On May 24, when VoIP provider Vonage went public, its shares dropped from $17 to less than $12, making it the worst public debut in more than two years. (The previous biggest loser, a biotech firm named Lumera, still trades at about half its offering price.) So what happened to Vonage? One theory is that investment bankers, chasing Skype's heady valuation, overpriced the stock. The government, meanwhile, is investigating allegations of naked short selling, and shareholders have named founder Jeffrey Citron in a lawsuit in which they claim the company made false and misleading statements about its financial health leading up to the IPO. (Vonage did not respond to Inc.'s request for comment on these issues.) The blame game aside, what lessons can other growth companies learn from Vonage's IPO woes? Below, some thoughts.

Cash is (really) king
Despite Google's blockbuster IPO, the public markets remain skeptical of flashy tech companies--especially if they are wildly unprofitable, which is the case with Vonage. The company has lost $467 million since its start in 1995. "Cash is king today," says Katrina Ellis, a University of California at Davis finance professor. "Without positive future cash flows, a company won't escape the basics of valuation."

Marketing gimmicks can backfire legally
In the run-up to its offering, Vonage announced that it would set aside 13.5 percent of the 31.25 million IPO shares for its faithful customers at the offering price of $17. With the stock in bad shape, some 10,000 customers have filed suit against Vonage claiming that they were duped. Vonage briefly flirted with repurchasing these shares but has since backed away from that idea.

Venture capitalists are becoming even more impatient to score
In the past, VCs sought returns on their investment within five years. But the five VC firms that owned 30 percent of Vonage--and that are thought to have pushed Vonage to go public--all invested in the past three years, which suggests that the life of a VC investment is getting even shorter.

Public companies are juicy legal targets
About a month after the IPO, telecom provider Verizon sued Vonage over seven alleged patent infringements related to VoIP technology. Verizon acted after Vonage filed technical documents and diagrams with the SEC, which were made public. (Vonage has denied Verizon's allegations.)

The spotlight is on the CEO
Keep an eye on November 21, which marks the end of the 180-day waiting period after which insiders like Citron can sell their shares. "People will be watching for signals that the entrepreneur is selling out," Ellis says. Assuming Citron doesn't sell, can he engineer a comeback? Perhaps. Vonage has a brand name and cash to spend. "An IPO is not an exit," notes Ellis, "it's a beginning."

Source: Vonage