A Pattern of Deception, Part 1: Arbinet

VOIP, bandwidth exchanges, Enron, and the worst IPO of 2004

Alex Mashinsky, the CEO and founder of Celsius Network, built his career around his first startup, Arbinet. It’s the origin for several claims Mashinsky makes about his abilities as an inventor and businessman, and is a wild story with a surprise cameo by Enron…

As quick background, Alex Mashinsky describes himself as a telecom entrepreneur and venture capitalist. He claims to have generated “over $3 billion” in “successful exits.” Of these successes, his first major success was with a VOIP company he founded called Arbinet.

Mashinsky has made a variety of claims regarding Arbinet:
1. He was the inventor of “voice over IP” (VOIP) and is responsible for billions of people using VOIP services today
2. He raised over $300 million in funding for Arbinet
3. Arbinet was the “best IPO of 2004”

Much of this thread will be based on a 1999 piece detailing the early days of Arbinet:

web.archive.org/web/2000081823…

Mashinsky apparently traveled the world before landing in New York, trying his hand at a variety of business that had two things in common: They were all weird trading schemes, and they all failed.

He then got into the voicemail business, then expanded his company to offer PC-based telephone switches. While building this business, he became interested in the potential for “voice over IP” services as an alternative to traditional phone calls 

Mashinsky has made the claim that he invented VOIP on his own website and in multiple interviews. However, I was unable to find any mention of him in articles about the history of VOIP development:

.https://getvoip.com/blog/2014/01/27/history-of-voip-and-internet-telephones/

While building Arbinet’s business in PC-based phone switches, he also began to develop a new idea: A commodity trading platform for excess bandwidth. In this instance, he was definitely one of the first people to have the idea:

Mashinsky wasn’t cautious and shared this idea freely. Competitors began working on similar ideas. This is where Enron showed up, forming their own exchange platform based on Mashinsky’s idea:

Meanwhile, Arbinet was starting to have financial problems. @Mashinsky was too busy trying to sell a product that didn’t exist (the exchange) to focus on providing solid customer support in the areas of his business that actually existed:

Eventually, his investors gave him an ultimatum: Ship up, or ship out. In response, Mashinsky fired his management team for betraying him, then immediately rehired them in desperation. He managed to get $6 million from investors to keep Arbinet afloat:

At the end of 1999, Mashinsky was still in control in Arbinet. He projected the company would be eventually worth $3 billion in a couple of years. However, analysts didn’t think the idea of making bandwidth a commodity was a sustainable business.
While Mashinsky disagreed, he had a backup plan: Invent “whole-body transplantation” technology.

You can’t make this stuff up!

Despite saving the company in 1999, Mashinsky was forced out as the CEO in 2000 by investors. He remained a director of Arbinet until 2004. In 2000 and 2001, Arbinet completed 2 rounds of funding totaling $76 million.

In 2004, Arbinet filed to go public. In their IPO disclosure, the company noted they had, net, LOST $105 million over the course of the company’s existence:

Arbinex-thexchange goes public as $ARBX in December 16, 2004 at a IPO price of $17.5. The price skyrockets in the first day to $29.50, experiencing the largest single-day increase for an IPO in 2004.

This is the origin of @Mashinsky‘s claim about the Arbinex IPO being the “most successful IPO of 2004.”

But, an article from 3 weeks later shows the share price has “cooled” to ~$22.
Arbinet-thexchange IPO coolsNEW YORK (CBS.MW) - Arbinet-thexchange, a firm that runs an Internet marketplace for communications capacity, has cooled since it rang up the biggest...https://www.marketwatch.com/story/arbinet-cools-las-vegas-sands-sizzles-in-04-recap

Fast forward to 2006. How’s ARBX doing?

Mashinsky and a comrade attempt a proxy battle to take the company back over. At this point, the price has fallen to $7 a share. Mashinsky and his collaborator are reported to own 3% of the company:

Founder of Arbinet Starts Proxy Fight To Regain ControlArbinet's founder is launching a proxy battle to regain control of the telecommunications firm.https://www.wsj.com/articles/SB114291611334603853

And what was the eventual fate of Arbinet?

It is acquired in 2010. For $28 million, far, far below its IPO valuation.

Arbinet Corporation to be Acquired by Primus Telecommunications Group in Stock-for-Stock Transaction/PRNewswire-FirstCall/ -- Arbinet Corporation (Nasdaq: ARBX) ("Arbinet"), a leading provider of telecommunications services to fixed and mobile operators,...https://www.prnewswire.com/news-releases/arbinet-corporation-to-be-acquired-by-primus-telecommunications-group-in-stock-for-stock-transaction-107211548.html

So, tl;dr- are any of Mashinsky’s claims about Arbinet true? As a reminder:
1. He claims to be inventor of “voice over IP” technology
2. He raised over $300 million in funding for Arbinet
3. Arbinet was the “best IPO of 2004” 

1. No, Mashinsky did not invent VOIP. VOIP had been in development for many years before he shows up on the scene.

However, he WAS an early proponent of trading ”excess bandwidth” as a commodity. Which, as we might remember, was not a viable business strategy even in 1999.

2. It is unclear how much money Mashinsky raised for Arbinet. He claims $300 million, but there was at least $76 million raised AFTER he was kicked out as CEO.
He also takes credit for the IPO, yet the IPO took place well after he was out as CEO, and the business had been developed considerably by others at that point. 

3. Arbinet was the most successful IPO of 2004... If you count a pump and dump as a successful IPO.

Arbinet was a sh*t company and its business model failed to deliver value. It was sold for a fraction of its IPO valuation only 6 years after going public. 

So we can conclude that Mashinsky’s claims about Arbinet and VOIP are somewhere between “misleading” to “outright fabrications.”

This matters because Celsius Network claims over $20 billion in AUM. It supposedly has over 1.5 million customers.

If we can’t trust its founder and CEO, what does that say about his platform?