VC Financing

1. VC Financing BY: Prashanti Lakamsani Shailesh Manjrekar Steve Martin Omar Nawaz

2. AGENDA • Introduction • Venture Capital • Venture Capitalist Point Of View • Revenue, Expenses, & Profitability • The Pitch • Valuing the Company • Dividing the Company • To IPO or Not to IPO • Market Conditions

3. Venture Capital • Venture Capitalist: investor who provides equity capital for high risk business oportunities • Can be generalists or specialists, Regional or Global • VC’s are equity investors • Collateral or security is not required • Part owners of the company • Under pressure to make huge returns • Other roles • Sit on Board of Directors • Recruit executive talent • Structure the company • Raise later rounds of funding • Build partnerships and alliances • A good VC firm puts you on track for IPO http://www.estartuphelp.com

4. Venture Capital by Region • 3rd Quarter 1999 concentrations: Silicon Valley $3.36 billion(38%) New England $927 mil (10%) New York $687 mil (7.7%) Southeast $654 mil (7.3%) Washington DC $638 mil (7.1%) LA/Orange Co. $540 mil (6%) Texas $485 mil (5.3%) Rest of country $1.67 billion (18.5%) http://estartuphelp.com/vcregion.html

5. Venture Capital by Region • Silicon Valley funding • Advantages • Experienced VC firms with proven track records • Established networks for alliances and partnerships • Disadvantages • Competition for venture funding • Difficult to grab attention of VC firms • Local or Regional funding • Advantages • Smaller portfolios • More time can be spent on your company • Disadvantage • Risk of lower valuation due to lack of competition among VC’s in the local area http://estartuphelp.com/vcregion.html

6. Stages of Venture Funding • Sweat Equity Stage • Friends and Family Stage • Angel Investor Stage • Seed Stage • Early Stage • Expansion Stage Financing • Later Stages http://estartuphelp.com/vcstages.html

7. What Venture Capitalists look for in a Start-Up • Substantial Market Size • Market Positioning • Superior Management team • A combination of vision and implementation • Participants and enablers of principal electronic commerce transactions • Aggregators of commercial buyers and sellers, and market makers for others • Marketing models that exploit one-to-one opportunities http://estartuphelp.com/vcwhat.html

8. What Venture Capitalists look for in a Start-Up • Software enabled internet based value added services • Partnership’s, Alliances and Endorsements • Distance from VC’s http://estartuphelp.com/vcwhat.html

9. Selecting a Venture Capital Firm • What companies has the firm been involved in the past and how well have they done • What was the firm’s relationship with those companies, did the VC’s add value to the business with their experience and expertise. • Can they help you improve your valuation during the IPO or acquisition process • Do they have connections to help you build partnerships and alliances with the important players in the industry. • What stage do they finance, are you at that stage. http://estartuphelp.com/vcresearch.html

10. Revenues, Expenses and Profitability • Why are profits scare or non-existent in the Internet space ? • Why is there so uncertainty about Internet Business models ? • When will some order emerge from the chaos of doing business on the web ?

11. Revenues, Expenses and Profitability • The factors that make Internet attractive business venture are the same that make it treacherous : • Low barriers to entry • Low switching costs for customers • No “ moat around the castle” to protect profitability Some of the money losing dot-coms are still in heavy investment or land grab phase, in an effort to capture customer base thinking one day it will pay off. They go IPO’s in this investment phase rather than waiting until they show a profit Historically most businesses require 3 to 5 years before reaching profitability

12. Revenues, Expenses and Profitability • Does that make the Internet a “No-Profit Zone” • Absolutely Not. • Successful Internet Business models like AOL, Yahoo, E-bay show that there is money to be made on Internet even to-day by thinking Business First, Design second and Digital third

13. Revenues, Expenses and Profitability • A unique and robust on-line value proposition for your customers is essential • A customer you cannot monetize = 0 • Advertising offers a sustainable value mechanism only if you can deliver either a well-defined niche audience or a true mass audience • The business fundamentals are more important than ever • Evolve fast or fail

14. Revenues, Expenses and Profitability • Business models, in the most basic sense is the method of doing business by which the company can sustain itself I.e generate revenues. • Brokerage – they bring buyers and sellers to-gether and charges fee for each transaction • Buy/Sell – Etrade • Market Exchange – Metalsite or Chemical Exchange • Vertical Web Community – Verical Net • Buyer Aggregator – Mobshop • Distributor – NECX • Virtual Mall – Yahoo Store

15. Revenues, Expenses and Profitability • Brokerage • Metamediary – Amazon’s zshop • Auction Broker – Ebay • Reverse Auction – Priceline • Classifieds • Advertising : Extension of traditional media broadcasting model • Generalized, Personalized, Specialized, Free Model

16. Revenues, Expenses and Profitability • Infomediary Model – data about consumers and their buying habits are collected, analyzed and sold. – Netzero • Merchant Model – the e-tailers, sales bassed on list price or auctions • Virtual – Amazon • Catalog – levenger • Surf and Turf – Gap, Lands End • Bit Vendor - EyeWire

17. Revenues, Expenses and Profitability • Manufacturer Model – Dell,Cisco • Negative Working Capital • Choice boards • 10X Productivity • Capital • Cost • Cycle • Subscription Model – Wall St. Journal

18. Revenues, Expenses and Profitability • Inktomi v/s Akamai or Selling a Product v/S Selling a Service. • Selling a Product • Traditionally results in lower fixed costs and wider profit margins • Can take advantage of sales generated when third parties create related applications • Requires a field sales force, which would significantly add to the cost of doing business • May limit the potential customer base, because smaller companies can’t afford the purchase of specialized product.

19. Revenues, Expenses and Profitability • Selling a Service • Eliminates manufacturing and distribution costs and generates a recurring revenue stream • Attracts customers because of lower up-fornt cpaital expenditures and a shorter deployement process • Can be expensive because fixed costs to run a network for customers increase as the business grows.Traditionally results in lower fixed costs and wider profit margins • Can be easily replicated by other companies with large worldwide networks in place, which could result in a price war.

20. Pitch “In baseball, they say, pitching is 90% of the game.For start ups pitching may be even more important” (Red Herring's "Venture Capital Post Script”) • What is a pitch? • Types?

21. Presentation/Pitch • Pitch: “A pitch is a presentation one makes to a VC about the idea, implementation etc to seek finances to turn the idea into a profit making company” • Types of Pitches • One or two line summaries • Elevator pitch • 10-15 minute pitch • Full one hour pitch

22. Top ten pitching techniques by Lim(Kiva S/W)&Polar(I/Pro) • Focus, Focus, Focus • Know your VC • (e.g.) Exodus Communications • Ditch your business plan • instead 20 slide power point presentations • Keep it simple • Get Visual (Red Herring's "Venture Capital Post Script”)

23. Top ten techniques by Lim&Polar • Team up • Push the buttons • Find the top dog • Get a commitment • Move on (Red Herring's "Venture Capital Post Script”)

24. Pitch • Preparing for the pitch • Knowledgeable about your industry/sector • Knowledge about major events, competitors in industry/sector • Learn about the VC firm well in advance • Learn about the equipment at the place of the presentation • <= 1 hour • Attire – formal, semi-formal • Rehearse (http://www.estartuphelp.com)

25. More techniques • Making the pitch • Short and efficient • Attendance – CEO, executive members must • Very crucial first few minutes • Answer questions in your area of expertise • Show vision for your idea – continue with or without their money • Audition for a possible IPO road show • Listen to them • Emphasize the things to be remembered

26. Pitch • Ending the pitch • Business card, hand outs, executive summary and business plan • NDA – Good but not absolutely necessary

27. Pitch • After the pitch • Success – phone converstaions, emails • Possible second meeting with partners –> serious • contender • Agree to fund – fortunate .01% of entrepreneurs • Employ good lawyers • Caution until the deal is closed • Issues – valuation, dividing the pie, term sheet, • legal docs, intellectual property, employees

28. Pitch • Example Success stories • Hotmail (sold for 400m to Microsoft) • Juniper( backed by Kleiner Perkins Caufield and Buyers, 69b market cap) • Sycamore Networks (400m from Williams)

29. Pitch • Successful pitch doesn’t guarantee successful company! • Living.com (backed by Benchmark, Amazon, Starbucks) • Pets.com • What do you do if your pitch fails?

30. Pitch • ……MOVE ON! • Don’t spend too much time re-writing the business plan or pitch • Make sure the idea is worth the efforts • (e.g.) Infoseer, Link-VTC

31. Valuing the company • Assets and liabilities • Revenues or market share • P/E ratio • EPS • Multiples of expected earnings, potential growth • Market leaders – incredible valuations • Second largest - half the first • Etc • VC chasing after first funding • Go with the VC who you are comfortable with than with VC with best valuation for the company (http://www.estartuphelp.com)

32. Dividing the pie • Common model • Founders 30% (3 million shares) • VP operations 15% (1.5 m shares) • VP marketing 15% (1.5 m shares) • Stock options (Employees) 20% (2 m shares) • VC’s 20% (2m shares) (http://www.estartuphelp.com)

33. Models • Professor Theroux model • The idea • patents etc • The execution • formation, long term • The money • good idea, more investors, less % - more often remains largest % (http://www.estartuphelp.com)

34. Before • "If [investors] had spent two hours listening to a team present [their company], the opportunity cost of not investing was so great that they just threw money at the situation anyway” Quincy Smith, partner at The Barksdale Group.

35. Now • ”In the wake of the fall-out in the e-commerce sector, firms are combing through their portfolios, facing stark choices about which companies to continue financing” (http://www.ft.com: “Start-up funds adopt more global focus”)

36. Investment Score Card • Scorecard for U.S. Internet-Related Deals • $1.326 Billion Month to Date$9.790 Billion Year to Date • 2000- $71.493 Billion in funding • 2000-March $21.114 Billion in funding • 2001- $9.790 Billion in funding http://www.vclinks.com

37. Monthly VC Funding http://www.vclinks.com

38. To IPO or Not to IPO • Technology IPO may remain nonexistent into the second quarter and probably well into the second half of this year • 'Nobody would take their company public in today's environment unless they had no choice,' says Bruce Pollock, chief financial officer for Wavesplitter, ‘And we do have some choices’ • Including wavesplitter, 8 other companies elected to forgo the IPO plan since last Friday. http://www.herring.com

39. To IPO or Not to IPO • Loudcloud IPO on March 8, ‘01. Won’t reach profitability until end of 2003 but had to go for IPO because they were running short of options. • Last funding was for $120 million in June 2000. • Current burn rate is $10-12 million per month • Reverse 2-for-1 stock split, increase offering from $10-25 mil shares. • Reduce offering price from $10-12 to $6 • Market capitalization from $1.2 billion to $450 million • Total expected IPO in 1st QTR are 13. • First 6 tech IPO at 10.3% below offering

40. To IPO or Not to IPO

41. Survival of thE Fit E-stIn E-Times • What caused the downfall of E-Business • Overspending • Over expansion • Not paying attention to Cash flow and profitability • How to survive? • Cutting back across the board? • Understand where cost cutting is required and areas where need to continue to spend

42. The Income Statement Revenues Sales $5,000 Expenses Salaries $2,500 Rent 300 Utilities 100 Total Expenses 2,900 Net Income $2,100

43. Revenue & Expenses • What the income statement does for you? • Quick assessment of company’s expenses and revenue • With Balance sheet a way to measure how solvent is your company. • Do you have enough money to pay your bills • Measure by quick ratio ( quick assets/liabilities)

44. Finance & Accounting • Not just numbers • Help understand • What works, what does not • Areas of strength and weakness • Watch your inventories • Keep an eye on margins • Cash Flow

45. Income NetRevenues NetIncome Earnings / Share