Skype and Vonage: The Ones That Got Away

BOSTON — A good telecom venture capitalist is like an NBA shooter. Every once in a while he misses a big shot. The key is, he puts it behind him and hits the next one, and the one after that.

Charles Lax of Grand Banks Partners and David McCarthy, of BCE Capital, are prime examples.

In a panel discussion at the Voice Over Net (VON) show here today, the veteran institutional investors confessed to passing on Vonage and Skype.

Skype, of course, is being bought by eBay for $2.6 billion and Vonage is moving to the IPO launch pad.

Lax met with Vonage CEO Jeffrey Citron when the VoIP firm was seeking early financing. Citron had a strong track record, having already hit with the online brokerage Datek, but wanted too much capital for the equity he was willing to part with.

“[Citron] wanted a valuation that we weren’t willing to pay at the time,” Lax said. “He was right; we were wrong. That company will be worth billions of dollars at IPO.”

McCarthy has his own story of the one that got away, having been unable to see the value in a small European computer-to-computer VoIP company called Skype.

“When I passed on Skype, it was because I couldn’t figure out the business model, and shame on me,” he said.

Despite recent high-profile successes, VoIP entrepreneurs shouldn’t walk into financing meetings and ask for a valuation number based on what Skype got or what Vonage is expected to fetch.

“Pricing is always a matter of who’s driving the bus,” Lax said. “If they have a track record.”

In addition to the leadership team, other factors determining whether a company gets funded and for how much include the traction it has in the market, its revenues and the size of the market it addresses.

As for specific areas of interest, the investors on the panel said they look for products and services that are easy to use (Skype is a good example) and may fit into offerings of large network equipment makers or service providers.

“There will be a roll-up [of VoIP technologies],” said Stanley Stern, head of investment banking at Oppenheimer. “Big companies will come along and say, ‘I need that, I need that, then it comes down to valuation.”

Noting the converging world of communications devices and networks, McCarthy noted that BCE is less strict about evaluating only enterprise plays.

“We would never invest in a low-margin consumer electronics [firm] that would compete with Sony,” he said. “But we recognize that solutions are now end-to-end in nature.”

Other technologies mentioned by VCs include quality of service technologies for IPTV and other IP applications that are expected to be rolled out in coming years.

As for Lax and McCarthy missing out on Vonage and Skype, don’t feel too bad. Both have had plenty of other winning investments over the years.

Throughout his career, Lax has seen 15 of his portfolio companies go public, 10 of which achieved market caps in excess of $1 billion. McCarthy was also involved in the acquisition of Catena by Ciena for $456 million, the largest acquisition of a Canadian VC-backed company to date.

And you can bet they’ll keep shooting in the VoIP space.

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