Cover Story: VoIP Comes of Age –

Steve Jurvetson is an electrical engineer by training and a savvy investor by practice, and by most accounts a pretty smart guy. Yet Jurvetson, the Jurvetson in Draper Fisher Jurvetson, confesses that until recently, he’s always felt intimidated by conference calls. “Oh sure, I’ve been on millions of them, but I’ve never set one up. It’s too complicated,” he says.

What’s changed for him is Skype, the wildly popular Voice-over-Internet Protocol (VoIP) startup that allows even Jurvetson to set up a five-way conference call, simply and easily. Jurvetson sees this feature as a breakthrough in his work life, the kind of simple thing that can make entire new markets develop-and one of the reasons DFJ has invested in Skype. He sees VoIP as something that will create room for a number of Skypes over the next five or 10 years. “What I see for quite a while is layers of new communications opportunities where you might not have had them,” he says. “There’s a lot of technology that will arise around VoIP, both in the U.S. and abroad.” In part, that’s because VoIP is not just about voice. It’s become a form of shorthand for the conversion of analog communications of all forms to digital packets. This conversion in turn will create new ways of handling music, videos, video-conferencing and other types of multimedia.

Certain that the conversion will happen sooner rather than later, venture capitalists have dramatically ramped up their VoIP investments this year, putting more money to work than they did in the previous two years combined. As of Nov. 10, they plunked down $355 million for 18 companies, according to the MoneyTree survey conducted by PricewaterhouseCoopers, Thomson Venture Economics (publisher of VCJ) and the National Venture Capital Association.

The most active investor in the space this year has been 3i Group, which put money into three VoIP-related deals: Kineto Wireless Inc., Sonim Technoligies Inc. and Vonage Holdings Corp. Another five firms have done two deals each in 2004: Accel Partners, BCE Capital, Enterprise Partners Venture Capital and Storm Ventures.

The year’s biggest round went to Vonage, an Edison, N.J.-based startup that lets people make local and long distance phone calls over the Internet. After pulling in a $40 million Series D round in February, it hauled in $105 million in August. The Series E round was led by New Enterprise Associates and joined by Institutional Venture Partners, Meritech Capital Partners and 3i.

All this talk about the future of VoIP might spark cries of “hype” from investors who remember similar talk from four years ago. Flush with capital-remember billion-dollar funds? -VCs over-saturated the space in 2000, dropping $685 million on 28 VoIP startups. Investments declined in the following years, hitting a low in 2002, with $160 million invested in just 12 companies.

Subscribers can read the rest of this month’s Cover Story in the protected