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HOW I DID IT

How I Did It: Jeffrey Citron

First he disrupted the brokerage business. Now, with Vonage, Jeffrey Citron is changing the game on the phone companies.
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As told to Brian L. Clark

Jeffrey Citron is an excitable entrepreneur who likes to talk about his track record for starting companies, disrupting industries, and making money. In 1992, he disrupted the financial services industry when he created Island ECN, a high-tech trading system that allowed investors to trade shares by entering buy and sell orders into a single database. He sold it in 2002 for $503 million. In 1996, he started the online brokerage Datek Online, which targeted day traders and was sold for $1.3 billion in 2002. Citron, however, had been forced to leave in 1999 because of an illegal-trading dispute with the SEC that he ultimately settled -- without admitting any wrongdoing -- by paying a $22.5 million fine. That's something he says he can't discuss. But he's more than happy to talk about his latest venture, Vonage, the broadband phone company based in Edison, N.J., that lets users make phone calls over the Internet and plans to introduce a Wi-Fi handset later this year. The company, in which Citron invested more than $50 million of his own money, has 850,000 subscribers and expects $100 million in revenue this year.

I took an economics class in high school and part of the class was to pick securities. One I picked was MCI. Watching what happened in the markets, translating that into decisions, getting a daily update on how you're doing -- it's a very painful and rewarding experience. One day's pain is the next day's drug. So I pursued a career on Wall Street, which is probably the most competitive environment in the world. Being bred out of that gives you a certain drive. It's the same here at Vonage except it's 24 hours a day, seven days a week. That's been the hardest transition -- you have to say, "I'm going to stop now."

I like to work with disruptive technologies that require a lot of capital for marketing but not for building a service. You don't have to build a factory or a plant. It scales easily.

Being an entrepreneur is like being a parent. You want to nurture your young children or your young companies and take an active and dominant role in their lives, making sure they grow up appropriately. And as they get older, you start ceding authority. You can still be a very active parent, and in the case of Vonage, I probably will be for a long time.

Don't listen to the naysayers. Even with Vonage, there are still lots of naysayers. They just don't have the vision and the forethought to see how the world's going to change.

We started working on Vonage in August of 2000. We decided to form this company -- with a small amount of capital, $6 million -- whose sole purpose was to take our ideas and turn them into a commercial, workable product. After that we raised a little more money to see how quickly we could build a real service.

The issue was how do you explain the product. We tried talking about it in terms of VoIP and we found that confused a lot of people. We tried "broadband phone company" and that worked -- it's how we are known today. And then after we figured out how to price it, market it, and distribute it, only then did we go forward and start selling it. We spent almost a year figuring out the marketing.

One of the key moments was when we took one IP phone and made it ring another. And then I took that phone home, and I plugged it into the broadband connection in my house and called the guys in the office -- and we had phone service.

We had a number of technological hurdles. We had to make the service work with home networks and 911. That's a huge challenge because with Vonage, someone living in L.A. can have a 212 number, so an emergency call would go to New York. I also think you have to redefine quality. People aren't sensitive so much to voice quality -- many use cell phones to reduce their long distance bills. But at the end of the day, they keep the landline because cell phone reliability isn't good enough. When you go to dial your phone call, does it go through? How many calls drop? That, people will not sacrifice.

This market was ripe for someone to take a fresh look and say, "What can we do differently?" The telecom industry hadn't changed much in almost a hundred years. Technology has improved service quality and economics, but for the most part, the systems that were built in the '70s are still operating.

The larger companies aren't going to cannibalize their own business to stop a small competitor like Vonage. They aren't going to try to convert all their customers to VoIP. Remember, we've competed with AT&T now for nearly two years. And we've competed with Time Warner for nearly two years and we've competed with Cablevision for nearly two years. And based on the most recent market data, Vonage had over 600,000 lines in service (now more than 800,000), and the two cable operators each had a little over 350,000. And AT&T had somewhere around 75,000. We overcame a tremendous challenge not only to establish a leadership position but also to maintain that position. Over the last nine quarters we've added more customers than any other operator.

The initial delay with the Wi-Fi phone came from maintaining good battery life. Our goal is to make sure your talk time is comparable to what you would get with a cell phone or a home cordless phone. Now, we think we've got that one licked. Once the field trials are perfect, we're going to go live with the product.

The consumer market is so big, about 100 million homes. We'd love to get to 1.8 million lines in service. And that's a great number for a company that's only a couple of years old, compared with an entrenched Bell. It's sort of ironic that the people who started all this may very well not be here when it's all said and done.

Last updated: Jul 1, 2005




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