Chrysalis Ventures
2008 2nd Half & 2009 1st Quarter Newsletter www.chrysalisventures.com
 

Year in Review

The past six months have challenged most sectors of the economy—including the venture capital industry. Money is tight. Venture capital is hard to raise for both fund managers and entrepreneurs. Venture capital investments in Q4 08 were down 26% from Q3, and this decline was spread across most industries and stages of development. Debt financing is harder to come by, less dependable and more expensive. Tight money is limiting exit opportunities and depressing valuations. In sum, venture capital is not immune to the financial market crisis.

So – should we abandon the entrepreneurial economy in these tough times? My answer is an emphatic “NO!” Innovation will be essential to pulling us out of this mess; simply doing tomorrow what we did yesterday won’t solve our problems. The good news is … read more »

   

Highlights

HealthMedia Acquired by Johnson & Johnson

In October 2008, Chrysalis portfolio company HealthMedia, Inc. was acquired by Johnson & Johnson (NYSE: JNJ), delivering a nearly 18x return on investment and becoming one of the firm’s most successful exits to date …

Read more »

Chrysalis Commits to Invest $5 Million in Achieve CCA

In February 2009, Chrysalis committed $5 million to Evansville, Indiana-based Achieve CCA, Inc., a provider of debt management services to healthcare patients. Chrysalis was the sole investor in this round …

Read more »

Digitalsmiths Secures Additional Capital from Chrysalis and CISCO

In November 2008, Digitalsmiths, the innovative video indexing, analysis, and publishing technology provider, closed a $12 million Series B round of equity financing from a combination of new and returning investors …

Read more »

 

Year in Review

The past six months have challenged most sectors of the economy—including the venture capital industry. Money is tight. Venture capital is hard to raise for both fund managers and entrepreneurs. Venture capital investments in Q4 08 were down 26% from Q3, and this decline was spread across most industries and stages of development. Debt financing is harder to come by, less dependable and more expensive. Tight money is limiting exit opportunities and depressing valuations. In sum, venture capital is not immune to the financial market crisis.

So – should we abandon the entrepreneurial economy in these tough times? My answer is an emphatic “NO!” Innovation will be essential to pulling us out of this mess; simply doing tomorrow what we did yesterday won’t solve our problems. The good news is that big problems that go far beyond the financial sector also offer handsome rewards to those who can conceive, design and implement urgently needed solutions.

Let me give two examples, each a theme behind which Chrysalis is actively investing today. First, in healthcare the nation is embarking on a great debate about how both to cover the uninsured and control costs. This is interesting and important–but the debate has so far largely ignored long-term, disturbing trends in population health that will render its outcome obsolete.

Diseases that result from obesity and smoking now account for an estimated 70% of U.S. healthcare spending. Although rates of smoking seem finally to be responding to high taxes and a dramatic shift in cultural acceptance, obesity rates are still rising, and cultural norms still seem to be moving toward more acceptance and accommodation. The future costs of this trend, in dollars, in workforce and military weakness, and in human suffering, are terrifying. No reform of how we pay for medical care or who we cover can succeed if half of our children contract Type 2 diabetes, or most adults receive heart surgery.

We believe innovation can help avert this looming disaster – not through some magic pill that keeps us thin, but through advances in communication and information technologies that focus behavior change on the actual causes of our conditions: what we eat, how we move, how we live. Chrysalis portfolio company HealthMedia, recently acquired by Johnson & Johnson, proved that free-at-the-margin elements of the Internet can deliver weight loss and persistency equivalent to that achieved by Weight Watcher’s group therapy, but for about 5% of the cost. Johnson & Johnson told the Wall Street Journal that they plan to build a $20 billion wellness coaching business around this innovative platform! We foresee opportunities like this to use information services and other developing technologies all across the healthcare spectrum. Entrepreneurs, for example, are now working on returning a much-needed element of personal contact to physician-patient communications through social networking tools.

This healthcare technology revolution will require both innovations in software, hardware, and communications networks, and new business models that knit these together in sustainable, scalable ways.

This brings me to my second example of an industry in need of ongoing innovation: media and communications. Chrysalis has had great success over the years in building telecommunications infrastructure (think High Speed Access Corp., now the backbone of Charter Communications’ broadband business, and Tritel, now part of ATT Wireless) and specialized information services that could not exist apart from advances in network and IT infrastructure (e.g. Genscape, Appriss, TechRepublic, and CELS, in addition to HealthMedia).

We’re still at it, most recently in Open Kernel Labs. This company supplies software to developers of intelligent mobile phones and broadband devices, allowing them to integrate their offerings across multiple platforms, more securely and faster. We have also invested in Digitalsmiths, which provides technology services that enable video content owners to index and catalogue their libraries for use in targeted advertising. Two high-profile web sites, theWB.com and TMZ.com, are now using DigitalSmiths to index and play video.

In both the media & communications and the healthcare sectors, the emerging combination of digital media and ubiquitous broadband is enabling richer, more personalized delivery of content. We believe that laying the pipes that support delivery, and connecting people with personalized, actionable information, will improve infrastructure, services, and decision making. This thesis underlies our investment philosophy across sectors.

The economy is in a tough place right now, and innovation is only one part of the solution. Renewal of timeless values like thrift, discipline and diligence would also help. But Chrysalis believes strongly that our role in these times is to invest with discipline behind the entrepreneurs with the courage and vision to solve today’s problems–that is, to help them build great companies and deliver great returns to our investors. Plus ça change

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New Developments

Chrysalis Fourth Fund Reaches $175 Million

In September 2008, Chrysalis announced the revised final closing of its fourth fund at $175 million, exceeding the firm’s original $150 million target as well as the $163 million closing previously announced in February 2008. The fund attracted commitments from a variety of institutions and high net worth individuals, many of whom had been serial investors in Chrysalis’ prior funds while welcoming such new limited partners as Morgan Stanley, Credit Suisse, and the Kentucky Teachers’ Retirement System. The most recent addition was Health Evolution Partners, a manager of healthcare investment funds.

The managing directors and their affiliates, together with the Chrysalis professional staff, are collectively the second-largest investor in the new fund. In addition, nine of the firm’s former portfolio company executives invested in the fund.

This fourth fund will remain focused on media and communications, healthcare, and companies focused on emerging trends and technologies and will invest in up to 20 companies.

View the complete press release »

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Bob Saunders Transitions to Role of Senior Advisor

In January 2009, Bob Saunders announced his retirement from an active management role and his transition from Managing Director to Senior Advisor.

As Senior Advisor, Bob will continue to participate in deliberations of the firm’s investment committee and retain several of his current directorships but will generally not represent Chrysalis in new portfolio investments. His other directorships will transition to other senior investment professionals over the next few months.

Bob has made a tremendous contribution to the firm since he joined us in 1997, working with Chrysalis portfolio companies including Genscape (sold to GFI Energy Ventures), High Speed Access Corp (IPO and later sold to Charter Communications), PeopleFirst.com (sold to Capital One Financial), Telemics (sold to Tyco Electronics), CELS/Midi (sold to SAI Global), and MindLeaders (sold to ThirdForce). We are pleased that he will continue to share his extensive experience and counsel with us as a Senior Advisor.

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Greg Richey Joins as Chief Operating Officer

In December 2008, Greg Richey, a former Chief Operating Officer/Chief Financial Officer and principal with Butler, Shine, Stern & Partners in San Francisco, joined Chrysalis as Chief Operating Officer. In this newly created role, Greg is responsible for managing our growing firm’s day-to-day operations, including administration, finance, human resources, IT, and legal.

Greg has over 15 years of operations leadership and experience with rapidly growing companies. He comes to us from Butler, Shine, Stern & Partners, a leading independent advertising agency in San Francisco, where as COO/CFO he managed the daily operations while the company was growing 30% annually for over four years. Prior to that, as COO/CFO of SF Interactive, a venture-funded pioneer in digital advertising and media, Greg led the company through the dot.com boom and bust and successfully negotiated a sale of the company to Butler, Shine. He has worked with and for interactive media and ecommerce start-ups since 1993. Prior to entering the entrepreneurial world, he spent several years as a tax and corporate finance lawyer for O’Melveny & Myers, primarily handling mergers and acquisitions and LBOs. Greg has a BA from Yale University and a JD from the University of Virginia.

Greg’s many years of experience with venture-funded, early and expansion stage companies gives him strong operating expertise and a deep understanding of the emerging growth environment. Please join us in welcoming Greg to the Chrysalis team.

View the complete press release »

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Exits

HealthMedia Acquired by Johnson & Johnson

In October 2008, Chrysalis portfolio company HealthMedia, Inc. was acquired by Johnson & Johnson (NYSE: JNJ), delivering a nearly 18x return on investment and becoming one of the firm’s most successful exits to date. The Ann Arbor, Michigan-based behavioral science technology company builds and delivers tailored behavior change interventions in the areas of wellness, disease management, behavioral health, and medication adherence. Johnson & Johnson, a HealthMedia client, concurrently announced plans to make the company the keystone piece of a new $20 billion wellness and prevention business platform.

Under the leadership of CEO Ted Dacko and the active guidance of Chrysalis Managing Director and HealthMedia board member Koleman Karleski, the company migrated from the business it had pursued prior to our investment – customized marketing campaigns for pharmaceutical companies – into an organization that deployed sophisticated knowledge of behavioral change and advanced communications technology to help individuals improve their health and manage chronic illnesses.

This strategic acquisition for J&J, which Chrysalis facilitated over many years by fostering the interest of numerous suitors, will allow HealthMedia and its team to continue its rapid growth and expand its global reach.

View the complete press release »

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New Investments

Chrysalis Commits to Invest $5 Million in Achieve CCA

In February 2009, Chrysalis committed $5 million to Evansville, Indiana-based Achieve CCA, Inc., a provider of debt management services to healthcare patients. Chrysalis was the sole investor in this round. The capital will be used to expand the company’s call center as well as enhance the services offered to hospital partners and consumers.

Achieve partners with hospitals, physician practice groups, and other healthcare providers to provide debt management services to qualified patients. By assessing the patient’s whole financial health and developing a customized plan to help financially stressed patients get out of debt, Achieve complements and reinforces the public service mission of healthcare institutions. Unlike collections agencies or medical loan providers, Achieve works on behalf of a hospital’s patients and can actually help improve the patients’ monthly cash flows. Using this approach, as well as its proprietary technology, Achieve plays a unique and important role in the revenue cycle of its healthcare partners.

View the complete press release »

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Chrysalis Leads $7.6 Million Investment in Open Kernel Labs

In January 2009, Chrysalis led a $7.6 million Series A financing for Chicago-based Open Kernel Labs, a provider of systems software and virtualization technology for mobile devices and other embedded systems. Founded in August 2006 as a spin-out from National Information and Communications Technology Australia (NICTA), Open Kernel is the leading provider of high-performance, secure microkernel software for devices such as cell phones, set-top boxes, and consumer electronic devices. The company supplies software products and services to developers of mobile handsets and other intelligent embedded devices, allowing manufacturers the ability to reduce costs, more securely and easily integrate software across multiple device platforms, and bring devices to market more rapidly. Nearly 250 million mobile devices have been shipped with Open Kernel’s flagship software product, OKL4.

Co-investors included existing investor Neo Technology Ventures and strategic investor Citrix Systems, a public software company with $1.5 billion in revenue and a global leader in application delivery and virtualization infrastructure. Open Kernel will use this investment to fund global expansion of its research and development and business channels, establishing further regional support throughout Asia, Europe, and the Americas.

View the complete press release »

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Chrysalis Leads $8.25 Million Series B in Regent Education

In September 2008, Chrysalis led an $8.25 million Series B investment in Frederick, Maryland-based Regent Education, Inc., the leading provider of financial aid management solutions for higher education institutions. Edison Venture Fund, a leading growth capital investor in the Mid-Atlantic region and lead Series A investor, also participated in this financing.

Regent is the only provider of financial aid management software-as-a-service (SaaS) solutions for higher education institutions. The company’s web-based, easy-to-use solutions leverage technology and automation to improve the operational efficiencies of the financial aid office, a mission critical aspect of higher education that is faced with regulatory compliance concerns, growth in demand for student loans, and increasing competition for students.

View the complete press release »

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2008 Summary of New Investments

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Follow-on Financings

Digitalsmiths Secures Additional Capital from Chrysalis and CISCO

In November 2008, Digitalsmiths, the innovative video indexing, analysis, and publishing technology provider, closed a $12 million Series B round of equity financing from a combination of new and returning investors as Boston-based venture capital firm .406 Ventures joined returning investors The Aurora Funds and Chrysalis.

View the complete press release »

Then in January 2009, the company announced that worldwide technology leader Cisco had made a strategic investment in the company. Digitalsmiths attracted interest from the Cisco Media Solutions Group, which has increasingly worked to develop and market products to media and entertainment companies.

View the complete press release »

Digitalsmiths' technology empowers online advertisers and publishers to capitalize on the ongoing growth of broadband video, rich Internet applications, and mobile and social media. The current round of funding will be used to accelerate Digitalsmiths' product development initiatives and to extend their technological leadership and engineering innovation.

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Asterand Raises £405,000 in New Issuance of Common Stock from Chrysalis

In November 2008, Asterand raised £405,000 ($600,000) through the issuance of common stock to Chrysalis. Asterand is a leading provider of human tissue and human tissue-based services to pharmaceutical companies engaged in drug discovery research and will use the proceeds to fund near-term growth opportunities. With this purchase, Chrysalis increased its ownership to 13.9% of the company.

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2008 Follow On Investment Summary

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Portfolio Company Developments

Regent Names Brian Madocks as Board Member

In January 2009, Regent Education, the leading provider of financial aid management SaaS solutions for higher education institutions, appointed Brian Madocks to its Board of Directors following an introduction by Chrysalis. Brian was previously the CEO of SunGard Higher Education, the leading global provider of software and services to colleges and universities. In addition, Brian is deeply involved in higher education and has been an active member of the Business-Higher Education Forum and has participated in roundtable discussions with former Secretary of Education, Margaret Spellings. He is a member of the Board of Trustees of Long Island University where he chairs the Academic Affairs Committee and is a member of the Planning Committee.

View the complete press release »

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SinglePipe Communications Named 2008 Hot Dozen Company

In December 2008, SinglePipe Communications, a leading provider of wholesale digital voice services, was named a 2008 Hot Dozen company by Greater Louisville Inc.’s ENTERPRISECORP. The Hot Dozen is an annual celebration of 12 locally-owned companies who have benefited from Louisville’s entrepreneurial atmosphere and continue to thrive in our region. The companies represent innovation and entrepreneurship in Louisville’s business community.

View the complete press release »

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Other

Upcoming Conferences and Events

Please look for Chrysalis team members at the following conferences and events that we are pleased to sponsor or expect to attend this spring:

Southeast Venture Conference (March 11 – 12, 2009)

Dow Jones Wireless Innovations 2009 (March 17 – 19, 2009)

CTIA Wireless 2009 (April 1 – 3, 2009)

CED Annual VC Conference (April 22 – 23, 2009)

Health Evolution Partners Innovation 2009 (April 23 – 25, 2009)

NVCA Annual Meeting (April 29 – 30, 2009)

Michigan Growth Capital Symposium (May 12 – 13, 2009)

Florida Early Stage Capital Conference (May 15, 2009)

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About Chrysalis Ventures

Chrysalis Ventures is the premier venture capital firm in Mid-America, managing one of the region's largest funds for early-stage and growth investments. Everything we do is focused on building extraordinary companies that outperform on every level. We are currently focused on opportunities in Media & Communications and Healthcare, and companies that benefit from Emerging Trends & Technologies in multiple sectors.

Please let us know if you are aware of a company that might be a strong investment fit. We are always looking for the next great investment and hope you will approach us first with any ideas. Contact us at info@chrysalisventures.com or learn more about our team by visiting www.chrysalisventures.com.

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