Editor’s note: Local Tech Wire’s initial Top 25 Companies List will focus on emerging firms in North Carolina – those selected to present at CED’s Venture 2002. Who are they? What are their products? Why should investors put money into their firms? And what do these entrepreneurs think of VCs? LTW is surveying the presenters to get the skinny about each, with Bandwidth.com leading off. LTW will feature another company each day — and some days two — leading up to the April 30-May 1 showcase. The executive team and backers behind TalkingNets believe this company is positioned to catch the next wave in telecommunications — the “one” network that delivers data, voice and even video.

Since development of the versatile communications technology called Internet Protocol, people have talked about the potential of one network to transport voice, video and data. The magic of IP is its ability to transmit in digital packets end to end, helping make the Internet and World Wide Web the multimedia miracle utilized worldwide today.

But building one seamless network has lagged behind, even though telecommunications giants such as Cisco and Nortel are working feverishly to deploy IP-based telephony known as VOIP (voice over IP).

TalkingNets, which was founded in November 1999 and counts Cisco as a partner, not only offers integrated services. It also boasts of having its own IP-based network and insists that the company can make the “one” network solution cost-effective even for small businesses.

“We operate one network, unlike traditional carriers who have built and must now manage and maintain separate voice and data networks,” says TalkingNets’ Justin Donaton. “Our architecture delivers integrated services over an integrated network, provides vastly better economics than those of legacy carriers with disparate platforms and multiple operation systems, and streamlines the provisioning process.”

John Phillips, president and chief executive officer of TalkingNets, will be coming to “Venture 2002” looking for as much as $10 million from investors to expand his firm’s network and services. The company expects to generate $1 million in revenue this year and already has raised $30 million from Venrock Associates, Charles River Ventures, Venrock Associates, The Hatch Group and Triad Investors Corporation. It has 40 employees.

As for what TalkingNets is looking for at the conference, Donaton wouldn’t say other than the firm wants a “symbiotic relationship” with investors. He’s mum on the firm’s exit and growth strategy although TalkingNets has told CED it hopes at some point to partner with a major telecom carrier.

(By the way, ILEC and CLEC referred to in the following Q&A segment, refer to Incumbent Local Exchange Carriers, or telephone companies in existence when the telecommunications reform act of 1996 was passed, and Competitive Local Exchange Carriers which sprang into existence after the telecom act was passed. The original Bell companies are among the ILECs.)

Q&A with TalkingNets:

Answers were provided by Donaton.

Times are tough. If you had only one chance and one paragraph to convince an investor, how would you answer this question: “Why should an investor choose your company?”

TalkingNets makes it affordable for smaller businesses to utilize the same productivity-enhancing communications services that previously have only been feasible for larger companies to deploy. This is possible because the TalkingNets network has vastly better economics than those of legacy carriers, allowing communication services to be deployed and operated at a fraction of the cost of traditional providers. The management team has established for TalkingNets an 18 month time-to-market advantage for this rapidly evolving technology, has successfully built a packet-based network utilizing softswitch architecture, has secured direct interconnects with ILECs and has leveraged the resources of partner networks. This makes for a company — with customers – that is difficult to duplicate.

What makes your company unique?

TalkingNets started with a clean slate, building a single IP-based network capable of supporting both voice and Internet services – using proven and reliable technology made available from partners like Cisco Systems. We operate one network, unlike traditional carriers who have built and must now manage and maintain separate voice and data networks. Our architecture delivers integrated services over an integrated network, provides vastly better economics than those of legacy carriers with disparate platforms and multiple operation systems, and streamlines the provisioning process.

By eliminating the need to invest in separate networks, TalkingNets delivers these services at disruptively lower capital and operating costs than the circuit-switched and narrowband technologies of traditional service providers.

What makes your product(s) and/or services unique vs. your competition? (Who is your competition, and what do they offer?) If you have no competition, why not?

TalkingNets makes enhanced communications services (broadband, phone systems, unified messaging, etc.) affordable to smaller businesses by layering multiple services over a single IP pipe.

TalkingNets’ primary competitors are local telephone companies or ILECs (Qwest and Verizon) and competitive carriers or CLECs (Allegiance, Cavalier). ILECs control 95% of the market.

There are also a few companies that on the surface offer similar services as TalkingNets and have IP-based platforms. Those companies include Pingtone, GoBeam, Cbeyond and Vonage.

TalkingNets Virtual PBX (hosted phone system) services serve as a substitute to traditional and IP PBX vendors including Nortel, Toshiba, Shoreline and Altigen.

Does your company already generate revenue? If so, how much? Are you cash flow positive?

TalkingNets is revenue generating. We are on schedule to reach positive cash flow in Q2 2003.

What is your target market?

Retail: TalkingNets focuses exclusively on smaller businesses who generally have between 5 and 100 employees. This segment is clearly “under-served” and the rationale behind this is not difficult to grasp – the underlying economics to provide productivity-enhancing platforms to smaller businesses is not the least bit profitable for traditional circuit-switch telephony providers.

Wholesale: The company is also pursuing wholesale relationships with major carriers interested in deploying packet-based telecommunication services. TalkingNets enables carriers to deploy packet voice services while lowering capital investment, eliminating technical and operational risks, and removing any regulatory and back-office burdens. TalkingNets integrated offerings and underlying economic model allows legacy carriers to improve customer retention, reduce churn and market new voice applications.

What will you do with the invested funds? What is the timeline for product delivery? If you have existing products and services, how will additional funding help you expand your company, if that is the intention, or will you develop new products?

Additional funds will be used to bring TalkingNets’ first market to cash flow breakeven, to then launch additional markets and to help secure our first carrier-partner deployment.

What do you want from an investor other than money?

A symbiotic relationship

Why will investors be impressed with your management team?

TalkingNets has brought together an experienced, proven and passionate management team that holds industry clout. TalkingNets executives have been specifically recruited from within the telecommunications and finance industries. TalkingNets executive have helped run firms including: GE, Sound View Technology Group, Level(3), Primus, PacBell, Telco Systems/World Access, Winstar and TTC.

TalkingNets executives also previously founded Synaptyx and Allegis Communications.

What is the exit strategy for the investor from your company? Are there potential strategic alliances with larger companies? Do you wish to take the company public? Or do you wish to grow the company and either sell it or acquire other companies?

(Chose not to respond; “Available upon request” from potential investors.)

What do you want to see in a term sheet? What would you consider “fair”?

Available upon request. We certainly do so with partners/investors but must first establish relationship.

What do you really think of venture capitalists?

No response.

TalkingNets: THE FACT SHEET

TYPE OF COMPANY: Telecom

ADDRESS: Corporate HQ’s: 1111 Military Cutoff Rd, Suite 221, Wilmington, NC, 28405

PHONE NUMBER: (910) 332-1800; (877) 661 8255 (toll free)

WEB SITE: www.talkingnets.com

MANAGEMENT TEAM MEMBERS: John Philips, Tony Surak, Cody Sutherland, Mark Cortner, Ed Lynn, Chris Dury, Mitch Black, Karin Davies, Glenn Pearston

BOARD MEMBERS:

John Philips, President and CEO, TalkingNets
Tony Surak, EVP of Sales and Marketing, TalkingNets
Michael Brooks, General Partner, Venrock Associates
Izhar Armony, General Partner, Charles River Ventures
Scott Stouffer, Founder and Chairman, Visual Networks

INVESTORS: Charles River Ventures, Venrock Associates, The Hatch Group, Triad Investors Corporation

COMPANY MISSION STATEMENT: TalkingNets is the premier provider of communication services, delivering packet-based telephone services, voice applications and dedicated T-1 Internet access to small and mid-sized businesses. The TalkingNets architecture is a true IP, integrated voice and Internet network built using proven and reliable technology made available from partners like Cisco Systems. TalkingNets operates one network, unlike traditional service providers who built separate voice and data networks. By eliminating the need to invest in separate networks, TalkingNets delivers these services at disruptively lower capital and operating costs than the circuit-switched and narrowband technologies of traditional service providers.

The operational efficiencies inherent in our single network approach result in an unprecedented value for our customers by reducing overhead costs, increasing functionality, simplifying management, consolidating staffing and incorporating emerging applications — all of which are so critical for today’s smaller businesses.

REVENUES: Available upon request

YEAR ESTABLISHED: November 1999

NUMBER OF EMPLOYEES: 40

Wednesday’s profile: Synthematix

Monday’s profile: Broadband.com ( www.localtechwire.com/article.cfm?u=468 )