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BetaDot » VC VoIP
VC's Still Investing in VoIP Companies

Intense interest from venture capitalists has resulted in speculations of the end of the VoIP gold rush.



Over the past few months, companies such as Homdel, Vonage, and Skype have garnered a lot of attention from the investment community.  Still, investors point to companies that are building the infrastructure and the services to support the VoIP market as the next hotbed for investments.
The ability to make calls over the Internet has been around for years but is just now really catching on. Its popularity is growing as more consumers trade dialup Internet service for broadband, almost the only essential for VoIP service. Investors are bullish over the VoIP market because they see the Internet as the gateway to all voice and data communications. It’s created quite some chaos in terms of investments.
Vonage raised $200 million in one round of funding last Spring and has now filed to go public. Skype was bought by eBay Inc. for $2.6 billion in cash and stock in September. According to VentureOne, a unit of Dow Jones & Co., more than $700 million was invested in VoIP startups in 2005, with 76 companies getting funding.
Despite the heightened interest, venture capitalists think there’s room to make money. As the VoIP market expands, the companies needed to support and bring services to the market will be numerous.
“In the next 10 years any analog voice call will become digital,” said Edward Sim, managing director at Dawntreader Ventures, the New York early-stage VC firm. “The real question is who will make the money.”
Sim thinks it could be SIPphone, the San Diego Internet telephone company. SIPphone’s Gizmo Project aims to offer the ability to make Internet calls not only on the Internet but on things like routers, Wi-Fi handsets and dual mode mobile phones, unleashing people from their PCs.  Much like Skype is moving onto Trio’s 650 and the Palm OS with its services.
SIPphone is Dawntreader’s only Internet telephone investment, but a recent trip to Israel gave Sim plenty of investment ideas.
“It’s moving beyond Vonage,” said Sim. “It’s cheap, and it works.”
For Bill Stensrud, managing director at venture capital firm Enterprise Partners Venture Capital, hardware is one way to play this market. Enterprise Partners is investing in Quorum Systems, of San Diego, which makes a semiconductor for mobile handsets. In essence, Quorum’s chip will transform a cell phone into an Internet phone anywhere there’s a wireless Internet network. That means your cell phone would know when you entered your home and switch to the wireless Internet network in your house.
“It allows the phone to look for the cheapest way to make a call,” Stensrud said.
Quorum faces some stiff competition. Companies like Motorola Inc., Texas Instruments Inc. and Broadcom Corp. are also going after this market. Vonage recently selected Broadcom to provide chip sets for new Internet telephony products, while Motorola and Vonage have been working together to develop mobile products.
On the software side of things, there’s Covergence, the Maynard, Mass.-based VoIP startup, which makes hardware to secure Internet calls. While security hasn’t been an issue yet, it’s sure to crop up as the service gains in popularity. Sean Dalton, managing general partner at Highland Partners, of Lexington, Mass., said the company is a play on investing in the infrastructure.
There are many venture capitalists circling the services side of the business, but the back end is equally interesting, Dalton said.
Most investors agree video will follow voice, albeit at a conservative pace. Not doubt, live video calls will be appealing to many consumers and corporations.
Video, however, will likely open up a Pandora’s box of privacy issues as the ability to send live video streams through your cell phone and computer catches on.
“There’s going to be a gradual evolution as people understand how to reconcile video with the array privacy and other issues,” Stensrud said.

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Intense interest from venture capitalists has resulted in speculations of the end of the VoIP gold rush.


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