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!