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Guerilla Financing for VoIP Companies

By Klaus Scholz


When you read the news that Skype (News - Alert) was bought by eBay for $2.6 Billion+ and Vonage (News - Alert)�s IPO was expected to raise at least $250 Million, you may think twice about the value of a VoIP company. You should ask yourself, is there not a way to participate in this gold rush for Internet telephony?

Vonage stated in its prospectus: �We are pursuing growth rather than profitability� and �While this strategy will have the effect of delaying or preventing us from generating net income in the near term, we believe that our focus on growth will better position us as a strong competitor in the long term.� It looks like all you need is growth, not profit, to attract investors.

So, you may consider it�s not such a bad idea at all to get financing and grow your customer base. Whether you believe in an exit strategy � la Skype or share the dream of Vonage that marketing dollars will return tenfold, you need money to expand your business.

There are many different variants of running a VoIP operation, but the crucial question remains in each: how to spend the initial capital wisely. I�ll walk you through different scenarios providing the ammunition that best fits your unique business plan. We will first discuss the different components to provide the service, then evaluate different finance models.

To offer VoIP, you may need a sales team, a Web site, a server to run the softswitch, connection to telcos for call termination, a VoIP platform and billing system, and last, but not least, technicians and customer support.

Why would I need to invest in a VoIP platform, as there are numerous companies that provide free hosting services?

The answer depends on what you plan to achieve as a service provider. Let�s assume you first want to test the service and also the capability to build a distribution channel. Then, you may be well advised to invest in a compelling Web site and customer support rather than on a softswitch technician and learning how to customize the VoIP platform. There are more than a hundred companies in the United States alone providing VoIP and searching for resellers, so you should be able finding the right match for your business plan.

Choose a provider that charges you on a per minute base rather than simply offering discounted calling plans. Keeping the breakage will not only increase your profit margin but, more importantly, per minute billing allows you to fine tune your own offering. When you are targeting Latin Americans, your �unlimited� plan may carry much more traffic than a similar offering to call Eastern Europe.

Check the A-Z list of your service provider for competitive rates to your targeted destinations, breakouts, and countries. Be aware that there is an important difference between wholesale and retail rates.

Besides competitive rates, you need a flexible billing system that allows you to customize calling plans, that alerts you if customers exceed their credit limit or the average call time (residential versus business customer), and that sets off an alarm if a calling plan does not achieve expected margins.

Whether you run your own software or use a hosted solution depends not only on the complexity of your call plans, but also on your experience in taking advantage of the variety of available options.

There are providers that allow you to test their platform before you purchase it, either hosted by the provider or operated by yourself. Owning your VoIP platform and an integrated billing system makes sense if you want to customize it, exceeding the generally supported level, and � most importantly � if this proprietary platform increases the value of your company. Both Vonage and Skype are running proprietary software and claim it is the base for their success.

Why would I own a softswitch to be hosted at my service provider?

Each Telco offers a unique A-Z list that is based on the company�s connection to Tier 1 or Tier 2 carriers, each with its own assumptions on which markets to price higher while still remaining competitive. When you own a softswitch you can choose your own carrier that offers you the most competitive rates.

As I alluded to previously, there is a fundamental difference between wholesale and retail rates. Let�s assume your wholesale carrier has six routes to Guadalajara and you buy at a given price. Your carrier, then, may either terminate the traffic through the first three routes, where he achieves a certain margin or returns the call as undeliverable to you. If you are based on a retail LCR, the call should be connected, although the carrier may not achieve the desired margin, at the sixth route. The difference between a wholesale and retail LCR should not only be the price and call quality, but also the ASR, or call completion rate, provided by this carrier.

Choosing your carriers yourself and taking advantage of lower rates should pay for the cost of the softswitch once a certain traffic volume is reached. GlobalNet, for example offers three different A-Z lists, dependent upon whether the partner owns and operates the switch, whether the company hosts the switch owned by the partner, or whether GlobalNet owns and operates the softswitch. If the company does not need to blend in other services, like a managed billing system, and just provides termination, you should, obviously, get the lowest rates.

How can I get financing?

You could approach the capital markets through an IPO or raise money by listing the company through a reverse merger on one of the stock exchanges. You could take your business plan, with all its competitive advantages and proof of forming a successful VoIP company already for the third time, to a Venture Capitalist. Or, you could ask your lawyer to introduce you to an Angel, specialized in high risk, high tech adventures.

After many months and several expensive trips to Wall Street, you may come back arguing that the telecom industry is not longer the preferred playing field for investors and that they would rather focus on investments in nanotechnology, not Internet telephony.

That may be the time to change your strategy and consider guerilla financing. Instead of asking outsiders to finance your VoIP operation, you can seek funding within the industry.

Approach your service provider not only to sell you minutes, provide you a with a billing solution and a back office system, but also to share the opportunity of selling VoIP as a minority shareholder. Make the case that participating in your company and targeting a certain market will add value to its business by increasing its customer base. Rather than handing you over to a competitor that is more flexible and might take the risk and invest in your business plan, your carrier should evaluate the gain by acquiring new markets for its services.

GlobalNet, one of the VoIP platform and network service providers in the market, provides a three-stage plan in offering a partner the opportunity to finance GlobalNet�s VoIP platform and billing system, the server and softswitch, and a maintenance contract to support and upgrade the software.

In cooperation with Emergent Networks, which offers its Entice line of softswitches, GlobalNet offers a complete solution for less than $100,000 that can be financed in exchange for a minority position in the company. GlobalNet asks for a business plan outlining the competitive advantage, the marketing strategy, and the distribution channel.

The partner provides the working capital and has the option to operate the system or co-locate it at the Houston Technical Center of Level 3 under a GlobalNet maintenance contract. The company also provides a redundant system based either on its own softswitch or an independent system.

The VoIP provider has the option to own the system hosted, operated, and financed by GlobalNet or to run it based on its own resources. In any case, the provider gains the freedom to decide which carriers to choose for termination. It will take that decision and use it to its advantage to get the lowest possible rates in the market without paying a carrier that marks up rates to finance its VoIP platform. The provider may also get its own direct routes and connect direct to them.

What are the advantages of being a facility-based VoIP service provider instead of just focusing on sales as a traditional reseller?

Owning your VoIP platform and softswitch means not only lower rates but increases the value of your company and the range of services you are able to provide.

Running your own system allows you to offer other resellers hosting for their billing system and providing front and back office services for them. In the ever-changing world of VoIP licensing regulations, in many countries, you gain the pole position owning your platform. Whether you team up with an existing license holder or acquire your own, your company stands to gain a much stronger market position than a sole VoIP reseller.

Whether you opt for a hosted solution or operate the system by yourself, you should own your destiny. Partnering with a company that runs its platform for many different resellers allows you to take advantage of its experience without the financial exposure of owning and operating a softswitch.

Whether you seek to expand your business into other markets or are determining an exit strategy � like acquisition or merger � margins may well determine your fate.

One of the crucial questions each entrepreneur has to answer initially is how much money or margin is needed to finance marketing. Depending on your growth strategy, owning a system, but hosting it at a partner may become a reasonable option to stay competitive. IT

Klaus Scholz designed the financing program of GlobalNet as VP Sales and Business Development. He has a Master in Economics and can be reached at [email protected].

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