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Story URL: http://www.silicon.com/research/specialreports/voip/0,3800004463,39130214,00.htm

VoIP investment over the hill?
Is venture fervour cooling off?

By Ben Charny

Published: Monday 09 May 2005

The question of how long venture capital firms can sustain their fervour for the net phone industry has been raised despite a fresh $200m investment into Vonage - the largest one-time venture round since 2000, according to the New Jersey VoIP provider.

Venture investors continue to pour cash into companies involved with voice over Internet Protocol, which is free software that lets an internet connection double as a phone line. But there is a growing sentiment among insiders that after investing $1.6bn into VoIP over the past four years, it's time for venture capital firms to look elsewhere to invest such large sums.

Joshua Jaffee writes on TheDeal, a website specialising in venture capital: "Now would be a good time, it seems, for venture capitalists and would-be voice-over-Internet-Protocol entrepreneurs to give the sector a miss."

Yet deals continue to pour in. The new Vonage funding round - led by Boston-based Bain Capital - doubles the amount invested in Vonage by venture capital firms and Vonage executives. Vonage chief financial officer John Rego, said the cash is earmarked for the operator's expansion to Asia, and even more Vonage advertising to hammer its brand name home. Vonage chief executive Jeff Citron remains the majority owner.

Even lesser-known VoIP providers, such as SunRocket, still find it easy to attract new venture capital. SunRocket says it plans to raise another $15m by June.

Michael Krupka, a Bain Capital managing director, said in a statement: "Voice over Internet Protocol has reached a tipping point, as mainstream consumers begin to adopt broadband telephony as a replacement for their traditional telephone service."

If venture fervour for VoIP cools off, it'll impact SunRocket and other smaller net phone operators. Providers such as these - with a few thousand subscribers and small amounts of cash on hand - are underdogs now that major cable providers and internet providers such as AOL have entered the VoIP market.

Vonage's Rego said: "I think this is just the very, very beginning of next wave in communications. But it would be quite difficult now for a start-up to go and get this level of funding."

Ben Charny writes for CNET News.com