IP telephony gets a boost as Vonage raises $35m

Internet telephone service provider Vonage on Monday is expected to announce a $35m investment earmarked for expansion plans.

CFO John Rego said Vonage will use some of the funding to expand into Europe. Vonage also plans to reach all 50 states and more of Canada by next year. If all goes well, Rego said he expects the company will become profitable by mid-2004.

The funding round's single biggest contributor is New Enterprise Associates (NEA), a $5bn technology and health care venture capital company. Vonage is NEA's first internet phone company investment.

"NEA has substantial ownership of the company but not a majority," Rego said, adding Vonage has now raised a total of $65m. Vonage's largest individual investor remains Jeffrey Citron, founder of computerised stock traders The Island ECN, which Instinet ultimately bought for $500m.

The investment is further sign of the growing importance of voice over Internet Protocol (VoIP), a technology for making phones calls using Internet Protocol, the world's most popular method for sending data from one computer to another. VoIP requires a network connection and a PC with a speaker and a microphone or a device to convert a telephone's analogue signal into IP and vice versa. After years of over promising and under delivering, VoIP is generating significant interest among telecom carriers, corporations and consumers, thanks to significant improvements in quality of service.

Vonage, with 71,000 subscribers, gained a national reputation after several state utility regulators demanded it follow traditional phone rules and help pay for public telephone services including 911. Vonage claims it already does and recently listed a regulatory recovery fee on subscriber bills.

Ben Charny writes for CNET News.com.