12 Hot Startups Hatched during the bust, these promising companies will be the first to ride the rebound. Remember: You read about them here first.
By Brian Caulfield, Michael V. Copeland, Bridget Finn, David Howard, Kevin Kelleher, Matthew Maier, Om Malik, Jordan Robertson, and Owen Thomas

(Business 2.0) – Innovation may be the lifeblood of business, but money is what gets that lifeblood pumping. And money has been tight in recent years. Venture capital investment has declined every year since 2000, bottoming out at $12.9 billion for the first nine months of last year, according to a survey by Thomson Venture Economics.

All of which makes the dozen startups that we identify in the following pages just that much more impressive. Undeterred by a brutally stingy environment, they've built cool devices, nurtured creative business models, and latched on to massive trends still in their infancy. They've impressed the nation's smartest venture capitalists, inside and outside Silicon Valley, who either put money into them or told us they wished they had.

We weren't looking for companies that won the most financing. Rather, we asked VCs for startups they believe will be on everyone's lips years from now, whether those companies are, as they say on Sand Hill Road, "prerevenue," "preprofit," or already in the black.

As you'll see, many of today's most exciting startups are rooted in the well-funded fields of medicine and biotechnology, among them obesity fighter Satiety and drug developer Five Prime Therapeutics. But innovation, by its nature, resists confinement, and other young companies on our list are in industries you'd never expect, like industrial cleaning (NitroCision) and personal fitness (Carmichael Training Systems). Whatever their field, these are companies to watch. Turn this page and see where today's hottest new ideas are leading.

Power Paper PETAH TIKVA, ISRAEL

Electronic devices want to be smaller and thinner, but they've been held back by the comparative bulk of batteries. Not anymore. A group of engineers from Israel's Technion Institute, led by current CTO Zvi Nitzan, who once designed electronic gear for the Israeli military, has created power sources as thin as paper and flexible as ribbon. The team uses printers to put down zinc and manganese dioxide in inklike layers on a wide variety of backings, including paper and plastic, essentially creating batteries less than a millimeter thick. Each power source throws off 1.5 volts and has a shelf life of three years, the same as common dry cell batteries.

Power Paper did $5 million in business last year powering Hallmark musical greeting cards and Hasbro's Thin-Tronix stickers (which, when touched, play 12 seconds of music). But such novelties are just proof of concept, believe investors like Banc of America Capital Partners and Amadeus Capital Partners, who've put in $29 million. Power Paper's thin batteries will one day drive wearable computers, antiaging skin-care patches, and many as-yet-unimagined products. Their most compelling current use: powering "smart active labels," integrated circuits that can process and transmit even more data than passive RFID tags.

Apptera SAN BRUNO, CA

BIG IDEA: Eliminate phone-tree hell for thousands of midsize and small businesses. If you've bought Amtrak tickets over the phone, then you know "Julie," the virtual customer-service rep who didn't put you on hold, understood everything you said, and helped you book your tickets faster than you could have done it online. Unfortunately, Julie is a rarity in phone-based customer service, because the speech-recognition and transaction software that makes her so responsive costs more than most small companies can afford. Now comes Apptera, with the first off-the-shelf application that makes it possible to install a Julie at a fraction of the cost.

FOUNDER: CTO Leo Chiu, who built a voice self-service system used by Citibank, Merrill Lynch, and Charles Schwab.

FUNDERS: Alloy Ventures and Lightspeed Venture Partners, for a total of $7 million.

REASON TO BELIEVE: As the call center business grows, firms are looking for new ways to cut costs without going overseas. With an application that can sell for less than $200,000 (compared with seven-figure sums for systems like Amtrak's), Apptera is targeting banks and financial services firms to seed the market.

Slim Devices MOUNTAIN VIEW, CA

BIG IDEA: Play the music on your PC through a stereo anywhere in your house. Other companies have products that will link a PC to a sound system (see "Gizmos," page 118), but many require you to have an up-to-date stereo--and an engineering degree--to make them work. The $300 Squeezebox jacks into a PC by Wi-Fi or wired Ethernet and streams your songs to a stereo over any digital or analog connector.

FOUNDER: Sean Adams, 24, who started an ISP called QPT Networks in high school and sold it in 1999.

FUNDERS: Charles River Ventures's Bill Tai and former Xoom.com CTO Vijay Vaidyanathan, who contributed $330,000 in an angel round.

REASON TO BELIEVE: The Squeezebox has won rave reviews. Its use of open-source software not only minimized development costs but also lets the company improve the product quickly.

NitroCision IDAHO FALLS, ID

BIG IDEA: Mop up radioactive and industrial waste without chemicals. Ever watch a pressure washer strip a deck down to bare wood in a few minutes? Now imagine a jet of supercooled liquid nitrogen shooting out of that hose at up to 60,000 psi. It could blast the paint off sheet metal (above) or scour burnt fuel from a shuttle booster rocket--and afterward the nitrogen would simply evaporate. Such is the explosive efficiency of NitroCision's NitroJet, a breakthrough technology with applications ranging from industrial cleanup to precision cutting. The key advantage: NitroJets create none of the secondary sludge or costs associated with conventional corrosive agents.

FOUNDER: Ron Warnecke, formerly a manager of regulatory compliance at Westinghouse Electric.

FUNDERS: Warnecke and another private backer, for a total of $3.5 million.

REASON TO BELIEVE: NASA already uses NitroJets to clean shuttle boosters, and several high-profile nuclear power plants have placed orders. Warnecke says he'll triple his clientele this year, push sales up to $10 million, and announce his first profit by spring.

Satiety REDWOOD CITY, CA

BIG IDEA: Replace risky stomach-stapling surgery with a safe outpatient procedure. Shrinking the stomach is the only permanently effective weight-loss method, yet the surgery comes at an excruciating cost--three out of a thousand patients die as a result of the operation. Satiety gives doctors an alternative: Instead of slicing open the abdomen, they send a long, flexible device down the throat. It grabs opposite sides of the stomach lining, holds them together, and inserts a line of staples to partition and shrink the active portion of the stomach down to the size of a golf ball. The procedure takes 30 minutes.

FOUNDERS: The company emerged from medical-device incubators Fogarty Research and the Foundry in 2001.

FUNDERS: ABS Ventures, Morgenthaler Ventures, Three Arch Partners, and Venrock Associates; $17 million in two rounds.

REASON TO BELIEVE: Satiety's outpatient procedure will cost about 75 percent less than the current $28,000 tab for stomach stapling. The lower price and reduced risks could open up the procedure to a bigger market than just the morbidly obese. The company hopes to start clinical trials this year.

Carmichael Training Systems COLORADO SPRINGS, CO

After coaching Lance Armstrong to his first Tour de France victory in 1999--mostly via phone, fax, and e-mail--former U.S. cycling team member Chris Carmichael believed that he could train lesser mortals that way too. Today, through his Carmichael Training Systems website (www.trainright.com), Carmichael trains about 3,000 clients gearing up for century rides, triathlons, or just their first 10Ks. Unlike the dozens of failed personal-fitness sites of the bubble era, CTS sells a product that's truly personal: For between $29 and $500 per month, an amateur athlete receives a custom workout regimen from one of CTS's roughly 70 elite coaches, as well as continued long-distance support from his or her new mentor.

How much of a difference does one-on-one hand-holding make? Just look at CTS's growth: Its sales have jumped 100 percent in each of the last two years, pushing revenue beyond $6 million in '03. Armstrong helped bankroll CTS's launch, and armed with another $5.1 million from Austin-based Gefinor Ventures and other investors, Carmichael is eyeing franchise opportunities. This year he plans to launch the second of six planned CTS Performance Centers (where clients get performance tests usually available only to elite athletes) and perhaps a new line of frozen food and nutrition supplements. Chances are, none of CTS's customers will ever ride like Lance. But clearly there's plenty of interest in training like him.

Postini REDWOOD CITY, CA

Seventy-five percent of all e-mail aimed for corporate computers today is spam--up from 50 percent just a year ago. Anti-spam software sales, which topped $650 million in 2003, are expected to nearly double by 2005. No wonder more than 10 venture-backed software startups have joined the resistance.

But Postini holds an edge over rivals in both its effectiveness and its business model. Instead of selling yet another application for the IT department to install, Postini operates an outsourced service: It routes inbound e-mail traffic to its own army of servers, which, in a few milliseconds, scan for spam DNA. Just as important, Network World rates Postini as 94 percent successful in blocking spam--a wide margin over the estimated industry average of 80 percent.

Founder Scott Petry and CEO Shinya Akamine were among the earliest to jump into the market, leaving positions at Cygnus Solutions, an open-source software firm, to launch the company in 1999. Since then, Bessemer Venture Partners and August Capital have served up over $36 million in funding, and the company continues to attract blue-chip clients: Circuit City and Merrill Lynch are among the more than 2,000 customers for whom Postini handles over 1 billion e-mail messages per week.

Movaz Networks NORCROSS, GA

BIG IDEA: Build networking equipment that will let phone and cable companies go completely optical, and sell it for less than established vendors. Carriers are in a race to build optical networks within metro or rural areas. Optical networks allow them to unify their disparate voice, video, and data networks and charge more for new and enhanced services. While Movaz has plenty of competitors, the startup's equipment has a crucial advantage: It is designed to work on any type of network.

FOUNDERS: CEO Bijan Khosravi, who co-founded phone network equipment maker Siara Networks, and chief development officer Farr Farhan, who was vice president for engineering at Scientific-Atlanta.

FUNDERS: Anschutz Investment, Menlo Ventures, Meritech Capital, and Oak Investment Partners, among others; $130 million in three rounds.

REASON TO BELIEVE: Rapid growth is already occurring. Sales more than tripled last year to over $40 million, as Movaz snatched deals away from its more established rivals. It now sells to 40 customers, including America Online, Nippon Telegraph & Telephone, and Taiwan's Chunghwa Telecom.

Decru REDWOOD CITY, CA

BIG IDEA: Keep network data storage accessible to all authorized individuals but hidden from prying eyes. The sharing of data among employees, customers, and business partners has been one of the biggest productivity boosters of recent times. It's also a security nightmare. Decru's appliance scrambles all the data in a corporate storage system and then unscrambles it for authorized users--and does both so fast that users never notice a lag.

FOUNDERS: CEO Dan Avida, whose previous startup, Electronics for Imaging, created a print server appliance that turned ordinary copy machines into commercial-quality printers, and CTO Serge Plotkin, an associate professor of computer science at Stanford University and a renowned networking expert.

FUNDERS: Benchmark Capital, Greylock, New Enterprise Associates, Canon, and In-Q-Tel, the venture group funded by the CIA; $45 million in two rounds.

REASON TO BELIEVE: Though it has just 20 customers so far, Avida's reputation for making networked products that work is spurring interest. And Decru's custom-made processor, which encrypts and decrypts at lightning speed, gives it a barrier to entry in the market that could scare off potential competition.

Cooligy MOUNTAIN VIEW, CA

BIG IDEA: Cool off hot microprocessors efficiently. Cooligy's technology pumps water through microchannels cut into a piece of silicon that sits atop a computer chip, dissipating the heat from the chip. Though liquid cooling is not exactly a new concept in computers, Cooligy's innovation lies in delivering the water to specific areas of a chip that heat up more than the rest.

FOUNDERS: Ken Goodson, Tom Kenny, and Juan Santiago, all Stanford professors of mechanical engineering, who've turned the company over to professional managers and returned to teaching.

FUNDERS: Mayfield, Mohr Davidow Ventures, and Granite Ventures; $15.8 million in two rounds.

REASON TO BELIEVE: Cooligy hasn't sold anything yet, but its target markets are potentially huge: Compact "blade" servers are meant to be packed closely together in racks, and manufacturers like Hewlett-Packard and Sun Microsystems need efficient ways to keep those clusters from overheating. So do PC makers that are cramming tiny CPUs into the backs or bases of new flat-screen monitors. Says Rick Lytel, vice president for Sun's advanced system development center, "This is cool--literally."

Five Prime Therapeutics SOUTH SAN FRANCISCO, CA

BIG IDEA: Accelerate the development of hit drugs. Of the 30,000 proteins produced by the human body, only a few thousand have the potential to be marketable drugs--but first they must be isolated and their precise functions uncovered. Until now, scientists have screened proteins one at a time--a process that takes millions of dollars and years of research. Five Prime Therapeutics's proprietary process can test hundreds of proteins at once, allowing the company to generate new drug leads "on a scale and in a time frame that's unprecedented," claims CEO Gail Maderis.

FOUNDER: Lewis T. "Rusty" Williams, former R&D chief at Chiron and founder of Cor Therapeutics, which was acquired by Millennium Pharmaceuticals for $1.8 billion in 2002.

FUNDERS: Kleiner Perkins, Versant Ventures, and other VCs put in $30 million.

REASON TO BELIEVE: The startup put its drug-screening system to work on a large scale for the first time in November, targeting proteins related to cancer, Type 2 diabetes, and autoimmune diseases such as rheumatoid arthritis. With Williams's track record, the drug industry will be paying close attention. And Five Prime won't lack for rich business partners when the time comes to license its drug leads.

Grand Central Communications SAN FRANCISCO, CA

Halsey Minor founded CNET and Internet software standard Vignette back in the mid-1990s. He cashed out at the peak and is now set for life. But the 39-year-old entrepreneur just wasn't ready to retire. With $40 million in VC money, including some from eBay founder Pierre Omidyar and other investors in the now-defunct incubator 12 Entrepreneuring, Minor has returned with a cost-effective, low-hassle fix to the digital Tower of Babel problem: a way to get your computers talking to those of your suppliers, clients, and other partners.

In the past, the only solution to such interoperability issues was to hire high-priced consultants from the likes of IBM or EDS to link you and your partners one-by-one--assuming you first could agree on things like security protocols. Grand Central, by contrast, harnesses the ubiquity of the Web to solve the problem: You and your partners connect to its computers, where the data is translated and sent securely on to the intended recipient in a format it can use. But how do you get your partners to play? Easy: They don't pay a penny to link to your computers through Grand Central. The meter starts running only when they invite their partners to join.