customers. As a result, they have to market heavily to get customers. In contrast, PC-Centric VoIP providers can leverage their huge user base to gain a foothold in VoIP. For example, AOL, Yahoo, and MSN simply leveraged their IM customer base by adding VoIP to IM clients and by promoting it on their web properties. Likewise, facilities-based VoIP providers have access to a huge customer base that they can market at low-cost.
  3. Lack of bundled service – This is where Pure Play VoIP providers are hit the hardest and the reason why Pure Plays will sink while Facilities-based and PC-centric providers thrive. Facilities-based VoIP providers such as AT&T and Verizon already have already have voice, video, data/Internet plays so they are able to offer bundled services with VoIP as an add-on. Likewise, Cable MSOs have video and data/Internet plays, and can provide VoIP/voice as an add-on in a bundle of services.
  4. Expanding scope of PC-Centric VoIP providers – not only are new players joining the VoIP bandwagon, but existing PC-Centric VoIP providers are expanding into the Pure Play VoIP providers’ turf. Skype used to be only on the computer, but is creating an ecosystem of cordless phones, WiFi phones and gateways, to go beyond the PC.
  5. New Game-changers: IP-PBXs are entering the home, especially open-source software such as Asterisk that can be loaded on any computer and you can connect a traditional POTS phone to it.

All these reasons point to a gloomy future for Pure Play VoIP providers. Now let’s look at how these providers compare in terms of market share.

voip-provider-landscape.JPG

As this dated market share report on from Telephia shows, only Vonage has significant market share. The small players will find it very hard to survive because they don’t have enough scale. VoIP has high gross margins (low incremental cost of service), but to make money when fixed costs are relatively high very high, one needs a lot of customers. If customer acquisition costs are too high, which it likely is for these small unknown pure-play VoIP providers, then no amount of customers are going to help you – eventually you will run out of money. I believe this is exactly what happened to SunRocket.

The future is bleak for these pure play VoIP providers with little market share – they will be acquired or fade into obscurity soon. Ironically, Vonage, the pure-play VoIP provider in the news for patent infringement, may be the unlikely survivor.

Babelgum strengthens strategy, gets new CEO

babelgum_logo.jpgBabelgum, the upstart Internet TV network that looks and works much like Joost, has appointed Valerio Zingarelli as the CEO. Zingarelli takes over from co-founder Erik Lumer who will now focus on strategic product development. Prior to Babelgum, Zingarelli was an independent Boardmember of Fastweb, the second largest Wireline Telecommunication Company in Italy. Before that, Zingarelli was formerly Vodafone’s Global Director of Networks and Service Platforms, which he joined from Omnitel. Prior to that he worked for Alenia and for Cselt, both in Italy.

The most interesting part is that Babelgum is looking more and more like a Europe-focused company. Babelgum is founded by Italian entrepreneur Silvio Scaglia. Now, the CEO is someone with strong experience in Italy (but not much global experience). Nothing wrong with that, but a more global outlook would’ve been better.

Looks like Babelgum is placing its bets in Europe, rather than in the U.S., the biggest market for Internet TV (or is it?). With the level of competition in the U.S. Babelgum would have a better standing Europe. Contrast that with Joost, another European company, that is focusing on American consumers and American media, as judged by the media distribution agreements with U.S. media companies.

Speaking of Media, Babelgum’s recent content partnerships with 3DD, Associated Press, BBC MotionGallery, Big Picture Limited, Black Diamond, Breakthru Films, Entertainment Rights, Fight Network, Filmchest, Gong Anime, IMG, Fashion, Gamer TV, Golf, Indivisual, Intervision, ITN, Journeyman Films, Quattro Media, Reuters, Spike Lee, aren’t anything to write home about – more evidence that Babelgum is focusing on the indie-like niche.

This is disappointing as I was looking forward to Babelgum and Joost blazing a trail to bring Internet TV to the television via the set-top box.

Nonetheless, I like what I hear about Babelgum’s strategy. By the end of the year, Babelgum plans to grow to 100 employees. In the next year Babelgum will concentrate on the three sequential priorities of building quality content through direct acquisition of content and automatic self-uploads by independent content owners, marketing Babelgum to English speaking viewers around the globe, and addressing the advertising market. I think Babelgum has the right strategy – to focus on a niche. Why compete with traditional TV providers, and Internet TV providers like Joost, Veoh, and YouTube/Apple TV when you can carve out a profitable niche in long-form long-tail media!

Facebook hires AOL Marketing Veteran to increase revenues

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Facebook has hired Chamath Palihapitiya, a former marketing executive at AOL, as vice president of product marketing and operations. The challenge for him: find new ways to make money.

Chamath’s credentials come from the 5 years at AOL, where he helped turn around the IM business as the Veep and GM of the Desktop Messaging group that includes the AIM and ICQ businesses. Chamath was most recently a Principal for the Mayfield Fund, a venture-capital firm.

With 29 million active users, Facebook is as as popular as it gets. Interestingly, when it comes to monetizing its business model, it’s no Google or even a Yahoo, with just $30 million profits on $150 million revenues.

Facebook has been an acquisition target, so its recent moves to bolster its management ranks and strengthen its balance sheet seems like a bid to set itself up for a high value acquisition or an even IPO?

Mr. Palihapitiya, is originally from Sri Lanka. Its good to see a fellow Sri Lankan in the news!

What is Ribbit up to?

ribbit_logo.jpgRibbit is yet-another startup in stealth mode. According to its web site,

Ribbit offers a new way to communicate without the hassle of additional software or hardware, and without having to purchase a new device.

Putting voice and choice back into communications…is what Ribbit does.

So we now know its some kind of telecom or Voice service provider. Hmmm….no software or hardware…I hope its not vaporware :-).

Looking at the Management team bios, it is clear that these folks have hardcore telecom backgrounds (i.e. client-server centric rather than peer-to-peer)

  • “carrier-class softswitch”
  • “TDM and voice packet infrastructure”
  • “carrier-grade products with reliability and scalability”
  • “voice-activated dialing, single number service, personal telephony assistant”
  • “distributed call control element and an ECTF S.100-based application platform”
  • “converged VoIP and fixed wireless services”

No one would assemble such an experienced team without intending to leverage that experience, so I’d venture that this is a softswitch-based VoIP application. Nothing out of the ordinary here – everyone and their mother has been doing softswitch in the last 5 years.

Looking further, Ribbit is developing a flash platform. See Director of User Experience, Flash Platform and this for evidence. This also ties in with some of the management team’s titles – “VP Applications” and “GM Software as a Service Ecosystem”.

Ribbit appears to be a softswitch-based VoIP telephony service that is accessible from a browser via a Flash application. Flash works on both PC environments and on mobile devices, so it would be a good choice for a service that runs on both PCs and mobile devices and offers a great user experience.

Jingle’s 1-800-FREE-411 Service on Skype

skype_jingle_logo.JPGJingle Networks, the provider of the free 411 service 1-800-FREE411, is now easily accessible to Skype users in the United States. Skype is a leading Internet VoIP company that is looking to spread its wings and 1-800-FREE411 is a free Directory Assistance service in the U.S. – so this looks like a match made in heaven. Skype users could already access 1-800-FREE411 because Skype allows a user to access any phone number (no 911 support though) for free. This agreement simply makes it easier – Skype users can dial easily by adding “Free411USA” to their contact list.

TechCrunch doesn’t see the value in this:

Personally, I find this deal a little dumb. Skype users are generally on an Internet connected device, and a web search is almost always an easier way to find information on a business v. a 411 call.

I agree that on a large form-factor device like a desktop PC or a Laptop this doesn’t make sense, but Skype is not just on a Computer. Nowadays, skype is available on cordless handsets, WiFi handsets, on PDAs (mainly with WiFi access), and even trying hard to get on Cell phones (but not doing too well). Nonetheless, Skype is trying to get on each and every mobile/portable device and this is where this partnership makes sense.

Also, I would venture out to say that this partnership doesn’t involve a cost to either party. It’s just a win-win for Skype and Jingle. So, why not! I remember in the startup division I used to work in, we had a speech-recognition based system (much like Tellme), and we would make ‘Strategic Agreements’ like this every day (especially the kind that had no value). Seriously, both these companies could use some additional publicity anyway.

iPhones for less than $15! No Waiting in Line

Would you like to have an iPhone? But cannot shell out $499 or don’t want to stand in line? Bidwarslive.com is allowing people to get an iPhone without waiting in line and without the massive price tag. Bidwarslive.com is auctioning 4 Apple iPhones in July. But they don’t go to the highest bidder! The iPhone will go to the lowest “unique” bid – that is the bid that is lower than all others and is the only one to bid that amount. An iPhone will be auctioned off every week in July, with auctions ending on July 7th, July 14th, July 21st, and July 28th. The iPhone requires a two year contract with AT&T, the only U.S. network the iPhone will work on.

So far nothing on Bidwarslive.com has sold for more than US$15, and the owners say the iPhone will go for even less.

Members pay $15 a month for 25 bids a day (or $25/month for 50 bids/day). Those bids can be used on any one of the prizes on auction. Current items include a 20” wide screen LCD Monitor, Xbox 360, and a $1500 Vacation to anywhere you choose.

Plus, there’s a nice social entrepreneurship aspect – whatever the small price the winner pays will be given to a charity of your choosing. Winners choose between the Susan G. Komen Breast Cancer, Livestrong, American Red Cross, and the Boys and Girls Club of America.

So go ahead! make your bids for the iPhone or any other of the other stuff on Sale. If you win, you’ll be sure to get it cheap!

MojoBaby launches Mobile Content site

mymojobaby.jpgMobile content launch pad MojoBaby officially launched this week. MyMojoBaby.com or MojoBaby.com focuses on sharing content with friends and family; Users can post photos and text messages from their mobile phone, somewhat like the love child of twitter and flickr.

The nice thing about MojoBaby is a widget called Mojo Player that can be embedded into, say, your MySpace homepage or other blog.

Currently the cell phone component of the site only works with U.S. cellular providers Verizon, TMobile, Sprint and AT&T/Cingular. International carriers will be added soon. To upload mobile pictures and videos, the user must have a MMS service enabled with a cellular provider.

Looking at some of the pictures on the site, it’s hard to imagine they were taken from a mobile phone. Or am I way behind on mobile phone camera capabilities?

Get your Spock On!

Spock is a personal search engine that helps users find and discover people. Spock already has more than 100 million people already indexed (just another 5900 million to go!), and is well on its way to building the broadest and deepest People Search Engine.

Spock is funded by Clearstone Venture Partners, a leading early-stage venture capital firm with prior investments in Overture, PayPal, NetZero, MP3.com, Internet Brands, and Opus Capital Ventures, another early-stage venture capital firm.

Spock is currently in beta and is offering private invitations to check out the service. You can get invitations at the following sites.

Hurry, the invites may be gone by the time you get there.

Openads to focus on much needed features with $5 million investment

Openads, which offers open source ad server software for Web sites to manage their online ad campaigns, is a 6 month old company that spun out of London based Unanimis. While Openads itself is only 6 months old, the open source ad server software its developing is based on open-source phpAdsNew, which has existed since 1999. Openads will make money by layering services on top of the core software.

Openads is a very popular ad server with 25,000 publishers on 100,000 sites in 140 different countries and in 20 languages. Openads has approximately 30 ad networks. Apparently, this open-source ad server delivers 60-100 billion page views a month, compared to industry-leader DoubleClick’s 300 billion.

More importantly, Openads just closed a $5 million Series A round led by Index Ventures (who also funded Skype, MySQL, and Zend), with participation from First Round Capital, Mangrove Capital Partners, and O’Reilly AlphaTech Ventures.

With this round of venture funding, Openads will be able to hire a core team of developers and enable important features such as PayPal integration and Self Sign-up that users have been requesting for a while but weren’t the focus before the spin off.

Openads is democratizing the ad network, where any website or blog can host the ad server and serve adds, rather than a few companies (aka Google, Yahoo! and Microsoft) hosting adds to websites and blogs.

$5 million wont be enough to take Google head-on, but it’s a good start!