2002 2nd Half

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In this issue:

New Developments
  • Irv Bailey Elected to NASBIC Board of Governors
  • Two New Associates Join Chrysalis

New Investments
  • Inoveon Corporation
  • HCCA Holdings, Inc.
  • Construction Software Technologies, Inc.
  • 2002 Summary of New Investments

Portfolio Company Developments
  • Aperture Credentialing, Inc.
  • Manorhouse Assisted Living, Inc.
  • AfterBOT, Inc.

  • "The VC Bust: Implications for Entrepreneurs" - David A. Jones, Jr.

New Developments

Irv Bailey Elected to NASBIC Board of Governors

In November 2002, Chrysalis Ventures managing director, Irving W. Bailey, II, was elected to the board of governors of the National Association of Small Business Investment Companies (NASBIC). Mr. Bailey, the former chairman and CEO of Providian, will serve a two-year term.

NASBIC is the professional association for the SBIC industry and the oldest continuously operating organization of venture capitalists in the world. The association plays a vital role in working closely with both federal legislators and the Small Business Association (SBA) on policy and operating issues effecting SBICs.

Mr. Bailey joins the 30-member board of governors, elected annually by their peers, which establishes NASBIC's policies, priorities and working agendas. These governors are active industry executives who represent the various types and sizes of SBICs throughout the country.

Please click here to view the complete press release.

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Two New Associates Join Chrysalis

Two new associates joined Chrysalis Ventures in the summer of 2002: Suzanne Bergmeister and Jason Mahoney.

Ms. Bergmeister joined Chrysalis from Blue Chip Venture Company in Cincinnati where she was an associate specializing in technology investments. Prior to Blue Chip, she worked at Cincinnati’s Fort Washington Investment Advisors where she helped launch their $240 million Fort Washington Capital Partners Fund-of-Funds. An Air Force veteran, Ms. Bergmeister is currently a Lieutenant Colonel in the Air Force Reserves and serves as an instructor at the Air Force’s Test Pilot School. She holds a BS in Electrical Engineering from Rutgers University, an MS in Electrical Engineering from California State University and an MBA from Cornell University.

Mr. Mahoney joined Chrysalis from Safeguard Scientifics’ affiliated PA Early Stage Fund in Philadelphia. At PA Early Stage, he focused on seed-stage and early-stage investments across a broad range of industries including software, IT services, optical networking, wireless infrastructure and financial services. He holds a BBA with High Distinction from the University of Michigan and an MBA from Wharton. Before business school, Mr. Mahoney worked in management consulting.

Both Ms. Bergmeister and Mr. Mahoney are working primarily on investments for Chrysalis’ recently closed fourth venture fund. The $143 million fund is investing in both early-stage companies and in later-stage companies seeking follow-on venture financing.

Please click here to view the complete press release.

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New Investments

Inoveon Corporation

In October 2002, Chrysalis Ventures invested $1.5 million in Oklahoma City-based Inoveon Corporation. The investment was part of a $17.5 million Preferred Series B Equity financing, the bulk of which closed mid-year 2002. Chrysalis’ co-investors in the financing included CenterPoint Ventures of Dallas, Massey Burch Capital Corp. of Nashville, Chisholm Private Capital Partners of Oklahoma City and Prolog Ventures of St. Louis.

Inoveon Corporation is a medical services company specializing in detecting, staging and monitoring diseases of the eye — diabetic retinopathy, macular degeneration and glaucoma. The company’s initial target is to help patients and their providers improve diabetic retinopathy care through Inoveon diagnostic service centers that are either independent or co-located in high volume diabetes care sites. Its unique approach to diabetic screening results in higher quality exams, quantitative staging and tracking of disease progression, and better patient compliance – all of which will ultimately lead to better patient care and lower costs.

Please click here to view the complete press release.

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HCCA Holdings, Inc.

In September 2002, Chrysalis Ventures co-led a $10.8 million financing of HCCA Holdings, Inc., parent of HCCA International. Other investors included Massey Burch Capital Corp. (co-lead), Clayton Associates and Voyent Partners of Nashville, Jefferson Capital Partners of Richmond, and SunTrust Equity Partners of Atlanta and certain individuals.

HCCA International is a recognized leader in global healthcare recruitment and staffing services. The Company is an HCA, Inc. “legacy” company, tracing its origins to the in-house international management and staffing arm of the hospital industry leader. Since the Company’s inception in 1973, HCCA has recruited over 30,000 medical, nursing and professional staff from the United States, Europe, Canada, the Philippines, Australia/New Zealand, the Middle East and India for placement in facilities of its international clients. The proceeds from this funding allow HCCA to focus on domestic demand for registered nurses.

David Jones, Chrysalis chairman and managing director, has joined HCCA Holdings, Inc.'s board of directors.

Please click here to view the complete press release.

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Construction Software Technologies, Inc.

In September 2002, Chrysalis Ventures co-led a $5.5 million equity investment in Cincinnati-based Construction Software Technologies, Inc. River Cities Capital Funds of Cincinnati co-led the transaction and Messer Construction, a Cincinnati-based regional general contractor, participated as a strategic investor.

Construction Software Technologies provides online construction information for general contractors and public plan rooms serving the commercial and industrial construction markets. Construction Software Technologies electronically hosts all project information including plans (blueprints) and specifications to facilitate the online planning, bidding and post bid process for both public and private construction projects. Construction Software currently provides public plan room information in 17 states in conjunction with local chapters of the Associated General Contractors of America (AGC), and is serving a growing list of the nations largest general contractors in these regions. The company’s products are known in the market by the name “iSqFt.”

Bob Saunders, Chrysalis managing director, has joined Construction Software Technologies' board of directors.

Please click here to view the complete press release.

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2002 Summary of New Investments



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Portfolio Company Developments

Aperture Credentialing, Inc.

On October 18, 2002, Ingenix® Health Intelligence, a subsidiary of UnitedHealth Group (NYSE: UNH), acquired Louisville-based Aperture Credentialing, Inc. in a deal that brings together one of the nation's leading healthcare information companies with the industry's top provider credentialing firm.

Ingenix®, one of the industry's largest health information companies, provides products and services to a large, diverse customer base within the healthcare community to improve the delivery and operations of their businesses. Aperture Credentialing, Inc. is a data and technology firm that enables companies to effectively analyze, verify and manage network provider credentials and information data management, credentials and facilities verification. Its clients include managed care organizations, government agencies, large employers, IPAs, IDNs, e-health companies and benefits consulting firms.

The acquisition allows Ingenix® to add Aperture's industry-leading provider credentialing products and services to its robust offerings for payers, physicians, hospitals, property and casualty organizations, government agencies and employers. Conversely, the deal opens the door for Aperture to offer its clients Ingenix® products and services - including actuarial consulting, anti-fraud and recovery solutions, cost containment and decision management tools.

Chrysalis' initial investment was in Aperture Credentialing, Inc.

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Manorhouse Assisted Living, Inc.

On October 1, 2002, Nashville, TN-based LifeTrust America, LLC, the owner and operator of Morningside Assisted Living communities, acquired Richmond, VA-based Manorhouse Assisted Living, Inc., an owner and operator of assisted living centers in the mid-Atlantic states.

Founded in 1996 by Morgan Stanley Capital Partners, Clayton Associates and Coleman Swenson, LifeTrust America is a privately held senior services company focused on providing community-based residential and wellness services to the senior population. After the acquisition of Manorhouse communities in Virginia and North Carolina, Morningside now owns and operates 48 communities with a capacity for over 3000 residents.

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AfterBOT, Inc.

On September 19, 2002, Atlanta-based AfterBOT, Inc., the leading provider of digital receipt based point of sales audit and marketing services to the retail industry, announced the appointment of John S. Simon as president and CEO. Mr. Simon replaced R. Stephen Schultz, founder of the company, who will remain active with AfterBOT as vice chairman of the board of directors.

Mr. Simon has more than 22 years of experience in the retail industry, including 14 years with QRS Corporation (NASDAQ: QRS) where he was a founder in 1988. At QRS, he helped develop, sell, implement and operate the leading electronic commerce solutions for the retail industry. Mr. Simon most recently served as QRS CEO from 1999 - 2001. Prior to the creation of QRS, he served in a variety of merchandising, store operations and information services management positions with Carter Hawley Hale Stores, Inc., which was subsequently acquired by Federated Department Stores, Inc.

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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"The VC Bust: Implications for Entrepreneurs" - David A. Jones, Jr.

Lots of ink has been spilled recently about the decline of the venture capital industry. Reporters have dug gleefully into how the wunderkinds of Silicon Valley got their comeuppance as the Internet bubble burst, the rise in disputes between venture capital firms and their own investors, and how hard it is for VCs to raise new money.

For entrepreneurs trying to finance a growing business, the latter point is probably the most important – and it’s real. The venture industry is still reeling from the boom and bust in the technology and telecommunications sectors. Many firms remain busy with companies they funded during the bubble years that face severe financing and growth challenges. Some 14,500 companies received venture capital from 1995 - 2000, and by mid-2002 only about 3,700 had been identified as either having gone public, been sold or gone out of business. Sorting through this overhang to identify the companies with real prospects diverts resources from new projects.

Also important, far less capital is coming into the venture sector. Institutional investors – the pension funds, university endowments and foundations that provide the bulk of the money that venture capitalists invest – put something like $105 billion into venture funds in 2000. That figure will probably be $15 – 20 billion for 2002, and could be lower. In the second quarter of 2002, more money was returned to institutional investors by venture funds, through voluntary reductions in commitments to older funds, than was committed to new funds. This capital crunch is causing a shake-out in the venture capital industry, with some managers leaving the sector either because their firms couldn’t raise new funds or because they concluded that the work would be harder and less remunerative, and sought greener pastures.

So – we’re in a “tight money” period that makes life harder for entrepreneurs. Not only are investment terms tougher and valuations lower, but the VCs who are still investing are swamped. Entrepreneurs rightly complain that they have a hard time getting their calls returned, even as the remaining active firms are working harder than ever. For the entrepreneur who succeeds in attracting the active interest of one venture capital firm, the battle isn’t yet won: with fewer firms actively investing fresh capital, investment syndicates have become harder to pull together. (In other words, venture capitalists don’t return each others’ calls as fast as they used to, either!) All of this means that raising capital has become a much slower process.

What’s an entrepreneur to do? Here are a few things that, if accomplished, increase the likelihood of attracting venture capital.

  • Assume that no institutional money will finance your start-up – and start up anyway. It’s not a big exaggeration to say that there is no venture capital available for flat start-ups today. This means that companies must grow from concept through product launch and initial sales without venture capital. Seed capital must come from founders, friends and family, or customers. Several of the most exciting companies with whom we’re working today have proven their business concept via prepayments by customers who desperately wanted their product or service.

  • In your business plan, focus on how you sell, and ensure that your team includes people who’ve sold that way successfully. The economy is slow. Business customers have been burned by dot.com promises and rhetoric, and are skeptical about new products and services. Novices in the sales force, or sales management with prior experience in a different industry or channel, won’t do.

  • Tell your story clearly and candidly. Investors assume that your business has grown more slowly than you’d hoped. They know that sales cycles have lengthened. They have email and phone messages from 20 other promising companies (so far this morning), and feel guilty about not returning them. Even a hint that they must pry the truth out of you gives an excuse to decline your deal and show you the door. In this market, investors want to work with people who recognize failure quickly, adapt, and communicate well enough to lead through tough times. Investors have no confidence in anyone who appears never to have failed.

Chrysalis has chosen to stay the course: despite the challenges described above, we continue to invest in young growth companies. We’ve been fortunate in that our results before, during and since the market bubble have been strong enough to enable us to raise a new fund, and we’re excited about putting it to work. There’s almost no part of our economy that couldn’t be improved, and this means there’s lots of opportunity for people who can conceive of and execute plans to do things better. Our task is to find such people and finance their projects.

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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

© 2003 Chrysalis Ventures, LLC

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