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Without tunneling? I.e. it got laggy just by switching from telnet to SSH? There's just no good reason for this. If this is with tunneling, that might be due to SSH hogging the (mediocre) CPU resources. Switching to faster crypto would be one option, though Putty doesn't support a lot of options and neither does dropbear running on the KDX (a recompiled version of dropbear allowing "none" crypto could help, but that's a lot of work if you never did this). Another option is to hand kindlevncviewer the "-encodings" flag and experiment with various settings.
That said, I would have considered this the most promising approach.
Other than a close investigation on why it actually fails using the telnet solution, especially when the netwatchd is not running, I'm out of ideas. You could try various other tunneling solutions, but there is no ready-made software yet. It takes real dedication, knowledge and work to bring this further.
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