Star2Star Raises $30M for Unified Communications

NewSpring Growth

Technology companies have been trying for years to use the Internet to unify communications for businesses, combining voice, video conferencing, instant messaging and so on, usually with mixed results.

But NewSpring Capital has found one company, Star2Star Communications LLC, that it thinks has the right approach.

A nearly nine-year-old company based in Sarasota, Fla., Star2Star raised $30 million in a round led by NewSpring Growth Capital, the firm's technology and business services growth equity fund, VentureWire has learned.

Also participating in the round is PPM America Capital Partners, which is a NewSpring limited partner, and the consulting firm that did due diligence for NewSpring on Star2Star's technology before NewSpring agreed to invest.

"We briefly considered [getting ourselves acquired], but I feel like we have so much more to run here," said Chief Executive Norman Worthington, who said he was offered more than 20 term sheets for the funding round. "What's so interesting about telecommunications is that it's our oldest modern technology, it's 130 years old…but a giant vacuum is about to be created."

Mr. Worthington and his co-founders started Star2Star, his eighth technology company, in 2006, even though there were doubts at the time over whether Internet Protocol-based communications were reliable enough for businesses.

As a person who knew software and networking, he said, he figured that bandwidth in North America would eventually become cheap and good.

He also bet that "if we could manage the transport of packets of information-get them from where they started to where they were going and manage and monitor and optimize that-we could actually build a business-grade solution. That was the mission," he said, "but we were not certain in 2005 that we could do it."

An important problem to solve was being able to reliably connect offices in different geographic locations, so Star2Star created a technology hybrid, relying on what it calls Star boxes. These sit on a customer's premise and handle local communications from office to office, while at the same time creating reliability for communications that go through the cloud, handling multiple connections so that if one fails, another can pick up the job, monitoring bandwidth and determining the best path for routing packets.

Because he'd had some success in business, Mr. Worthington could afford to bootstrap Star2Star, he said, so the company spent about 18 months developing the technology and then launched. It became self-sustaining in 2009.

The company told the Inc. 500/5000 List this year that it had a three-year growth rate of 206%, with more than 150,000 business users at more than 30,000 locations across the US and Canada.

The new money will be invested mostly in more growth. Star2Star has been targeting what Mr. Worthington calls the "middle space"-customers with about 100 people in multiple locations, and it's attracted customers with a national presence, including Family Dollar Stores Inc . and Kelly Services Inc .

Still, only about 10% of business communications are based on Internet Protocol, he said, and competition is expected to be stiff. Both Verizon and AT&T are rebuilding their networks. Meanwhile, newer companies likeRingCentral Inc ., a cloud-based telephony company that went public last year, and Thinking Phone Networks Inc ., which raised $56.7 million in new funding earlier this month, are likely to get bigger.

"We think we're so unique in terms of technology and our technology differentiator, we said, let's go ahead and get the growth equity money to rocket this," he said.

Star2Star is NewSpring's 100th portfolio company, according to General Partner Marc Lederman . The firm is headquartered in Radnor, Penn., and invests in the mid-Atlantic and Southeast regions. NewSpring Growth Capital, which provided $21.5 million of the Class C Convertible Preferred financing round, is one of four NewSpring funds that together have raised a little more than $1 billion.

Mr. Worthington said he chose NewSpring in part because the firm was so transparent, allowing him to talk to the CEOs of portfolio companies that NewSpring had invested in, even in situations that were "less happy," before he'd committed to NewSpring.