Ad Market Woes Push Dialpad into Bankruptcy

By Ryan Naraine

Less than two years after burning through $67 million in venture funding to build out an ad-supported PC-to-phone service, Santa Clara, Calif.-based Dialpad Communications has filed for Chapter 11 bankruptcy protection from creditors.

Dialpad, one of the bigger names in the much-hyped Voice-over Internet Protocol (Vo-IP) space, first ran into trouble when the tanking of the online ad market forced the scrapping of its free telephone service in the U.S.

Unable to attract enough paying subscribers to even meet overhead expenses (insiders say the paid subscriber list peaked at approximately 100,000), Dialpad began shaving staff two months ago and, at the time of the bankruptcy filing Friday, the company was down to a bare-bones crew of software engineers and high-level management.

“Our top priority is to continue to serve our customers (with Vo-IP services and support),” said acting CEO Craig Walker. “This restructuring gives us the ability to ensure that our daily operations will continue uninterrupted for both existing and new customers.”

“We focused on growth and market share in exchange for profitability as we built the largest customer base of loyal users in the industry. We over-expanded in some areas in advance of demand, and did not anticipate the dramatic decline in advertising revenues as the economy weakened,” Walker added.

While Dialpad’s statement hinted at the creation on an “operating plan that is focused on sound financial metrics and managing Dialpad to profitability,” well-placed sources say the company will attempt to sell its assets in bankruptcy proceedings.

New Jersey-based Net2Phone, Inc. is said to be interested in acquiring the 100,000-strong paid subscriber list but, beyond that, sources say Dialpad was unable to drum up interest from buyers prior to the bankruptcy filing.

There was talk that mega-portal Yahoo was interested in acquiring the company but, once those negotiations fell through, sources say Dialpad’s board decided federal bankruptcy protection was necessary.

The company’s backers, most notably Serome Technology (which owns 38 percent), are desperately looking to shed the failed Dialpad, which incurred approximately $300,000 in losses per month.

Last October, investors poured $50 million into Dialpad to fuel its growth but, in the end, there was not enough revenue to justify continuing operations. In addition to Serome Technology, Dialpad received investments from CMGI @Ventures, Mokwon Assets Management, Citizen Capital and Sterling Payot.

As part of the bankruptcy filing, Dialpad said former Serome Technology CEO Sang Su Oh had invested $1.25 million in post-petition financing. It said the money would be used for operating expenses while the bankruptcy court reviews the company’s plan of reorganization.

“With the protections provided under the Bankruptcy Code and a commitment for additional financing in place, we are confident our abilities to continue operations without interruption as we complete our restructuring,” Walker said.