SunRocket Largely A Management Failure

Sunrocket

SunRocket's demise this week highlights another transition that the consumer VoIP industry is going through and that is a fundamental rethink of how VoIP is delivered to the consumer. What is not clear is what happened to SunRocket and it’s management that caused such a spectacular collapse. What is clear that single play consumer voip is a very tough and risky business and it looks like the cable companies hold the upper hand. What is also clear is that the company suffered from a string of poor management decisions couple with over the top spending heavily contributed to the downfall. SunRocket was founded by two ex MCI executive, Joyce Norris and Paul Erickson. They felt strongly that a strong customer focus and aggressive marketing techniques was the secret to building a consumer voip service. Where as the market perceived a technology weakness, they felt that customer given a simple choice would make the transition: Paul Erikson put it this way:

We eliminate the angst and concern about that their bill. We designed it so that month in and month out their bill will be $24.95. We have pioneered the concept of bottom-line pricing. The $49.99 all-inclusive package from a typical phone company becomes a $65 bill pretty quickly. In our world, $24.95 is the bottom line.

But of course this strategy is very expensive to implement. Where as a software company could build a better widget and work a channel strategy to build revenue, a consumer voip company had not only to participate in expensive mass marketing, it had to over come consumer inertia staying with their POTS service. This of course results in the company being addicted to Venture Capital where they eventually raised over $80M including $33M just last fall (followed by another $20M). Couple that with the hubris that comes with such a large amount of money and the game gets far more complicated as competing corporate interests take hold A telling comment was this:

The reality is, it is almost always new players that become market leaders as new markets emerge.

This is absolutely true however what they didn’t realize that the new market leaders would be the cable companies, not single play voip companies. Aside from Vonage with it’s 2.4M customers and heavy debt, the cable companies seem to have the upper hand. The huge downside of being beholden to Venture Capitalists is that the destiny of the company is now in the hands of people who are largely hands off and not personally staked in the outcome of the business (they would of course argue otherwise). This means all of their decisions are made based on the ability to exit the investment, not what is in the long term best interest of SunRocket. The long term interest of the company is to grow stronger with each customer, not take market share for market share’s sake. Also the people who did have a personal investment, Paul and Joyce no longer had a significant economic and emotional stake in the success. This also means that a new CEO is found that fits the profile of money raiser and someone who looks the part, someone whos contacts can move the business forward and also commands a huge salary as part of a package to make the company more saleable. That person was Lisa Hook, an ex Time Warner executive who had never run a fast growth company outside of a corporate setting. This distinction is important because running an independent company is very different skill that running a business unit in a Fortune 500.

Hook started her legal career with Hogan & Hartson in Washington D.C., which assigned her to its communications group. It was the early days of cable and cellular. “They were a bunch of cowboys in the early 80s and I took advantage of an opportunity that came along.” A headhunter called and asked if she wanted to join Viacom Cable. Hook says it sounded like more fun than practicing law and joined the firm as senior attorney. From there she when to the FCC. Through that job she met Steve Ross, then chair and CEO of Time Warner, who asked her to come work for him.

From there she came back to Time Warner headquarters first to do business development, then helped start the telecom division then back to HQ for M&A work. Following that she did work for AOL Broadband then onto SunRocket. Unfortunately this path is not uncommon in VC firms, but it is not that successful because the transition from corporate life to entrepreneurial life is very difficult. It is difficult because it is a completely different mindset that is needed. The skills you learn managing corporate politics does not serve a company. What is needed is to learn how to do without, how to launch marketing plans with no money and how to beat competition with $1000 in your bank. Couple that with the board consisting of 3 VCs and the CEO and you have very little skin in the game at the board level. With the departure of Paul Erickson all entrepreneurial zeal disappeared. Others already found that there was management issues in the company earlier on:

Bruce Hahn, CEO of phone maker ATS, said his company is not affected by SunRocket’s closure, as ATS spotted SunRocket’s ills months ago. ATS uncovered management, directional, billing and process problems within SunRocket during the first quarter of 2007, so it instead partnered with Primus Telecommunications’ Lingo division, a healthier, public company, Hahn said.

The year started with founders Joyce Dorris and Paul Erickson, leaving the company to form a new undisclosed venture. The company was still very young so that suggests that there was friction between the founders and the new CEO Lisa Hook. Although it can be argued that as a company grows up the founders don’t scale but there can be an equal argument that the most successful companies have founders as leaders. Just ask Fedex, Apple, Microsoft and Google.

The departures leave SunRocket largely in the hands of managers with backgrounds in consumer media companies, rather than traditional telecom giants. The three vacant slots will not be replaced immediately, said chief executive Lisa Hook, who came to the company in March after a long stint at AOL.

The Ultimate Downfall The keen interest in SunRocket is not the fact it failed but that it failed to publicly and with all the senior management running for cover. What first took the headlines was the firing of a large number of staff and some senior executives. It was at that point the CEO Lisa Hook was denying that the company was in trouble and this was just a realignment of resources. This was the signal that all was not well at SunRocket and it signaled a real slide in customer service and capability including some high profile outages. Over on the DSLreports forum there is discussion about SunRocket not paying bills. This would lead us to suspect that they ran through the $33M (plus another $20M) given to them in less than 9 months which if true is a huge burn rate and that would include revenues as well. This is the most perplexing, how did they burn through $50M odd million so quickly that they had trouble paying their bills (This was reported by both the ISP and the call center company they used). Does this mean that they did not get all the money they were promised? We will probably never know. What is known is that there was plenty of management failure to go around. For example over on The Crusty Systems Architect we discover that he worked for SunRocket. He has his opinion on the demise of SunRocket is (paraphrased):

• Management • Management • Management • Management • Improvement aversion (management) • Billing Systems that don’t work (management) • Another Billing System that didn’t work (management) • Outsourcing without understanding how to manage it (management) • Security failures • Lack of systems management and understanding (management)

The seeds of their destruction were sewn early with their addiction to VC money which required them to move much faster than the organization was able to grow. They managed to cope through the first seven months when the team was small and focused. They made some fundamental mistakes with the customer service offshoring and was forced to bring it back to the US among many other systemic mistakes. The arrival of the Corporate Team from a fortune 500 only poured fuel on the fire. Their inexperience only amplified the mistakes that were made early on. However I would not put Consumer VoIP out to pasture just yet. There is definitely a need to provide the consumer with choice for their fixed line needs. Vonage will survive in some form and there are some excellent small companies that are working to build value for customers without huge chunks of VC money. There are great companies working on business VoIP solutions that are offering real choice for small businesses. SunRocket did indeed fly too close to the Sun and paid the price for it’s hubris and this is a valuable lesson for entrepreneurs; there is the curse of too much money.

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Copyright © 2007 IDG Communications, Inc.

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