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Venture 2006 Newsletter - Issue #2, March 28, 2006.

Featured this Issue:

• One-on-One with Venture Presenter Nextreme Thermal Solutions’ CEO Jesko von Windheim
• Investment Trends with Sevin Rosen Funds’ David McLean
• Three Questions for North Carolina VC Jason Caplain
• Venture 2006 Presenting Company Snapshots: Visitar and Arrendale Associates
• Venture 2006 Deadlines
  • 3/31 FINAL Pinehurst Room Reservation Deadline
  • 4/25 Conference Pre-Registration Deadline
• Venture 2006 Program News
  • Venture 2006 Panel to Highlight M&A and IPO Strategies
  • Inventor, Author and Entrepreneur Ray Kurzweil to Keynote
  • 28 Companies Selected to Present

One-on-One with Venture Presenter Nextreme Thermal Solutions’ CEO Jesko von Windheim

Jesko von Windheim is CEO of RTP-based Nextreme Thermal Solutions, a company developing next generation thermoelectrics for applications that require extreme thermal management solutions. He helped spin Nextreme out of RTI International, where he was Entrepreneur in Residence and VP of Commercialization. Prior to joining RTI, Jesko was integral to numerous spin-offs from MCNC, Corp. (also a research organization), the most recent of which was Cronos Integrated Microsystems.

CED: What trends are you seeing right now in thermoelectrics?

von Windheim: Our focus is not so much on trends in thermoelectrics as it is on trends in the electronics industry that we serve. Today, a major trend in electronics is an escalating requirement for innovative cooling solutions. Since its inception, the electronics industry has continued to increase performance by packing more circuits onto a chip while at the same time increasing their operating speed. This capability has been the underpinning of the industry (referred to as Moore’s Law) and has resulted in the rapid proliferation of high performance, low-cost electronics that we enjoy today. With the recent emergence of nanoelectronics, where the circuit’s feature size is on the nanoscale, hot spots form on the chip resulting from high-speed, closely packed circuits. These hot spots limit the chip’s performance and reduce its reliability. As a result, the industry is for the first time faced with the prospect of a deviation from Moore’s Law – that is, the ability to regularly increase electronics speed and functionality is slowing down because of inadequate thermal management. We see the requirement to cool hot spots as one of the most compelling issues to face the electronics industry in the next five years and it is the reason we formed Nextreme.

CED: What predictions do you have for the upcoming year in this industry?

von Windheim: Hot spot mitigation will move to center stage as one of the major design objectives in a wide variety of chips, including CPUs, graphics, communication, LED and optical chips. Chip manufacturers will tackle hot spots by improving heat removal from the IC package. The acknowledgement of the hot spot problem has only started in these areas and we expect it to become more pervasively understood over the next year.

CED: Explain some of the practical applications of your breakthrough technology.

von Windheim: In our case, we concentrate on solving the electronic thermal problem right at the semiconductor chip where the heat is being generated. Our device is a micro–refrigerator, about the size of a piece of confetti. We insert this device into a semiconductor package, right above the hottest part of the chip; when we run a current through our device it pumps heat from the inside of the package to the outside (the same way a refrigerator compressor pumps heat out of a refrigerator compartment). This proves to be the most efficient way to keep chips running cool and would allow our customers to continue to increase circuit density as they have always been doing.

CED: Nextreme's thin-film superlattice technology represents the first significant breakthrough in thermoelectric materials in 40 years. Why do you think there has been such rapid advancement in this field over the last few years as compared to years past?

von Windheim: Thin-film superlattice technology is part of a larger trend of creating engineered materials using nano–structures. A “superlattice” consists of a structure of many thousands of very thin layers of a material stacked together to create a thin film of the material that is perhaps one tenth the thickness of a human hair – it looks something like a phone book on a microscale. People theorized 15–20 years ago that this kind of “quantum well” structure should result in improved performance. It took about 15 years of research to go from these ideas to actual devices. What you are seeing now is actually just the results of all of that work. So, although it appears like extremely rapid advancement, the progress has probably been fairly typically of any technological advancement from idea to implementation. The good news is that all this work is behind us. Today the technology is seeing actual implementation in semiconductor packages and proving that some of those ideas 20 years ago had real merit.

CED: What value do you see in presenting at this year’s Venture conference?

von Windheim: We see the Venture Conference as a great way to introduce Nextreme and more importantly our market opportunity to a wide range of investors. For those who already know about us, it will be an opportunity to showcase the extensive progress we have made in our first year of operation.

Investment Trends with Sevin Rosen Funds’ David McLean

David McLean is a general partner with Sevin Rosen Funds and a 20–year veteran of the semiconductor and networking industry. He joined the firm in 2004 and brings with him a wealth of operating experience from both established and early stage companies including IBM, Pliant Systems, Applied WDM and Cicada Semiconductor. At SRF, McLean focuses on investment opportunities in the semiconductor, sensor network, alternate energy and retail arenas.

CED: What do you see as the “hot sectors” for investment today?

McLean: We tend to refer to ourselves as generalist firm in that we don’t specialize in any one area. Between IT and the life sciences, our scope is fairly broad. For example, we are looking now at a range of alternative energy investments, not just in terms of energy source–new battery technologies, solar energy, bio–fuels, etc.–but also towards advanced energy management. Cleantech, as it is commonly referred, is no longer an area just for socially responsible investing. Our LP’s now expect for it to deliver similar returns to that of the overall asset class.

Another area of focus is the boundary between IT and life sciences where new technologies are applied to the discovery and development of drugs and the early diagnosis of disease states. Our recent investment in Durham–based Metabolon is an excellent example of this. Aurora Funds is an important local partner with us in the deal.

There is also a broad sector called systems biology which uses very sophisticated mathematics to predict the behaviors of biological systems that can be applied to a variety of markets, including big pharma. We have spent quite a bit of time looking at this area, including involvement with select universities, and have actually seeded a company in this area. In addition, wireless communications continues to be a big focus for us, from fixed mobile convergence to intelligent machine–to–machine (M2M) networks.

CED: What are trends that you are seeing in the specific areas you invest in?

McLean: I think it’s always helpful to look back at the activity over the last year and highlight the major takeaways or trends we should be thinking about as we forge ahead. In terms of the big picture, when the up–tick in IPO activity in 2004 wasn’t sustained in ’05, it underscored that we are in a capital markets environment where portfolio companies need to be much farther along before they can go public, particularly in terms of financial performance. As the time to IPO extends, it creates a kind of domino effect with respect to the pressure this puts on returns. For us, this just reinforced our focus on the fundamentals of the companies that we invest in at an early stage. A big part of the investment decision for us is their ability to grow and become stand–alone public businesses. This has an impact on how we advise our current companies as well as the criteria we use to make investments in new ones.

On the flipside, the data suggests that about a third of the M&A transactions in 2005 returned 4X or better to their investors. While we believe that the best returns come from companies that go public and then continue to grow, it was encouraging that there was some growth in the value of acquisitions, which is the likely outcome for some of our companies.

One of the most important challenges we face as we look ahead–this was true last year, and it will be true next year and the year after–is the abundance of capital that has been flowing into this asset class. The disciplined and measured approach taken by top tier venture capital firms in their fund raising activities needs to continue. There is always the potential to have too much capital serving a market with a finite ability to grow, running the risk of run–ups in valuation and the funding of “me too” companies–all of which we want to guard against. The data suggests that VC firms over the last year have tried very hard to take the high road and stayed disciplined–and that is ultimately good for the industry.

CED: Have you invested in companies in the Research Triangle Region? If so, what attracted you to these innovation–based companies?

McLean: Yes we have. In addition to our investment in Metabolon, we recently co-led a Series A investment in Hexatech, an exciting compound semiconductor company, along with Intersouth Partners. As far as our interest in the Triangle, it starts with me having spent the last 12 years working and residing in RTP. Secondly, as a firm we don’t target any particular geography over another. We look for good deals wherever they may be. With great local investment partners and experienced IT and life sciences entrepreneurs, the Triangle will continue to be focus area for me and Sevin Rosen Funds.

CED: What characteristics or qualities do you look for in companies that you invest in?

McLean: As an early stage investor we believe that the foundation for a successful company is built around big markets, big problems to be solved, and great teams that can execute. An important part of our investment thesis is that the start-up has the potential to be a stand-alone, public company. Some of the key elements we look for are:

• A large or potentially large markets (> $500M)
• The presence of a big problem or pain point that customers are looking to solve now
• Some level of customer traction even at the pre-revenue stage
• Elite teams comprised of successful, repeat entrepreneurs

Three Questions for North Carolina VC Jason Caplain

Jason Caplain is a general partner and co-founder of Southern Capitol Ventures, a firm focused on providing capital to leading early-stage technology and life science companies in the Southeast and Mid-Atlantic. Caplain joined Southern Capitol after spending two years at Red Hat.

CED: Why do you choose to invest in companies in the Research Triangle Park?

Caplain: As the largest research park in the United States, RTP has strong universities (Duke, NC State and UNC), large multi-national companies and a very strong entrepreneurial base. This entrepreneurial base continues to be supported by organizations like CED and the North Carolina Biotechnology Center. The access to technical talent is strong. Additionally, the cost of building a company in RTP is significantly less when compared to Boston or Silicon Valley

CED: What characteristics or qualities do you look for in companies that you invest in?

Caplain: First, we are investing in great people. We look for exceptional, driven leadership that share our passion for success and have significant knowledge of their markets and technologies. Other criteria include proprietary technology or a unique market position; a company that has the ability to scale rapidly and demonstrated market acceptance.

CED: CED will host its 23rd annual Venture Conference in May. Why do you think Venture is an important event for companies seeking capital?

Caplain: For a North Carolina company looking for capital, CED’s Venture 2006 is the single most important event all year. Since 1999 companies that have presented at Venture have raised $1.8 billion. Not only is the conference great for fundraising, but entrepreneurs often meet potential new board members, advisors, customers or even strategic partners.

Venture 2006 Presenting Company Snapshots: Visitar and Arrendale Associates

Presenting Company Snapshot: Visitar

Raleigh-based Visitar provides innovative solutions that link rich telephony capabilities with business applications to improve efficiency and enhance customer and employee experience. Delivered as a service, the solutions are affordable for small and mid-sized businesses and do not introduce any IT management burden. Visitar’s flagship product, 360° Care viaVisitar, is a comprehensive service that provides complete CRM capabilities to manage sales, marketing, and service activities and rich interaction facilities to manage inbound and outbound connections with customers.

“Visitar solutions have many major unique attributes, including some unique intellectual property that enables us to configure complex solutions faster than any of our competitors,” said Visitar CEO Peter Licata. “I’m also extremely proud of our management team. All of us have driven successful startup organizations as well as large enterprises. Together, we bring a proven ability to execute. I've been a part of 4 successes and this team surpasses all of those. Scott Albert of The Aurora Funds said it better than I can when he called us an A+ Idea from an A+ Team. We appreciate those sentiments and are confident that other investors will feel the same way.”

Visitar recently secured $2.6 million in first-round funding. The Aurora Funds, Inc., one of the leading seed and early stage venture capital firms in the Southeast and mid-Atlantic, was the lead investor.

Presenting Company Snapshot: Arrendale Associates

Arrendale Associates, based in Cornelius, NC, is a software company focusing on medical transcription workflow and document management solutions. Arrendale provides a comprehensive suite of installed and web-based (ASP) solutions which enable and facilitate the outsourcing and off-shoring of medical transcription for hospitals and the medical transcription service organizations (MTSOs) that serve them.

Since 1989, Arrendale has developed and marketed healthcare industry workflow systems for dictation, transcription, document management and physician electronic signature. Hospitals, clinics and A+ Network Transcription Affiliates benefit from AAI’s fully integrated TA+® platforms by reducing costs and providing secure remote access to transcribed patient documents for improved patient care. The webnative TA+ product line is HIPAA-enabled and delivers the automation and flexibility required by today’s healthcare community.

Venture 2006 Deadlines

FINAL Pinehurst Resort Room Reservation Deadline
March 31, 2006

Venture Conference Pre-registration Deadline
April 25, 2006

Venture 2006 Program News

Venture 2006 Panel to Highlight M&A and IPO Strategies

Listen to five of the biggest names and best minds in the RTP and nation explore winning M&A and IPO strategies. The featured panel, “M&A and IPO Strategies,” will be held May 2 during the first afternoon of Venture 2006. Panelists will discuss their views and experiences on buying and selling companies, the best forward path for future funding and liquidity and creating maximum shareholder value. Panel speakers include:

• Steve Nelson, Managing Director & Partner, Wakefield Group
• John McConnell, Chief Executive Officer, A4 Health Systems
• Stephen Pierce, Head of Equity Capital Markets for the Americas, Goldman, Sachs & Co. New York
• Harry Weller, Partner, New Enterprise Associates
• Ryan Wuerch, Chairman of the Board and Chief Executive Officer, Motricity

Inventor, Author and Entrepreneur Ray Kurzweil to Keynote

28 Companies Selected to Present