2002 1st Half

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In this issue:

New Developments
  • Chrysalis Ventures Closes New Fund at $143 Million

New Investments
  • Advanced Academics
  • Zoom Culture
  • Confluent Technologies
  • AfterBot
  • Genscape

Portfolio Company Developments
  • TeleCorp PCS
  • PeopleFirst
  • Intelliseek

  • "Venture Investing in the Current Environment" - David A. Jones, Jr.

New Developments

Chrysalis Ventures Closes New Fund at $143 Million

On May 10, 2002, Chrysalis Ventures announced that it had concluded fund raising for its fourth, and largest, venture capital fund. The $143 million fund attracted a variety of new institutional investors from the pension, endowment, foundation, insurance, fund of funds and banking sectors.

Chrysalis' new fund will make private equity investments in emerging high-growth companies in the Southeast and Midwest. These investments will be both in early stage companies, and in growth stage companies seeking follow-on venture financing. Chrysalis' prior funds have invested in 30+ companies. The new fund plans to invest in approximately 25 companies over the next four years. Initial investments will typically range from $1.5 to $2.5 million per company with additional funds available as partner companies grow.

The fund will be managed by Chrysalis' three managing directors: David Jones, Jr., Bob Saunders and Irv Bailey.

Please click here to view the complete press release.

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New Investments

Advanced Academics

In June 2002, Chrysalis Ventures co-led the $7.5 million Series B financing of Advanced Academics, an Oklahoma City, OK-based distance learning company that offers accredited secondary school courses via the Internet. Other investors included Nashville's Council Ventures (co-lead), Chisholm Private Capital Partners and American Fidelity Group, both of Oklahoma City, and Prosperitas Investment Partners of Louisville.

Advanced Academics provides accredited online courses to meet the needs of at-risk students and accelerated learners in grades 7 - 12. These courses are taught by full-time, certified teachers who are available 24/7 via telephone, e-mail and instant messaging. The company currently partners with public schools in 47 districts across the US and offers 60 courses in traditional academic areas. School districts contract with Advanced Academics to handle all aspects of the learning experience, including course development, assessment, grading, teacher interaction and custom reporting. The company's unique time-monitoring system allows the monitoring of a student's activities online not only by the district, teacher and student, but also by parents and guardians. Advanced Academics also provides all data necessary for accreditation and funding, plus financial and audit records so that minimal district management is required.

David Jones, Jr., Chrysalis chairman and managing director, has joined Advanced Academics' board of directors.

Please click here to view the complete press release.

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Zoom Culture

In May 2002, Chrysalis Ventures participated in the $7.0 million Series B financing of Zoom Culture, a Chapel Hill, NC new media company that produces and distributes digital video content via television and the Internet. Chrysalis joined existing investors Intersouth Partners, Cordova Ventures, the Atlantis Group, Tristate Investment Group and Charlotte Angel Partners in this financing.

Zoom Culture produces broadcast quality video through a unique network of young, geographically dispersed video directors ("ZDs") whose work is coordinated and edited online from company headquarters. This business model enables the company to produce compelling content for its customers -- television networks and corporations seeking content for websites, marketing videos or training materials -- faster and at a lower cost than traditional video producers. Thus, Zoom Culture fits within our investment theme of using technology to drive productivity enhancement in existing businesses.

To date, Zoom Culture has enrolled over 500 ZDs who are located primarily in the 12 largest MSAs and media markets in the U.S. Many of these ZDs have participated in the production of Zoom Culture's initial 85 corporate video services projects and first nine television programs. Two of these television programs are currently being broadcast, one on NBC and one on Fox Sports International. Zoom Culture has also recently entered into co-development agreements for new programming with units of CBS-Viacom and AOL Time Warner.

Irv Bailey, Chrysalis managing director, is a member of Zoom Culture's board of directors.

Please click here to view the complete press release.

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Confluent Technologies

In April 2002, Chrysalis Ventures led the $2.0 million first round of institutional investment in Confluent Technologies, a Louisville, KY-based provider of knowledge management and business intelligence services.

Confluent Technologies provides services that aggregate, manipulate and visualize data from multiple sources. Its proprietary ConfluentIQ product uses a set of unique, visually-based tools to help decision-makers track, graphically display, sort and reorganize their company's key performance indicators. As a result, users are able to access important internal data quickly, helping them run more efficient businesses by driving down expenses and increasing revenue.

Confluent serves customers in the financial services, food services, manufacturing and education sectors. Its current customers include National Processing Corporation, Bell Technologies, Job News USA, QCI and Texas Roadhouse Restaurants. Additionally, Confluent supports a number of school districts around the country.

Irv Bailey, Chrysalis managing director, is a member of Confluent's board of directors.

Please click here to view the complete press release.

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In December 2001, Chrysalis Ventures led the $3.1 million first round of investment in AfterBot, Inc., an Atlanta, GA-based web services provider. Other investors included River Cities Capital Funds of Cincinnati, Prosperitas Investment Partners of Louisville and e-RM Ventures, an Atlanta-based fund managed by CheckFree Corp. co-founder Mark Johnson.

AfterBot uses proprietary technology to create, sort and deliver digital receipts for consumers and business customers from purchases made in either physical or online retail settings. A digital receipt is an enhanced digital record of a paper-based transaction that provides information to all three parties to a retail transaction: the buyer, the retailer and the supplier. Through digital receipt technology, the AfterBot ReceiptsPLUS solution enables retailers to cut costs by streamlining paper and labor intensive post-sale business processes and enabling direct one-to-one consumer access.

Koleman Karleski, Chrysalis principal, is a member of AfterBot's board of directors.

Please click here to view the complete press release.

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In November 2001, Chrysalis Ventures led the $3.55 million first round financing of Genscape, Inc., a Louisville, KY-based energy information company that gathers, develops and distributes real-time proprietary data and analytics to energy traders. Other investors included Vectren Enterprises, Inc., an energy services company based in Evansville, Indiana, and Prosperitas Investment Partners and Anchorage Angels, both of Louisville.

Genscape gathers and provides unique, real-time online information regarding United States power plant operating status. Founded in 1999, Genscape uses wireless monitoring devices to collect data from high voltage electric transmission lines at various points on the electric grid. The company translates this information into accurate estimates of power plant operating status, allowing Genscape customers to determine areas of excess or deficient supply. This information is critical for any party seeking to manage their energy risks more profitably.

Genscape offers its service on a subscription basis to energy traders, power-plant operators, state and federal utility regulators and fuel suppliers nationwide. Many of the leading companies in the energy industry, including several Fortune 500 companies, subscribe to the service.

Genscape was listed in the February 2002 issue of Red Herring magazine as one of the "ten most intriguing recent VC fundings." In its "DealFlow" listing, Red Herring also identified Genscape as a company with "great market opportunity."

In May 2002, Genscape signed a joint marketing agreement with Platts Global Energy. Under the agreement, Genscape's Power 2.0 product, which monitors real-time output from major power plants and transmission lines, will be sold in conjunction with the Platts POWERmap energy-mapping system. In addition, Genscape will also publish its Daily Nuclear Report in four of Platts' daily trade publications. Platts, a division of McGraw-Hill, is one of the world's largest energy information providers.

Bob Saunders, Chrysalis managing director, is a member of Genscape's board of directors.

Please click here to view the complete press release.

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Portfolio Company Developments

TeleCorp PCS

On February 15, 2002, AT&T Wireless (NYSE: AWE) announced that it had completed its acquisition of TeleCorp PCS (fomerly NASDAQ: TLCP) in an all-stock transaction valued at $3.8 billion. At the time of the acquisition, TeleCorp offered services in markets covering a population of approximately 32 million in 14 states, primarily in the Southeast and Midwest. These included 16 of the top 100 U.S. markets, eight of the top 50 markets and more than 900,000 existing TeleCorp customers.

Chrysalis came to TeleCorp by investing in Tritel Inc. (formerly NASDAQ: TTEL) of Jackson, Mississippi. After going public in December 1999, Tritel merged with TeleCorp PCS in November 2000 in a deal valued at $5.2 billion in stock plus debt. Chrysalis chairman and managing director David Jones, Jr. was a member of Tritel's board of directors from October 1999 until the merger, and served on TeleCorp's board until July 2001.

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On October 9, 2001, Capital One Financial (NYSE: COF) acquired independent online auto loan provider PeopleFirst.com in an all stock deal valued at approximately $200 million. Capital One, one of the largest providers of credit cards in the United States, exchanged 3.7 million shares of its stock for control of the San Diego-based PeopleFirst. As a result, PeopleFirst became a subsidiary of Capital One and its offices, staff and name remained unchanged.

PeopleFirst is a pioneer in enabling consumers to secure financing online before purchasing a motor vehicle. It uses the Internet to offer "hassle-free" car and motorcycle loans. The company originated over $1.5 billion in loans to automobile buyers in 2001.

After being introduced to the company in 1998, Chrysalis Ventures led three rounds of financing for PeopleFirst which totaled nearly $60 million. Co-investors included J.P. Morgan, American Express Co., Madison Dearborn, Moore Capital, Daimler Chrysler and Morgan Stanley among others. Chrysalis managing directors Irv Bailey and Bob Saunders served as chair and vice-chair, respectively, of the company's board of directors.

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On October 25, 2001, Intelliseek and PlanetFeedback.com, Inc. agreed to merge. The merger combined Intelliseek's expertise in business intelligence and enterprise search technology with PlanetFeedback's strength in creating easy-to-use tools for consumer-to-company communication and interaction on the Internet. The combined company, Intelliseek Inc., has two distinctly branded divisions with dedicated products, sales and marketing teams.

On May 30, 2002, Intelliseek announced it had acquired the technology assets of Coreintellect, Inc., a privately-held Dallas-based information technology company, for an undisclosed amount. Intelliseek will use the technology to enhance existing products and create new ones in the fields of consumer and competitive intelligence and enterprise search applications.

Chrysalis' initial investment was in Intelliseek.

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"Venture Investing in the Current Environment"
David A. Jones, Jr.

Excerpts from remarks made to the Rotary Club of Louisville, January 24, 2002

The venture capital industry is in a tough period as the excesses of the boom years are wrung out. And these excesses were quite amazing. Institutional investors threw lots of money at venture capital firms as euphoria about the Internet and related technologies gathered steam. Annual funding commitments increased almost 20-fold between 1995 and 2000. Unfortunately, the venture capital business doesn't seem to "scale" very well. Throwing more capital at start-up companies doesn't automatically improve their prospects, and spreading the time of the venture capitalist, who must be a useful adviser as well as a financier, among more young companies reduced quality.

A shakeout is now underway among venture firms, driven by reduced appetite among institutional investors to invest in venture funds and the realization among many that the business is harder than it looked. 52% less money flowed into venture funds in 2001 compared to 2000, and further reduction lies ahead. Much of the industry is depressed, as managers have struggled since mid-2000 with young companies dying from flawed business models, recession, or in some cases, lack of capital. Gatherings of venture managers have the feeling of a wake, with happy memories of the dearly departed boom times and groping disbelief that we'll get by without them.

And yet I am thrilled to be in the venture business today. Why?

First, I'm a bit of a contrarian and I don't like crowds. As the ranks of people willing to invest in young companies thins, those still in the game see more deals, can be more selective, and can invest on better terms. This is simply supply and demand -- though it's hard to execute because "buy low and sell high" requires going against the crowd in both directions.

Second, many of mistakes of the bubble economy were stupid, and need not be made again. Lessons learned read like "Investing 101": Analyze methodically, be disciplined about price and terms, and diversify risk; invest in businesses that make money, not ones that just make revenue or PR hits; work with seasoned management. These are lessons that served Chrysalis well when we practiced them and bit us hard when we strayed, and this experience will make those who stay in the sector - I hope including Chrysalis - better investors and better advisers to their portfolio companies.

Third, and most important, the creativity, diversity and resilience of our economy never cease to amaze me. I believe we're still in the very early stages of two enormous trends: (1) the networking of everything, using Internet and communications technologies, and (2) globalization. These trends are hugely disruptive. They offer the potential for great good, as my involvement with China's transformation over the past two decades has shown me, or great horror, as 9/11 showed us all. But they offer, without doubt, tremendous business opportunities over the remainder of my investment horizon.

Breaking this down, and moving toward more specifics, I offer the following beliefs, and the investment themes to which they lead me:

1. Many of the tools developed in the boom years work.

The Internet is miraculous. It enables global sharing of information at zero incremental cost, and standardization that radically lowers the costs of automation and, ironically, customization. These are tremendous advances that we shouldn't forget in the wreckage of failed business models and depressed 401(k) plans.

Wireless communication around these standards is almost as amazing, creating ubiquitous connectivity for everything from streetlights to soldiers on the battlefield, and enabling "leapfrogging" of generations of investment in infrastructure. Think of international peacekeeping forces in Mogadishu installing a phone network in the first few days after their arrival.

Globalization both feeds and is fed by these technology advances. For businesses, this enlarges markets in which to sell and hire, and complicates enormously the competitive dynamic of many industries. Think of the emerging competition between India and China in software writing, and the implications, reminiscent of the challenge of Japanese auto-makers, for America's technology industry.

2. People change more slowly than the tools.

Some days I think none of these tools, no matter how miraculous, works very well. My e-mail box is overflowing as people overuse the "cc" feature; my wireless phone is useless in many places; companies are stressed, managerially and financially, as they learn to integrate the new tools into their business environments. Customer service, demand forecasting, and quality in all fields still has a long way to go.

My takeaway: We've barely begun to harness the power of the tools we've invented. Think of the hundreds of car companies started late in the last century, and how long it took the auto to really transform our lifestyle.

3. So -- where is there opportunity?

We're looking in two "places." First, in businesses that enhance productivity by making these miraculous tools solve real business problems. Some examples:

    i. The healthcare industry is a great example of a morass of incompatible systems and paperwork that bewilders every participant. Humana, on whose board I serve, is focusing with great zeal on using new tools to bring order out of this chaos for its members and supply chain partners, and believes the business opportunity is tremendous if it succeeds. At the smaller end of the scale, Louisville's Advanced Imaging Concepts, a portfolio company of Chrysalis affiliate bCatalyst, is bringing promising software tools to the physician's office.
    ii. Other Chrysalis companies are working around a similar theme. Genscape is using wireless communications and database technology to publish new info for energy markets, and Telemics is offering wireless telemetry that improves management of hard assets like streetlights.
    iii. Outsourced business services will continue to have appeal, as large companies focus on core competencies. Examples of this are Aperture, which is managing credentialing databases for healthcare organizations, and AfterBot, which manages the move to digital receipts for big retailers.

The second "place" where we are seeking opportunity is in our "neck-of-the-woods": the upper South or lower Midwest, depending on your definitional preference. I strongly believe this part of the nation is underserved by national venture capital markets, and has the talent, know-how and infrastructure to build great companies.

Thus, my basic theme is to invest in companies in our region that focus on realizing the potential of the tools and trends that are changing our world. Most industries offer opportunities, because most have a long way to go, and I'm enormously optimistic about what lies ahead.

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Chrysalis Ventures
101 South Fifth Street, Suite 1650
Louisville, KY 40202
(502) 583-7644 phone
(502) 583-7648 fax
Web site : www.chrysalisventures.com
E-Mail: info@chrysalisventures.com

© 2002 Chrysalis Ventures, LLC

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