Venture Capital Fundraising Methodology October 28, 2009

What Is Venture Capital?

What Is Venture Capital? Private equity class specialized in funding and building early stage, high growth potential enterprises

Private equity class specialized in funding and building early stage, high growth potential enterprises

Typical VC Fund Structure General Partners invest capital on behalf of Limited Partners LPs include endowments, pension funds, charities, corporations, individuals, and fund of funds GP contributes personal capital as well GP earns 2% annual management fees & 20% carried interest, i.e., share of profits Capital called as needed, with primary investing done in first 5 yrs of 10 yr fund cycle Quality fund returns 3x capital, or 18-20% IRR 1/3 of deals will likely fail, 1/3 will return amount invested, and 1/3 will drive majority of returns

General Partners invest capital on behalf of Limited Partners

LPs include endowments, pension funds, charities, corporations, individuals, and fund of funds

GP contributes personal capital as well

GP earns 2% annual management fees & 20% carried interest, i.e., share of profits

Capital called as needed, with primary investing done in first 5 yrs of 10 yr fund cycle

Quality fund returns 3x capital, or 18-20% IRR

1/3 of deals will likely fail, 1/3 will return amount invested, and 1/3 will drive majority of returns

Where Do VCs Invest? Life Sciences Clean Technology Information Technology

Fund Example: SoftBank Capital Select Current Investments Experienced Team (5 former CEOs) Focused on early stage high growth technology based businesses benefiting from the rapid deployment and adoption of broadband and mobile technologies Select Historical Investments

Industry Investment Trends Source: MoneyTree Report – NVCA/PWC/Thomson Reuters

Renewable Energy Renewables dominating “Green” VC investing and expected to grow with support of Obama administration Billions of dollars in loans and grants available for R&D for everything from new battery technologies to more efficient use of fossil fuels VC challenged by capital requirements for large green infrastructure deals Source: FastCompany/Chubby Brain

Renewables dominating “Green” VC investing and expected to grow with support of Obama administration

Billions of dollars in loans and grants available for R&D for everything from new battery technologies to more efficient use of fossil fuels

VC challenged by capital requirements for large green infrastructure deals

Fundraising Process You set the valuation. I’ll set the terms.* *Don’t be fooled by the cover price

Why Raise Venture Capital? Guidance & Support Board participants; Interim executives Product management, business development and financial planning support Access Industry contacts Leverage portfolio Credibility Stamp of approval with customers, partners and vendors Cash But at a high cost of capital, so Guidance, Access and Credibility should justify that cost

Guidance & Support

Board participants; Interim executives

Product management, business development and financial planning support

Access

Industry contacts

Leverage portfolio

Credibility

Stamp of approval with customers, partners and vendors

Cash

But at a high cost of capital, so Guidance, Access and Credibility should justify that cost

Typical Company Profile Team Ranges from a single, 1 st -time entrepreneur to a full team of seasoned entrepreneurs Stage of Development Ranges from pre-revenue to approaching profitability VCs sit between angel and growth/buyout investors, though some funds cross over into these stages Size of Round Definitions vary, normalized range from $2M-$15M Deals frequently syndicated between multiple funds to strengthen board and diversify risk

Team

Ranges from a single, 1 st -time entrepreneur to a full team of seasoned entrepreneurs

Stage of Development

Ranges from pre-revenue to approaching profitability

VCs sit between angel and growth/buyout investors, though some funds cross over into these stages

Size of Round

Definitions vary, normalized range from $2M-$15M

Deals frequently syndicated between multiple funds to strengthen board and diversify risk

Typical Deal Timeline Average firm reviews 1000+ deals per year 99% of deals turned down Promising deals present to partnership 2-6 weeks post initial meeting Partnership approved deals receive term sheet Accepted term sheets followed by 2-6 weeks of final diligence and legal documentation Average firm, in normal market, closes 8-12 new investments/yr Note: Graphic via NVCA; Industry statistics are approximations

Average firm reviews 1000+ deals per year

99% of deals turned down

Promising deals present to partnership 2-6 weeks post initial meeting

Partnership approved deals receive term sheet

Accepted term sheets followed by 2-6 weeks of final diligence and legal documentation

Average firm, in normal market, closes 8-12 new investments/yr

Deal Evaluation Focus varies by firm, but key elements include: Concept What is the product or service? Why will customers buy it? Opportunity What is the market size and penetration strategy? What is the competitive landscape? Team Can they execute on development, sales and support?

Focus varies by firm, but key elements include:

Concept

What is the product or service?

Why will customers buy it?

Opportunity

What is the market size and penetration strategy?

What is the competitive landscape?

Team

Can they execute on development, sales and support?

Financial Projections Focus on key revenue and expense drivers Sensitivities important given model immaturity Viability of margins long term How much additional capital required? What is the potential dilution from later rounds? Focus on model details varies based on stage Seed stage may not yield revenue for 18-24 mos. Later stage deals may consider debt financing, requiring covenant maintenance

Focus on key revenue and expense drivers

Sensitivities important given model immaturity

Viability of margins long term

How much additional capital required?

What is the potential dilution from later rounds?

Focus on model details varies based on stage

Seed stage may not yield revenue for 18-24 mos.

Later stage deals may consider debt financing, requiring covenant maintenance

Term Sheet Price Pre vs. Post $ Valuation Option Pool implications Liquidation Preference Liquidation: Sale of company as opposed to IPO Multiples and Dividends Participation: Full, Capped and Non-Participating Stacked vs. pari passu Impact on management ownership and resulting motivation Board Configuration Option Pool: Pre vs. Post $ Dilution Anti-Dilution Rights: Weighted Avg. thru Full Ratchet Pro Rata Rights for future rounds Protective Provisions Term Sheet summary at www.AsktheVC.com

Price

Pre vs. Post $ Valuation

Option Pool implications

Liquidation Preference

Liquidation: Sale of company as opposed to IPO

Multiples and Dividends

Participation: Full, Capped and Non-Participating

Stacked vs. pari passu

Impact on management ownership and resulting motivation

Board Configuration

Option Pool: Pre vs. Post $ Dilution

Anti-Dilution Rights: Weighted Avg. thru Full Ratchet

Pro Rata Rights for future rounds

Protective Provisions

Term Sheet summary at www.AsktheVC.com

Term Sheet (cont’d) Board of Directors Investor Seats and Observers Founder and Independent Seats Protective Provisions Veto rights for overall preferreds or by class On changing rights of preferred class, selling existing or raising additional shares, change of control, board composition, raising debt Anti-Dilution Full Ratchet, Broad or Narrow-Based Wghtd Avg See term sheet series at www.AsktheVC.com

Board of Directors

Investor Seats and Observers

Founder and Independent Seats

Protective Provisions

Veto rights for overall preferreds or by class

On changing rights of preferred class, selling existing or raising additional shares, change of control, board composition, raising debt

Anti-Dilution

Full Ratchet, Broad or Narrow-Based Wghtd Avg

See term sheet series at www.AsktheVC.com

Legal Documentation Stock Purchase Agreement Price and # of shares sold, reps & warranties Certificate of Incorporation (a/k/a Charter) Establishes rights, preferences, privileges and restrictions of each class and series of stock Investor Rights Agreement Information, registration, and pre-emptive rights Voting Agreement Board composition, drag-along rights See www.NVCA.org for these and other template docs

Stock Purchase Agreement

Price and # of shares sold, reps & warranties

Certificate of Incorporation (a/k/a Charter)

Establishes rights, preferences, privileges and restrictions of each class and series of stock

Investor Rights Agreement

Information, registration, and pre-emptive rights

Voting Agreement

Board composition, drag-along rights

See www.NVCA.org for these and other template docs

Subsequent Financing Bridge funding Discount into next round or warrants External rounds Up rounds vs. Recaps Internal rounds Potential pay to play when syndicate broken Venture Debt

Bridge funding

Discount into next round or warrants

External rounds

Up rounds vs. Recaps

Internal rounds

Potential pay to play when syndicate broken

Venture Debt

Exit Strategy Acquisition Strategic buyers Financial buyers for high cash flow business IPO Market appetite for venture-backed deals Sarbanes Oxley

Acquisition

Strategic buyers

Financial buyers for high cash flow business

IPO

Market appetite for venture-backed deals

Sarbanes Oxley

www.SoftBank.com @joevc - www.twitter.com/joevc www.JoeMedved.com

www.SoftBank.com

@joevc - www.twitter.com/joevc

www.JoeMedved.com