Tom Sweeney will be speaking at the GameON: Finance Conference in Toronto on October 28-29, 2008. His discussion topics will include revisiting innovation, business models, business plans and pitches, venture economics and development plans. He will discuss how early stage companies are better focusing on value leadership and new market innovation rather than sustaining and low-end innovation. The importance of intellectual property and business models in building sustainable companies will also be covered.

1. Correlating Innovation,
Business Models,
Development Plans &
Private Financing
GameON: Finance Conference
Toronto, Canada
October 28-29, 2008
Tom Sweeney
sweeney@garagecanada.com
514-865-2323

2. Discussion Topics Questions or discussion anytime, please!
• Revisiting Innovation
• Why Value Leadership and New Market innovation are better plays
for early stage companies (in Canada) than Sustaining and Low-End
• Business Models
• The CEO’s #1 job is to actively manage reality
• Read Confronting Reality by Larry Bossidy
• Business Plans & Pitches
• Do plans with your team, not (just with) consultants
• 20-minute rule for pitches and 2 minutes for micro-pitch
• Venture Economics & Development Plans
• Not all companies are VC candidates
• Use existing cash to achieve specific milestones that directly map to
a financing timetable based on your realistic access to capital
2
© 2008. Tom Sweeney

3. Revisiting Innovation
Why IP is so important to
building sustainable
companies...

4. Customers Pay for Perceived Value
• For every product-market category, including video games,
Customers decide based on a set of established “Value
Metrics”, typically defined by the established players in that
market
• Example:
• Bubble gum: chewing quality, size of bubble, smell, brand, etc
• Pricing is a function of Perceived Value
Established
Customer Value
Metrics Set
Perceived
Value
Product - Market
Price
© 2008. Tom Sweeney 4

5. Value Innovation & IP’s Role
Companies that go from a startup to market leadership have typically
introduced one of four forms of Value Innovation.
Sustaining
Low-End
Value Leadership
New Market
© 2008. Tom Sweeney 5

6. Sustaining Innovation
Sustaining Innovation is when incremental improvements are made to one or
more components in the existing customer Value Mix. This is a tough space,
particularly for Canadian companies. The market is dominated by the
established companies.
Customer Value
Mix
Price
© 2008. Tom Sweeney 6

7. Low-End Innovation
Low End Innovation is when similar value can be sold at a dramatically lower
price that incumbents can’t or won’t easily match. This usually requires
either business model innovation or operational excellence to stay in
business. It’s also a tough space for Canadian startups. Think of IKEA and
Dell.
Customer Value
Mix
Price
© 2008. Tom Sweeney 7

8. Value Leadership Innovation
Value Leadership Innovation is when new IP with proper protection is
introduced to an established market and one or more new Value Metrics
becomes the dominant reason why customers choose that product. Why do
you use Google?
Customer Value
Mix
New IP
New IP
Price
© 2008. Tom Sweeney 8

9. New Market Innovation
New Market Innovation is when a new product or service is introduced that
makes it easier or more convenient for people to do what they previously had
to go to experts to do for them. California and its ecosystem leads the world
in repeatedly doing this. Steve Jobs is the master.
New
Customer
Value Mix
New IP
New IP
+
New Product-Market
Price
© 2008. Tom Sweeney 9

10. Business Models
What are they?

11. Business Models: Five People, Ten Definitions….
“I can’t define it, but I know what it is when I see it.”
US Supreme Court Justice, Potter Stewart
“Hire the world’s best athletes as spokespeople. Buy an
enormous amount of advertising to get every sporting goods
store to carry your products. Make the product overseas for
very little money. Charge very high prices.”
Excerpt from Seth Godin’s, Bootstrapper’s Bible
“An organized and rigorous way of looking at the health and
profitability of your business now and in the future. [A business
model] is a statement of the current reality and its likely – as
opposed to hoped for – future direction. It is an early warning system
for real-world changes that pose threats or provide glimpses of
opportunities. The business model is a blueprint for taking action.”
Larry Bossidy & Ram Charan, Confronting Reality
© 2008. Tom Sweeney 11

12. “Product-Marketing” is a Critical Concept that
Needs a Remarkable Hyphen
Bootstrapper’s Bible
• Great way to spend $5.00
• Lighter approach to business
models but lots of pointers for
bootstrapping!
Purple Cow
• If your product is not remarkable
in its (niche) market ……
Blue Ocean Strategy
• Deeper look at developing
compelling and sustainable
product-market positions
© 2008. Tom Sweeney
12

13. Confronting Reality
• Provides a very detailed look
at how to develop your
business model, evaluate it
and constantly adapt it to
reality
• This book is the sequel to
Execution: The Discipline of
Getting Things Done
• Talks about actively managing
the reality of a business
• Both books are excellent
© 2008. Tom Sweeney 13

14. Business Models Have Three Main Components
External Realities Internal Activities
Financial history of your Strategy
industry Operations
Overall business environment People
Customer base Organization
Root-cause analysis
Financial Targets
Operating margins
Cash flow
Capital intensity
Revenue growth
Return on investment
Source: Confronting Reality
Repeated Iteration and Actively Managing Reality
Produces Tested, Actionable Business Models
© 2008. Tom Sweeney
14

15. The Truth About
Business Plans &
Investor Pitches
What purpose do they
serve….?

16. The Truth About Business Plans
• The exercise to produce one is fundamentally important
• VCs can spot plans done by consultants a mile away
• Most companies spend too much time on generating a
“complete” (long) document
• Should be 12-15 pages that convey “deep and insightful” analysis
based on “bottom-up” assumptions and a solid grasp of the business
model
• VCs typically don’t read business plans to be able to say “no”
• Be ready with a clear and well thought-out summary
• The first two or three paragraphs are critical
• Don’t assume investors have read anything you have sent
• Plan on having 20 minutes to make your case with no more than 10-
12 slides and around a 30-point font
© 2008. Tom Sweeney 16

17. Ten (+2) Slides, 20 Minutes, 30 Point Font
Obey the 10/20/30 rule. Stay high-level and hit the key points. Nobody writes a
cheque based on your presentation, but they do say “no”.
1 2 3 4
Title Solution
Elevator Pitch Problem
&
&
& Speaker Company
Key Benefits
Customer
Intros Overview
5 6 7 8
Business Competition
Marketing
Underlying Model &
&
Magic
Advantages
Sales
9 10 11 12
Status Summary
Team &
Projections
Why Us?
Timeline
© 2008. Tom Sweeney 17

18. Venture Economics,
Development Plans and
Use of Cash
The core drivers of due
diligence….

19. Venture capital is a specialized form of private equity, characterized
chiefly by high-risk investments in new or young companies
PRIVATE EQUITY
Venture Capital
Mezzanine Buyout
Angels Early Stage Later Stage
Capital Capital
TSX Public Equity Markets (TSX Venture, TSX, etc.)
Ventures
Preferred Shares
“C” Round
(>$15 million)
Value Creation and Paid-In Capital
5-7 Years
Preferred Shares
“B” Round
(>$5 million)
3-4 Years
Preferred Shares
“A” Round
($3-5 million)
Convertible Debt or
Common Shares 2-3 Years
(<$500 K)
1 Year
Angel Seed Start-Up Early Stage Later Stage Mezzanine IPO
Company Lifespan and Venture Capital Stage
© 2008. Tom Sweeney
19

20. Business Models and Venture Financing
• VC must generate high internal rates of returns to their LPs
• Portfolio theory: winners cover the losers
• Early stage VCs target high multiples (10X +) and IRRs of >50%
• A company’s development plan and its internal “clock-speed” must be
obsessed to use investment cash to achieve specific milestones on a
competitive schedule
What is a “4X Multiple” ? What is “30% IRR”?
• The increase in a VCs investment • Considers how much was returned by a
when there is a liquidity event liquidity event and how long it took
(M&A, IPO, MBO, RTO). “We • Invested $1M and got $4M back in 3 years ~
invested $1M and made $4M.” 59% IRR (great)
• Invested $1M and got $4M back in 7 years ~
19% IRR (weaker)
Silicon Valley’s Entrepreneurial “Clock Speed”
• The 10-year IRR for early-stage Silicon Valley VCs is 54.9%. The average in
Canada for the same period is -3%
© 2008. Tom Sweeney 20

21. Start-Up Business Model: Bootstrap With a Plan
to Achieve Specific & Important Milestones
Receiver’s
Wall
First Closing
Pitch ($$)
VC Due Diligence Process Director’s
Wall
Under-funded company
Family &
Grants SR&ED
Angels
Properly funded company
Bootstrap and Seed Syndicate
6-12 months
New Money
Due Diligence
Traction
The Idea
Deposited
Milestone
Milestone
Traction Milestone: achieve this key milestone before starting a financing round
(gives investor confidence you’ve done something “important” already)
Due Diligence Milestone: achieve this second key milestone during financing
(tell VC about it in “First Pitch”, hit the milestone, tell VC you did it)
© 2008. Tom Sweeney
21

22. Financing Stages & Development
$4.0 on $8.0 million pre
Total Cash Paid-In to Company
(two tranches)
Acquisition
$1.5 on $2.0 million pre
(two tranches)
Bootstrap
First Round VC Second Round VC
(Series “A”) (Series “B”)
Example
Shareholder Equity at Acquisition
•Bootstrap to achieve working prototype prior to “A” round
•Secure $1.5M participating preferred on $2.0M pre-money 33% 38% Common
•Achieve product and early revenue Series quot;Aquot;
•Secure $4M on $8M pre-money Series quot;Bquot;
•“A” round VC participates in “B” round 29%
© 2008. Tom Sweeney 22

23. =XIRR is a Formula You Should Learn
VCs want “C1” (their fully converted equity) to be large and “T5” (time to exit)
to be as short as possible
“B” Round
Second Tranche
B2
“B” Round
First Tranche
Cash Invested
B1
Acquisition
“A” Round
Second Tranche
“A” Round
C1
A2
First Tranche
A1
T5
Time T4
T2 T3
T1
=XIRR((-A1,-A2,-B1,-B2,C1),(T1,T2,T3,T4,T5))
© 2008. Tom Sweeney 23

24. Excellent VC Deal Terms Reference Book
© 2008. Tom Sweeney 24

25. Correlating Innovation,
Business Models, &
Development Plans
with Private Financing
GameON: Finance Conference
Toronto, Canada
October 28-29, 2008
Tom Sweeney
sweeney@garagecanada.com
514-865-2323