1. Entrepreneurs in the Valley of Death:
The perils and promise of early stage capital
Piedmont Economics Club
March 5, 2013

2. 2

3. A framework for our conversation
Survey the Explore the Scan the
landscape local vicinity horizon
3

4. We are all wealthy!
4

5. How did we get so lucky?
Scarce Productive Property Creative
Resources Technology Rights Destruction
ENTREPRENEURS!
5

6. US entrepreneurship rates are fairly steady
Kauffman Index of Entrepreneurial Activity
0.50%
0.40%
0.30%
0.20% % of adult population
starting a business each month
0.10%
0.00%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Kauffman Foundation Index of Entrepreneurial Activity, 2012 6

7. That’s about half a million startups per year
Startup Firm Formation
Number of Startup Firms
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Source: US Census Bureau – Business Dynamics Statistics Database 7

8. Those startups create all net new jobs!
6.0 Net Job Creation
4.0
Jobs Created (millions)
2.0
0.0
2003
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2005
2007
2009
-2.0
-4.0
-6.0
Startups
-8.0 Older Firms
-10.0
Source: US Census Bureau – Business Dynamics Statistics Database 8

9. So, how does South Carolina compare?
Kauffman Index – SC vs US
0.70%
0.60%
0.50%
0.40%
0.30%
US
SC
0.20%
0.10%
0.00%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Kauffman Foundation Index of Entrepreneurial Activity, 2012 9

10. SC has lagged, but shows signs of gaining
Kauffman Index – SC and Neighbors
0.70%
0.60%
0.50%
GA
0.40%
US
0.30%
NC
0.20% SC
0.10%
0.00%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Kauffman Foundation Index of Entrepreneurial Activity, 2012 10

11. In SC, ~6500 startups formed each year
SC Startup Firm Formation
Number of Startup Firms
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2009
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Source: US Census Bureau – Business Dynamics Statistics Database 11

12. And yes, startups create all the jobs in SC too!
100,000 Net Job Creation
50,000
Jobs Created
0
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
-50,000
-100,000 Startups
Older Firms
-150,000
Source: US Census Bureau – Business Dynamics Statistics Database 12

13. But those entrepreneurs must cross chasms….
Source: Crossing the Chasm, Geoffrey Moore (1991)
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14. …and survive the “valley of death”
0.2 The Cash Curve
$
0.15
0.1
Sources of0.05 time
Capital 0
-0.05
-0.1
-0.15
-0.2
Stage & Seed Startup Growth Later Stage
Capital Needs $1K-$100K $100K-$3M $3M-$50M $50M+
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15. Most cited source of funds is venture capital
120 US Venture Capital Investments 9,000
Deals
$Billions
8,000
100
7,000
80 6,000
5,000
60 deals
4,000
40 3,000
2,000
20
dollars 1,000
0 0
2009
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
2011
2012
Source: National Venture Capital Association and PWC MoneyTree

16. But most funds are now too large for startups
US Venture Capital Under Management
350
$Billions
300
250
200 $110M
$95M
150
100
Average capital under
50 $37M
Fund Size management
0
1991
1985
1987
1989
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Source: NVCA 2011 Yearbook 16

17. Meanwhile, in SC, venture capital is a whisper
450 US Venture Capital Investments 18
Deals
Millions
400 16
350 14
300 deals 12
250 10
200 8
150 6
100 4
50 dollars 2
0 0
1996
1997
1998
1999
1995
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: National Venture Capital Association and PWC MoneyTree

18. SC ranks 39th in per capita VC over last decade
Per capita VC Investments ($)
$140
$120
$100
US
$80
$60
$40 NC
GA
$20
dollars SC
$0 AL
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: National Venture Capital Association and PWC MoneyTree

19. Into the capital gap step the intrepid angels
Venture vs Angel Investments ($)
$45.0
Billions
$40.0
$35.0
$30.0 VCs
$25.0
$20.0
$15.0
$10.0 Angels
$5.0
$0.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: National Venture Capital Association, PWC MoneyTree, Center for Venture Research 19

20. Why would anyone do this?
60% 3 yrs
50% Rate of Return = 27%
Percent of Exits
40% 3.3 yrs
30%
20%
4.6 yrs 4.9 yrs 6 yrs
10%
0%
<1X 1X to 5X to 10X to > 30X
5X 10X 30X
Exit Multiples
Source: Returns to Angel Investors in Groups. Wiltbank & Boeker, Angel Capital Education Foundation
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21. Angels invest in ~20x more deals than VCs!
Venture vs Angel Investments
70,000
Deals
60,000
50,000 Angels
40,000
30,000
20,000
10,000 VCs
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: National Venture Capital Association, PWC MoneyTree, Center for Venture Research 21

22. Angels have banded together in 200+ groups

23. A framework for our conversation
Survey the Explore the Scan the
landscape local vicinity horizon
23

24. UCAN is working to fill the capital gap in SC
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25. UCAN targets scalable Southeast startups
Geography Southeastern US (within ~4hrs of Greenville)
Stage Seed Startup Growth Later
Management Trust, passion, effectual thinking
Markets Defensible, scalable, capital efficient
Structure Preferred equity, 50%+ target IRR
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26. Sifting process takes time, uses fine filter
Investment Process Best-case timing Success Rates
1 Application 1 day 100%
2 Screening meeting 2-4 weeks 12%
3 Member meeting 2-4 weeks 8%
4 Due diligence 4-8 weeks 6%
5 Investment 3-4 weeks 2%
4-6 months
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27. UCAN invests ~$1.3M in 5 startups/year
Cumulative UCAN Investments
$6.8
$7.0 $6.4 40
Investments ($M)
Deals
$6.0 35
$4.9 30
$5.0
26 25
$4.0 $3.6 24
20
$3.0 17
$1.9 15
$2.0 13
$1.2 10
$1.0 7
4 5
$- 0
2008 2009 2010 2011 2012 2013
Investments ($) Companies

28. UCAN’s portfolio is concentrated in SC
South Carolina Deals
38% of deal flow
69% of investments
81% of dollars

29. A few portfolio highlights
acquired by
acquired for 3.3x return in 4 months!
launched
is now launching great startups
survived, raised $50M+, thriving

30. A framework for our conversation
Survey the Explore the Scan the
landscape local vicinity horizon
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31. Barriers rising and barriers falling
• Visa restrictions • Startup accelerators
Talent
• Disruptive education
• Less basic R&D • Lower capital costs
Technology
funding • Lean startup methods
• VC concentration • Super angels/small funds
Capital
• Dodd/Frank • Crowdfunding?
• Overreach!! • JOBS Act? Startup 3.0?
Regulatory
• First to File? • Angel incentives?

32. Many states wooing angels with tax credits
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33. In SC, S262 targets over 100K latent angels
Millionaire Households in South Carolina
300
Thousands
250
200
150
100
50
0
2010 2015 2020
Source: Next Decade in Global Wealth, Deloitte Center for Financial Services, May 2011
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34. Help us help local entrepreneurs!
█ We always welcome new UCAN members
█ and affiliates and sponsors!
█ Support local entrepreneurship ecosystem
█ NEXT, Iron Yard, SC Launch, etc.
█ Help us help policy-makers get smart on startups
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35. In closing, a tribute to entrepreneurs:
Heroism and the respect it commands is a form of
compensation by society for those who take risks for
others. And entrepreneurship is a risky and heroic
activity, necessary for the growth or even the mere
survival of the economy.
Most of you will fail, disrespected, impoverished, but we
are grateful for the risks you are taking and the
sacrifices you are making for the sake of the economic
growth of the planet and pulling others out of poverty.
You are at the source of our antifragility. Our nation
thanks you.
- Nassim Taleb, Antifragile
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36. Thank you for your time!
Questions?
www.upstateangels.com
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