Last week Netcall’s bankruptcy, first IP Voice Operator (VoIP), or voice over Internet, was made public.

For having been co-founder of the Netcall business, because, despite having presented alternatives (rejected), I had anticipated and repeatedly warned, without being taken seriously, for this moment, for having felt obliged to leave the project in early 2006, for having proved with the current projects that the view I defended was far from lunatic and was sustained, despite being part of a shareholder conflict that still lasts and at the natural risk of being misinterpreted, I feel legitimacy and willingness to write a few lines about a project that had become mine.

The Netcall statement stated that bankruptcy was due “to the moment the international economy lives, and in particular to the national economy”. Externally, I know that it is easy to justify “fall” with economic factors; internally with internal conflicts and to say that because of these conflicts the “window of opportunity” has been lost. As in everything in life, we can hide behind excuses and justifications or we can learn from mistakes and move on.

Netcall actually had a “moment” and that “moment” was, at that time, its main asset. In 2005, a brand was created and designed and Netcall appeared on the market with an image of innovation and disruption. A kind of “enfant terrible” with the desire to change the world of telecommunications. It was even seen by the incumbent as the new competition wave (I saw Netcall proudly in Portugal Telecom's Powerpoints). It had the empathy of the media and the market, which saw cost reduction, innovation and the alternative to one (or several) incumbent.

What's wrong?

It failed the same thing that failed in all the VoIP businesses that sank and are sinking around the world. The truth is that VoIP was not, contrary to what it promised, very different from the traditional telecommunications business, following the same market logic in the telecommunications world and its regulators: high operating costs and very low margins. As someone said at GigaOM in 2006, unfortunately “It’s a sucker’s game!”

Massification business

The voice minute business only makes sense for big customer bases. For a Portugal Telecom that has around 4 million customers in the fixed network, an ARPU (revenue per customer) of 1 € monthly means 4 million euros. An increase in revenue of around 50 ts represents an additional EUR 2 million per month.

For a small player who gets 100,000 customers, the same ARPU means 100,000 euros, which does not cover operating costs.

Technology or services?

VoIP operators supported their business plans in numbers of customers who never left Excel or in the creation of Value Added Services. Some of these services were there from the beginning, others would appear with the time and needs of customers.

The vast majority did not realize what these services should be, or how they should be marketed, and ended up selling technology, quickly becoming “me-too players”. Even when, following market buzzwords, they presented SoIP offers (Services over IP) they did nothing but create ToIP (Technology over IP) offerings.

The business of telecommunications and VoIP is not, nor has it ever been, as many thought, a business of telephone service, voice service, connectivity, connections, integration or unified communications. If the goal was to stop being a “commodity” one should have realized that the context was business generation and not just cost reduction.

The new VoIP “services” such as IPCentrex, Mail2Fax and IP PBX represent for the common user... technology! They are not natural services, easy to use and much less to understand. Worse, they are not easy to install since each customer has its own specificity, either by the type of network equipment, by the type of broadband connection or by the type of services shared on their Internet connection. I mean... nightmare!

And if until 2006 it was said that traditional telecom operators did not know what to do with VoIP, the truth is that they quickly realized that they would have to view the voice as a “commodity” that would serve only as a “teaser” for new value added services (such as Broadband or Television) that would be the future source of revenue.

Most VoIP operators could not see beyond voice and could never sell SoIP services sustainably. They also did not realize that the real IP business is not at the level of IT and telecommunications but at the level of marketing and sales. New generation projects that want to succeed have to be “Problem Solvers”, tangible and able to generate value to their customers’ business, without ever forgetting their revenue generation.

Being “Problem Solver” implies knowing how to distinguish from competition and looking at the “problem” with another perspective (we must not forget that this is the obligation of any team managing an innovation project).

See the example of the iPhone that owes its success not to technology nor because it is another phone or “smart phone”, but because Apple designed a phone from another perspective. He looked at the phone from another angle and created a content delivery channel that created context for content, communications, services and commercial transactions. This is how you are “disruptive” and innovate.

Marketing and Branding

Netcall had a peak exposure and generation of Buzz in 2005. Almost without budget, it was not difficult to put the name “Netcall” on radio, television and newspapers. It was easy: “enfant terrible”, David and Goliath effect, innovation, national technology, everything was there. The brand, together with the team, must be the first asset to build! With Netcall, it was easy.

It is easy to say that the shareholders conflicts were responsible for the weakening of the brand. The truth “naked and raw” is that the project never appeared again. Not even with the release of the nomadic numerals could take advantage of Buzz's generation and brand exposure.

As I said in this Blog:

“ Those who do not appear, disappear!”

Technology as an asset

When it was launched, Netcall owned its own infrastructure. Later, he went on to use the platform of Dutch Intertalk (another company in the world VoIP in difficulties) in ASP (Application Service Provider). At that time, when Netcall gave up its platform, it gave up more than one platform; it gave up what distinguished it as an operator: its own know-how.

With this, aggravated by the weakening of marketing and “branding”, he gave up another asset and showed the market and potential buyers that it is easy to create a VoIP operator. Just subcontract a platform!

With this change the VoIP operator became the Intertalk of whom Netcall became a kind of agent (and this, despite the example inherited to the IOL Talki).

Of course, it is easy to argue with technical constraints, the need for new services and nomadic numbering. But what distinguishes “know-how” from a technological startup is the ability to do!

The problem of empathy

VoIP operators, due to the word “operators”, have a risk mission: to confront the incumbent(s). This forces them to have a single target (I will not call an enemy) and many “friends”. And these “friends” are media, customers and partners.

To not create enemies is important to please everyone (or at least not displease). This makes the VoIP operator's business have to generate revenue to partners and never, but never, can compete with them. This eliminates as business possibility:

  • IP network consulting, equipment and networking companies such as Telindus, NextiraOne and even Cisco;

  • the provision of integrated “solutions” such as IP PBX.

Netcall tried both unsuccessfully.

The business vs. private dilemma

The VoIP business has always had the business vs. private dilemma.

On the one hand, the bet on the private market allows for faster massification, generating Buzz and creating typified offers that minimize specific customer support problems and needs (this is what Vonage did ), but with almost no revenue. On the other hand, the business market allows thinking of “solutions” and “services” with visible revenues and is more permissive to reducing costs in telecommunications and unifying networks.

In addition to VoIP having associated the stigma of “Free”, business networks require tailor-made solutions and this requires the creation of commercial networks with a level of knowledge that does not exist on the market or on incumbent operators.

The initial Netcall business was designed to operate with a focus on the business market but creating private offer as the main marketing and branding strategy. In the middle, this definition was lost. The project was business, at one point changed direction and, with the netcall@home project, bet on the residential/private market with services that the market did not understand, then returned to the business market but without any service that distinguished and made a difference.

Innovation culture, 2.0 and the “me-too” trap

The 2.0 moment of the Internet world does not allow “me-too” attitudes. Today, in order to be innovative and disruptive in the online world, it is not enough to “want”; although essential, it is not enough to know only the technology but the multitude of services, marketing and market; it is necessary to live the VoIP, RSS, Blogs, Mashups, advertising models, social networks, everything! You need to have a true web culture; you need to breathe online and maintain the ability to anticipate customer needs and markets.

VoIP’s “business” outside Excel was never the sale of minutes. In a business where the commercial “teaser” is the “cost reduction” and the “free” for calls between network customers, at the limit, if the whole market was a customer, the service would be totally free and would not generate revenue (despite costs).

Netcall had in its structure the ability to be Web 2.0. To offer the market IP skills, not in voice but on the Web, in an integrated way. Actually, I couldn't take it. He was unable to market web solutions (first with Weblight, later Netcall Web) and ended up selling his client portfolio, lobotomizing what he should have always been (web!). That is, he never “breathed online” and quickly lost the culture of innovation.

The problem of capital and “risk”

Normally, while there is no “capital” projects are innovative and disruptive. Unfortunately, difficulties seem to increase cohesion and focus.

When a failure is justified by the “moment of the international economy, and in particular the national one”, how does this justify the fact that the project calmly followed the clear course of bankruptcy already foreseen (on my departure) in early 2006? I conclude that it did not happen earlier because people were leaving, reduced costs and the previous SME Administration Investments took on another “round” of investment seeming to say “acute a little more that we are leaving.”

Apart from everything else, the investor also failed. It failed because an investor is expected to press, rigour and control in the management of the Investment rather than the concern with the public image of the investment. It cannot be justified that, as InovCapital herself confirmed, the project has accumulated losses from the outset, almost without revenue and ending with a liability of around EUR 300,000, with debts to employees and suppliers and with claims claimed in court by a shareholder (I) of more than EUR 300,000.

After the previous public image concern, I wonder how the Administration of InovCapital now appears to give a face to the Business Journal assuming that the project had a loss of EUR 655,000 in 2007 against a small turnover of EUR 237,000?

Why wasn't Netcall sold?

It is inherent in an investment of “Risk Capital” the growth and subsequent sale. But this implies the creation and exploitation of assets. Netcall didn't create any assets. The ones you had, you lost.

For a VoIP operator, the valuationable assets are:

  • Make;

  • Technology that differentiates it and supports “Know-how”;

  • “Know How” and culture of innovation;

  • Customer base.

The brand was lost because it stopped speaking in “Netcall”. The platform/technology, it's from third parties. Know-how, today I'd say common, without a culture of innovation. Volatile customer base. In other words, nothing to value in a sale, as proved by the various failed attempts.

VoIP failed?

VoIP did not fail. On the contrary, he came to stay. But slowly, no bumps. Like almost everything that is today part of the world online, it ended up being part of our day. It didn't happen at once. Actually, it hasn't totally happened yet. But it's happening. Companies are increasingly unifying services and communications. Many times without realizing it. Traditional operators have defined new business models and reinvented themselves. The mobile works today based on VoIP technology. Same for network games. There is a multitude of services that use VoIP and the main sign of maturity is that we do not realize its presence.

A curious example is that of Google who knew how to walk through VoIP, risk, lose and win. When eBay bought Skype, the market thought Google should have. At that moment Google released GTalk with voice, based on an open P2P model. At that time Google bought a growing VoIP operator, GrandCentral. Some time later, when he did not realize how to link VoIP to the Google advertising model, he left GrandCentral to die and stopped betting on the traditional VoIP concept as a communication service. He stopped betting on GTalk with a voice.

Today, almost without the market realizing it, it released a voice and video plugin for Chat in Gmail (Gbalk web version). Actually Google realized that he was seeing VoIP from the wrong angle. VoIP made sense, not as a telephone service, but as an extension to a star product: Gmail. If like me, they have given up all other email clients to use only GMail, they will soon realize the potential of unifying features: sms to continue offline chats, videomailing, Twitter integration, Friendfeed...

VoIP not only didn't fail as it already is. The only thing that failed were the initial VoIP marketing models.

Learning from Netcall’s bankruptcy

I tend to find over the years that all we learn from experience is common sense. Today, I have this common sense of what I take from this unfortunate episode:

  • ** Shareholder structure:** now, it is clear to me that a startup should not have more than 3 partners. Too many opinions are not positive! “Mea Guilt” means Netcall having started with a shareholder structure of 6 partners (5 operational) to which a seventh (PME Investments/InovCapital) was added due to the need for investment;

      • Operational structure:** Small businesses are synonymous with low costs and flexibility. If a startup needs more than 10 people, I'd say I question viability.

  • ** Risk Capital: ** is not positive in startup phase. Companies when they start must know what it costs to start. This helps to focus on what is important: generating revenue. You start slower but sustainably! I am not saying that “Risk Capital” should not be used. On the contrary! I think it's important but at a time when you know what business is and you need capital for something more than paying wages (e.g. Internationalization, innovation and promotion). In Startup phases, more “Seed Capital” models such as YCombinator – an excellent example of how to manage/generate Intellectual Capital are needed;

  • Control: It is important not to lose control of our projects. Investment yes but “without selling the soul!”;

    • Indebtedness:* in any way (bank, state, suppliers)... avoid. In times of crisis companies without debt have a freedom of action that allows them to adapt quickly;

  • Branding and networking: remain the assets I feel in deficit in Portuguese startups;

  • ** P** Awareness and perseverance:** Starting a project is a burden of work. It's not having time off, it's sleeping with worries, it's taking time from the family, it's mostly starting to earn less than working for third parties. Of course, it pays when you can execute but... it costs!

One last word to IAPMEI, SMEs Investments and InovCapital

Despite the noble goal of IAPMEI, SMEs Investments and InovCapital to help boost the economy, I cannot help but leave a word of discomfort for everything that the “Risk Capital” has done and did not do to the Netcall project.

I left the project because of a conflict that took away any trust I could have in the shareholder structure and when this happened I put, for good and for evil (apparently for evil), all the cards on the table to SMEs Investments, warning insistently about the course the project was taking.

In view of the seriousness of the conflict presented, if investment had been the priority, intervention by the Investor would have been inevitable. It wasn't. I feel like you've earned the need to keep up appearances. Too bad!

In the middle:

  • an investment of more than EUR 2M is lost;

  • a project that could have happened is lost;

  • Employees, shareholders and suppliers are left with debts that will never recover;

I lost:

  • Almost 8 years of project (Infopulse > Webware > Netcall);

  • A team;

  • A debt I claim in court concerning a purchase and sale contract that was signed with knowledge, acceptance and commitment of SMEs investments;

I won:

  • Pass the persona non grata to a shareholder who did not want and does not want to listen to me;

  • The possibility of doing a reset and being able to start from scratch innovative projects, with the right team, with viability and that allow me to have the legitimacy to write these lines and... move on!

This is not easy to be an entrepreneur in Portugal!