Another $250 million for Vonage

By now Vonage was supposed to be on track for an IPO, that would have helped the company raise $400 to $600 million from public markets, and help fight a good fight with cable providers, phone companies and others with VoIP ambitions. Well, that (IPO) did not happen, so for now the company is going the route of raising convertible debt – a whopping $250 million – according to a report in the Wall Street Journal.

With this round of financing the company has raised a whopping $658 million from private investors. Is this proof that the company continues to burn cash as it competes with the giants? This is the last round before IPO, a line I have heard before.

The report indicates that the VC funds previously invested in the companyBain Capital, Meritech, 3i Group, NEA and a whole slew of others – and some hedge funds are investing in the company. Apparently, the value being put on Vonage is about $2 billion. Apparently that was the price tag when Sprint-Nextel was kicking the tires at Vonage and smartly, decided to walk away.

I don’t buy the $2 billion valuation, and anyone who is coming up with these numbers, and those buying into it ought to check the brand they are smoking. The math works out to about $2000 per subscriber, since Vonage has publicly said that it has about a million subscribers. The per-subscriber valuation could be lower if Vonage has increased the total number of lines to over 1 million.

The $2000 per line works out to about 80 months of revenue, or about 6.6 years of total revenues. And that’s using $25 a month plan as standard, which we all know is not sustainable. Given the recent price declines and the incessant commoditization of voice minutes, along with successful and aggressive rollouts from the cable companies, most Internet Voice Service Providers (aka SunRocket and Vonage) are facing heavy weather in the future. Another big issue hanging over the independents – an increasingly unfriendly FCC.

PS: Further thoughts later today.