On May 30, 2006, Motley Fool Senior Analyst Bill Mann wrote a stinging commentary about Vonage and its post-IPO valuation, titled "Vonage: The Most Successful IPO in Years." Since its original publication, Vonage's shares have lost roughly 75% of their value, thanks to legal scraps and the company's inability to actually, you know, make any money. Please join us for a stroll down memory lane ...

It's been the talk of the investing world over the past few days: VoIP provider Vonage (NYSE:VG) held an IPO last Wednesday at $17 per share -- the middle of its targeted range -- and immediately tanked. The stock dropped below $13 in two trading days, and it still sits there. This means that the market is valuing Vonage at a bit more than $2 billion, down from $2.6 billion. Those who purchased the IPO are screaming, and some of Vonage's customers, whom the company decided late in the day to cut in on the process, have refused to fund their purchases.

In my mind, this makes Vonage the most successful IPO in many years, at least since such former luminaries like Internet Capital Group (NASDAQ:ICGE), Autobytel.com, and deltathree came screaming out of the box in the late 1990s at many times their actual value.

In every other form of commerce, "success" is determined by someone's ability to generate profits, or to sell something for more than it is worth. Vonage's management and underwriters convinced a bunch of people and institutions that a company worth roughly the price of a Happy Meal should be valued on the market at $2.6 billion!

I stand in awe of this level of salesmanship. I'll bet they are high-fivin' all around in the executive suites in Holmdel. After all, they took a company that has lost nearly half a billion dollars since its inception (with more than 25% of that in the last three months alone), racked up $250 million in debt, and devised no clear plan to profitability, and turned it into a mid-cap.

Ah, yes, you say, but they're growing their company at more than 300% per year. I agree -- Vonage has done a good job in attracting customers and providing service. It's also racked up enormous marketing expenses. It spent a quarter billion to bring in folks in 2005. But even if it managed to attract those 870,000 net customers without spending a penny on marketing, it's still losing money, with its $269 million in gross revenues failing to cover its $290 million in operating expenses ex-marketing. Subtract out the $279 in marketing spent per net customer added in 2005, and the company still can't keep the lights on. Unless ...

Unless there is a stream of additional willing money to prop up the carcass until it can make a stab at profitability, or get itself sold. The first possibility seems remote. I've never really been a fan of the "we make money only when our customers use us less" models, of which all-you-can-eat telecom service is a primary example. It's a tough business, with rapid technology obsolescence and low barriers to entry. Shareholders in Net2Phone, now part of IDT (NYSE:IDT), found this out the hard way, as the company delivered a long string of losses.

So Vonage has its work cut out for it, and while we have to recognize that this is an industry in rapid flux, the fact remains that very few companies have taken on Verizon (NYSE:VZ), AT&T (NYSE:T), and BellSouth (NYSE:BLS) and come out on top.

But that's not where we are right now. We're celebrating the company's ability to raise nearly $500 million at a valuation that the business absolutely does not (and, dare I say it, will not) support. In fact, if you consider that a business is an entity through which people exchange services for money in the interest of generating profits, what do you call an entity that provides services without hope of generating profits? A charity, maybe? In that case, it might not be correct to say that Vonage has the most successful IPO in years.

It might be more accurate to describe the Vonage IPO as "the most successful fundraiser in the history of mankind."

That's more like it.

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At the time of original publication, Bill Mann had no financial position in any of the companies mentioned in this article. The Motley Fool has a disclosure policy.