1. 1 The Art and Science of Valuation Prepared for Faegre & Benson April 19, 2006

2. 2 Overall Agenda Part 1: Capturing the Attention of the Venture Capitalist Part 2: Understanding the state of the Venture Capital Industry Part 3: Valuation Overview

3. 3 Part 1 Agenda Part 1: Capturing the Attention of the Venture Capitalist Finding the right VC Courting the right VC Management Team Market Characteristics How hard can it be? Part 2: Understanding the state of the Venture Capital Industry Part 3: Valuation Overview

4. 4 Finding the Right VC Do Your Homework Buying Criteria Just Like a Customer

5. 5 Courting the Right VC Online Dating Anonymous Highly Competitive 1 Chance

6. 6 “As a founder, think hardest about the team. Are these the people I want to be in trouble with for the next 5, 10, 15 years of my life? Because as you build a new business, one thing’s for sure: you will get into trouble.” John Doerr, Kleiner Perkins Caufield & Byers Management Team

7. 7 Investing In Talent Factors considered most important by investment professionals (Weighted importance out of 100*) Management Team Market Sector Business Model Proprietary Product/Service 37 24 20 19 Source: Spencer Stuart/NVCA VC-backed Leadership survey

8. 8 Market Characteristics Worth Winning $250 million Sustainable Drivers Y2k Well Defined Sub-segment

9. 9 How Hard can it Be?

10. 10 A Rapidly Evolving World Yahoo raises $2 million Amazon goes live Netscape goes public 45% heard of www AltaVista 16 million pages 1995

11. 11 Technology is only the Ante

12. 12 Sustaining vs. Disruptive Technologies Sustaining Technology Foster improved product performance Disruptive Technology Bring to the market a very different value proposition The Innovator’s Dilemma – Clayton Christensen

13. 13 Sustaining vs. Disruptive Technologies Sustaining Technology Improves performance along an existing utility curve A B Sustaining Technology Cost Performance

14. 14 Sustaining vs. Disruptive Technologies Disruptive Technology Moves the market to new utility curve A Disruptive Technology B Cost Performance

15. 15 Explicit Need / Compelling ROI IT Budgets and ROI: “Purse strings are loosening ever so slightly, but that won’t slow the quest for better metrics”

16. 16 Part 2 Agenda Part 1: Capturing the Attention of the Venture Capitalist Part 2: Understanding the state of the Venture Capital Industry Locations: East Coast / West Coast and everywhere else State of Emerging Market Funding US Market Trend Minnesota Market Trend Pre-Bubble Normal Part 3: Valuation Overview

17. 17 Locations: CA, MA and then the Rest

18. 18 State of Emerging Company Funding (Hint: Small VC Funds are Disappearing )

19. 19 U.S. Venture Capital Market Trend Info Group Median Expansion – 53% Later Stage – 18% Early Stage – 22% Seed Stage – 4% Source: PWC MoneyTree

20. 20 Minnesota vs. U.S. Venture Capital Market Trend Info Source: PWC MoneyTree Average MN vs. U.S VC Investment = 1.54%

21. 21 A Pre-Bubble Normal

22. 22 Part 3 Agenda Part 1: Capturing the Attention of the Venture Capitalist Part 2: Understanding the state of the Venture Capital Industry Part 3: Valuation Overview Valuation Start-Up Stages Equity Financing Food Chain Sherpa Guide to Success Valuation Methodology A Lesson from Charles Darwin

23. 23 Valuation is Chess Not Checkers

24. 24 Stages of a Startup Definition and Validation Prove Solution is Repeatable Grow the Channel to Capture Opportunity

25. 25 Seed Stage 100% – 30% IRR Early Stage – (Sherpa) 50% - 20% IRR Expansion Stage 25% - 15% IRR Late Stage 20% - 12% IRR Early Adopter Customers Early Majority Customers Late Majority Customers Innovation Customers Friends/FamilyAngelsInstitutional - VCsPublic Market Equity Financing Food Chain Return Expectations

26. 26 Return Expectations

27. 27 Return Expectations 5-10x your investment or 30%+ IRR

28. 28 Sherpa Pocket Guide to Success Quick Go vs. No Go Decision (4x in 5 Years = 32% IRR)

29. 29 Valuation Methodology 1. Determine valuation in an out year Revenue in year 5 is $20 million Use a multiplier (i.e., revenue, operating income, earnings, subscribers, locations, etc.) to determine value A revenue multiple of 2x would make the company value $40 million in year 5 2. Compare future value with current value Divide the future value ($40 million) by the post-money valuation Post-money value of $10 million means this investment increased in value by 4x ($40 million / $10 million) 4x in 5 years equals a 32% IRR

30. 30 “It is not the strongest of the species that survives, nor the most intelligent; it is the one that is most adaptable to change.” - Charles Darwin, British Naturalist

31. 31 Recap Part 1: Capturing the Attention of the Venture Capitalist Part 2: Understanding the state of the Venture Capital Industry Part 3: Valuation Overview

32. 32 Rick Brimacomb Founder, Brimacomb & Associates General Partner, Sherpa Partners Board Member, Minnesota Venture Capital Association 612.803.3169 rick@brimacomb.com Jason Voiovich Principal, Ecra Creative Group 651.209.2778 jason@ecracreative.com