The document discusses alternative strategies for attracting foreign investment to outsourcing companies in China. It covers types of financing, profiles of target companies, stages of company development, and strategic choices for capital markets. Venture capital, private equity, and leverage are examined as options for deals involving seed, early, expansion, and late stage financing.

1. Agenda
to
Alternative Strategies to Attract Foreign
Investment
for OutSourcing Companies in China
• Types of Financing
• Profiles of Targets
• Status of Company
• Private Placement Memorandum
• Deal Costs
• Strategic Choices

2. Capital Market Line
Seed Stage VC
Late Stage VC
Early Stage VC
Return
Grwth Pub Equity
Private Equity
Est. Pub Equity
T-Bonds
T-Bills
Risk

3. Types of Financing

4. Profiles of Targets

5. Stages of New Venture Development
Financing Stages of
Development
• Seed
• Early Stage (“Series A”)
• Expansion (“Series B”)
• Late Stage (“Series B”)
• Exit

6. Stages of Corporate Development
Dollars
Revenue
Net Income
0 Cash Flow
0 Time
Seed Early Stage Expansion Late Stage Exit!!

7. Stages of Financing
• Bootstrapping
– Proof of concept- <US$50k
• Seed Financing
– (R&D Financing) - US$150k
• Early Stage Financing
– First Customers - US$1 to 5 million
• Expansion
– Sales and marketing - US$5 to 10 million
• Late Stage
– Continued growth to exit - US$10 to US$25 million
• Exit
– IPO, LBO, M&A

8. Sources of Financing
• Entrepreneur/State Funding
• Friends and Family
• Angel Investor - Individuals
• Strategic Partner – Corporate Investor
• Venture Capital - Firms
• Asset-based Lending; equipment lessor; venture
debt
• Trade credit; Factor
• Mezzanine Lender; Public Debt
• IPOs
• Acquisition; LBO; MBO

9. Sources of New Venture Financing
SourcesSeed New Venture Stage Exit
of Early Expnsn Financing
Stage
Late
Entrepreneur/State Fund
Friends and Family
Angel Investors
Strategic Partner
Venture Capital
Asset-based Lender
Equipment Lessor
Venture Debt
Trade Credit
Factor
Mezzanine Lender
Public Debt
IPO
Acquisition, LBO, MBO
Black shading indicates primary focus of investor type.
Gray shading indicates secondary focus, or focus of a subset of investors.

10. Deal Costs

11. Costs of Capital
• Venture funds focused on seed and early-stage
companies deliver superior long-term returns.
1-year 5-year 10-year 20-year
Early/Seed 38.9% -1.5% 44.7% 19.9%
Balanced* 14.7% 0.4% 18.2% 13.3%
Late Stage 10.4% -4.7% 15.4% 13.7%
All Venture 19.3% -1.3% 26.0% 15.7%
NASDAQ 8.6% -11.8% 11.2% 12.4%
S&P 500 9.0% -3.8% 10.2% 11.7%
Source: Thompson Venture Economics/National Venture Capital Association for periods ending December 31, 2004

12. What is Venture Capital and Why does it
exist?
• An asset class within Private Equity
• It exists to finance businesses which are not
finance-able via traditional means while
providing superior returns to investors
• What kinds of businesses cannot financed?
• What is a superior return?

13. Venture Capital Overview
• Asset Class
– Real Estate, Stocks, Bonds and Private Equity
– $100B Under Management
– $65M Invested every working day
• Who Invests and Why?
– Limited Partners – Pension Funds, others
– Higher Returns – 41% +
• What is the deal
– Management fee and carry
• Mgt Fee of 2% and 20% of profits
• Creating a VC
– Four years and $20M

14. Venture Capital Cycle
• Limited Partner invests in a Venture Capital
Fund
• The fund manager (aka, the “VC”) invests
equity in a portfolio company
• The VC monitors the company
• The Venture Capital Fund realizes cash
proceeds upon an exit event and returns
capital to the Limited Partner

15. What a VC does
• Identifies an opportunity, recruits investors, raises a
fund, hires partners
• Finds the deal, negotiates the terms and closes the
transaction
• Sits on the Board of Directors, works with the CEO,
CFO and others
• Advises on contracts, agreements and company
direction
• Pursues, negotiates and closes the sale of the
company

16. Review: The Axis of VC
• Stage
– Seed, Early, Expansion, Late
• Region
– Local, Regional, National, International
• Technology Focus
– Retail, IT, Energy, Life Sciences, Nanotechnology

17. Venture Capital and Private Equity
Dynamics

18. Types of Funds
Venture Funds are a part of a larger trend
Asset Class # of Funds # of Funds %
in 1995 in 2004 Increase
U.S. Venture Capital 361 946 162%
U.S. Private Equity 150 454 203%
Non-U.S. Private Equity 57 424 644%
Real Estate/Timberland 53 160 202%
Oil and Gas 36 57 58%
Distressed/Recovery 23 58 152%
Fund of Funds 39 178 356%
TOTAL 722 2,277 215%
Source: Cambridge Associates

19. History of Venture Capital
• American Research and Development, 1946
• Draper, Gaither and Anderson, 1958
• Closed end funds or SBICs
• Amendment to “prudent man”, 1979
• Enter the investment advisors, 1980s
• The bubble
• Today

20. Venture Capital Returns
Upper Quartile
Vintage Years 1989 – 2003, as of 31 March, 2004
Median
Lower Quartile
600
Internal Rate of Return (%)
500
400
300
200
100
1 1 1 1
0
-100
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: Cambridge Associates LLC Non Marketable Alternative Assets Database
Note: These internal rates of return have been compiled from 755 US Venture Capital funds with inceptions from 1989 through 2003 and are net of management fees, expenses and carried interest
1
Most of these funds are too young to have produced meaningful returns. Analysis and comparison of partnership returns to these benchmark statistics may be irrelevant.

21. Private Equity Returns
Vintage Years 1989 – 2003, as of 31 March, 2004 Upper Quartile
Median
Lower Quartile
300
250
Internal Rate of Return (%)
200
150
100
50
0 1 1 1 1
-50
-100
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: Cambridge Associates LLC Non Marketable Alternative Assets Database
Note: These internal rates of return have been compiled from 407 US Private Equity funds with inceptions from 1989 through 2003 and are net of management fees, expenses and carried interest
1
Most of these funds are too young to have produced meaningful returns. Analysis and comparison of partnership returns to these benchmark statistics may be irrelevant.

22. Comparison of All Returns VC and Private Equity
End-to-End, Net to L.Ps. as of 31 March 2004
60.0
50.0 46.4
38.6
40.0
30.0
Percentage (%)
20.0
11.1
10.0 5.0 7.4
3.9 2.6 -0.2
0.0
-10.0
-20.0
-19.6
-30.0
Three Years Five Years Ten Years
U.S. VC (Mean) U.S. PE (Mean) MSCI World Index
Source: Cambridge Associates LLC Non-marketable Alternative Assets Database.
Note: Returns are end-to-end pooled means net of management fees, expenses and carried interest. The pooled means represent the end-to-end rates of return calculated on the aggregate of all cash flows and the beginning
and ending market values as reported by the General Partners to Cambridge Associates LLC in the quarterly and annual audited financial reports.

23. Comparison of Top Two Quartiles VC and Private Equity
End-to-End, Net to L.Ps., as of 31
March 2004
60.0 54.8
150.7
50.0 46.4
38.6
40.0
30.0
Percentage (%)
21.8
20.0 15.1
12.6 11.1
10.0 5.0 7.4
3.9 2.6
-0.2
0.0
-10.0
-20.0 -13.4
-19.6
-30.0
Three Years Five Years Ten Years
U.S. VC (Mean) U.S. VC U.S. PE (Mean) U.S. PE MSCI World Index
(Top Two Quartiles ) (Top Two Quartiles )
Source: Cambridge Associates LLC Non-marketable Alternative Assets Database.
Note: Returns are end-to-end pooled means net of management fees, expenses and carried interest. The pooled means represent the end-to-end rates of return calculated on the aggregate of all cash flows and the beginning
and ending market values as reported by the General Partners to Cambridge Associates LLC in the quarterly and annual audited financial reports.

24. The “Bubble”
National Venture Investment
$120,000
Millions
2000
$100,000
Dollar Value
$80,000
$60,000 1999
2001
$40,000
1998 2002 2003 2004
2005*
$20,000
1995 1996 1997
$0
Year

25. US Venture Capital Fundraising
$83.1
$80
$60 $57.8
Funds Raised ($B)
$50.3
$40
$26.6
$20 $17.1 $18.4
$15.9
$12.7 $13.1
$9.2
$5.3 $7.1
$0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 YTD05
YTD05: 1Q05 – 3Q05

26. Median New VC Funds Are Largest Ever
$200
$200
$163
$150
Median Fund Size ($M)
$120
$110
$100 $100 $100
$100
$88
$80 $76
$67
$57
$50
$0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 YTD05
YTD05: 1Q05 – 3Q05

27. Median Premoney Valuation by Year
$25.3
$25
Median Premoney Valuation ($M)
$21.1
$20
$16.0 $16.7
$15.5
$15
$12.9 $13.0
$11.1 $10.8
$10.0 $10.0
$10 $9.3
$5
$0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 YTD05
YTD05: 1Q05-3Q05

28. Median Premoney Valuations by Round Class (All
Industries)
$40
$36
Median Premoney Valuation ($M)
$30
$20
$20
$17
$14
$10
$6
$5
$2 $2
$0
3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05
Later Stage Second Round First Round Seed Round

29. Private Equity Funding Overview
• Typical Private Equity Fund Management Team
– Total capital under management in excess of $1.0 billion
• Significant dry powder remaining in $585 million Fund II
– 15 professionals with a wealth of transaction and operating experience
• Target platform investments in companies with enterprise values
between $50 million and $500 million
– Primarily focused on U.S. opportunities
– Currently pursuing opportunities across multiple industries, including energy
– Create value through buy-and-build strategy
– Targeted hold period: 3 – 7 years
• Focused on identifying growth companies with embedded franchise
value
– Sustainable and differentiating characteristics that result in strategic value

30. Private Equity Transaction Structures
• PE firms work with management teams to execute change-of-control
investments
– Leveraged recapitalization is utilized when PE Firm with existing management
teams and/or owners
• Selling shareholders receive a “second bite at the apple” through rollover equity and stock options
– Leveraged buyout is utilized when PE Firm partners with operating executives to
acquire a business
• Frequently utilized when selling shareholders are retiring from the business
• Transaction funding sources typically include some combination of:
– Equity from Firm’s fund
– Rollover equity
– Bank debt
– Subordinated or mezzanine debt
– Seller financing
• Employment agreements and stock incentive plans are typically mutually
agreed upon prior to closing

31. Role of Leverage
 Debt financing is critical for private equity transactions
 Leverage enhances equity returns
 Vast majority of mature companies do not have the growth profile required to
generate an unlevered equity return that clears the hurdle rate demanded by
private equity LP’s
 Similar to the real estate market, abundant debt financing was
partially responsible for the unprecedented private equity deal
volume over the last several years
 Lower levels of debt today Lower private equity deal volume
 Leverage reduces tolerance for earnings volatility
 Private equity firms value growth, but value predictability more
 Post-LBO, a company must be able to service its debt and meet its
covenants every quarter
 Current debt markets are effectively closed for LBO
transactions

32. Generalist Approach to Private Equity Investing
Necessary Qualities
√ X
Proven business models that Established companies with Early-stage companies without
generate EBITDA strong historical results cash flow
Sustainable and predictable cash Companies with strong Construction companies
flows contracted recurring revenue focused on short-term
at sustainable margins, projects, companies benefiting
companies with a proven substantially from a temporary
ability to generate revenues in dislocation (e.g. hurricane) in
economic downturns the market
Ability to survive changes in Companies with products Companies whose revenues
commodity prices and/or services that are in and/or profitability are highly
high demand regardless of sensitive to changes in oil or
commodity pricing levels gas prices
Ability to survive changes in Companies whose unit Companies whose revenues
legislation or regulation economics (or whose and/or profitability are wholly
customers’ unit economics) dependent on controversial or
are attractive without expiring legislation or
legislative or regulatory aid regulation

33. Partnering with Private Equity Firms
• Partnering with a private equity firm can be an attractive liquidity option for
talented owner-managers who want to remain with the business
– Diversification for estate planning purposes, while retaining “second bite at the
apple”
– Continuity of operations, leadership, and corporate culture
– Continued influence over future strategic direction and identity
– Private equity firm brings resources to support growth
• Capital for growth
• M&A expertise
• Recruiting board members and executives
• Corporate relationships
– Cleaner sale process: competitors and potential competitors do not get access to
proprietary information during due diligence
• Every private equity firm is different
– Before partnering with a private equity firm, do your own due diligence to
determine whether that firm would be a good fit for you as a future partner

34. Status of Company

35. Private Placement Memorandum

36. Elements of a Private Placement Deal
Deal Structure
• “The Deal”
• Term Sheet
• Pre-money Valuation
• Post-money Valuation
• Investment Agreement
– Representations and Warranties
– Covenants and Undertakings
– Affirmative Covenants
– Negative Covenants
– Registration Rights
– Preemptive Rights
– Ratchets or Anti-dilution Provisions

37. Strategic Choices