850 Woodside Drive Woodside, California (650) W O O D S I D E F U N D “Challenges and Funding of Seed and Early Stage Companies” Contra Costa Software Business Incubator November 18, 1999

W O O D S I D E F U N D I V History Founded 16 years ago; launching its fourth fund; currently have $150 million under management Each senior partner has served as a founder and CEO of a technology company; five investment professionals Seed and early stage Computer software, Internet, e-commerce, telecommunications, networking Management Stage of Investing Industry Focus O VERVIEW Woodside Fund Background

W O O D S I D E F U N D I V Market Potential Company must address a large demand-driven market; and must have the potential to attain $50 million to $100 million in annual revenues or a market value of at least $200 million, preferably $1 billion or more An exceptional management team or willingness to build it First mover advantage, proprietary technology, typically high margins and sustainable competitive advantage Required to influence key policies, decisions, and management A viable strategy for liquidity is required Target a return of at least 10 times invested dollars in 2 to 4 years Market Leadership Qualified Management Partnership Relationship Exit Strategy Return on Investment I NVESTMENT C RITERIA Criteria for Selecting High Potential Companies

W O O D S I D E F U N D I V Early Stage Investing is Labor Intensive One early stage investment equals 5 to 6 later stage investments As the size of Funds have increased, the proportion of venture capital professionals devoted to seed and early stage investing has diminished Early Stage Funds Require Specialized Skills It requires senior Partners who have start-up and operating experience Early Stage Funds Must be Organized to do Early Stage Investing A strategy for organizational development Hiring a strong CEO and other management early Helps increase valuations, facilitate strategic partnerships and speeds growth The Challenges of Seed and Early Stage Investing S EED AND E ARLY S TAGE I NVESTING

W O O D S I D E F U N D I V Early Stage Funds Must be Organized to do Early Stage Investing Resources and a willingness to help Generating business plans Assisting with strategic relationships Obtaining follow-on financing Management controls (Cash forecasts for both “plan” and “worst” case scenarios and reporting by department) The Challenges of Seed and Early Stage Investing S EED AND E ARLY S TAGE I NVESTING Trust is essential, especially when strengthening management and establishing terms.

W O O D S I D E F U N D I V Methods to Establish Trust General Partners share their entrepreneurial experience - the “Zucchini” example How to operate - trust and openness, no surprises The assessment process Testimonials are critical Entrepreneurs should do as much due diligence on the venture capitalists as the venture capitalist do on them S EED AND E ARLY S TAGE I NVESTING The Challenges of Seed and Early Stage Investing

W O O D S I D E F U N D I V Financing Requirements Companies need to meet the investment criteria Demonstrated progress prior to a major first round outside of the initial syndicate Build solid references Successful beta sites, customers, strategic alliances Excellent presentation materials A cogent executive summary and powerpoint presentation A well thought out business plan Professional quality writing and graphics Do not include price, valuation and size of financing Include technical, financial and other details in the appendices The Challenges of Seed and Early Stage Investing S EED AND E ARLY S TAGE I NVESTING

W O O D S I D E F U N D I V Marketing and Sales What is the pricing model, what will customers pay? Informal and formal focus groups Test marketing Consultants How do you position the products to avoid market clutter? Competition can easily be underestimated - who could become serious competitors? How can we establish a sustainable competitive advantage? How do you reach customers -what are the likely sales channels? When do you add market and sales resources? (They are not the same) How good and supportable should the products be before they are sold widely? The Challenges of Seed and Early Stage Investing S EED AND E ARLY S TAGE I NVESTING

W O O D S I D E F U N D I V Pricing and Capitalization Initial valuations must be “realistic” to justify the additional effort (except for certain Internet deals) Burn-rates must be carefully managed A company should consider taking financing when it’s available There should be equity provisions for future management - typically 15% to 25% The Challenges of Seed and Early Stage Investing S EED AND E ARLY S TAGE I NVESTING

W O O D S I D E F U N D I V The Disclosure Dilemma Obtain intellectual property early Test markets earlier instead of later Other Sources of Assistance Incubators Mentors - board members and advisors Angel investors Attorneys Accounting firms Banks Venture leasing The Challenges of Seed and Early Stage Investing S EED AND E ARLY S TAGE I NVESTING

W O O D S I D E F U N D I V How do you get in the door? Referrals, referrals, referrals The best referrals are: Incubators Successful entrepreneurs Mentors and board members Potential or existing customers Professional service providers Good presentation materials Conferences and associations The Challenges of Seed and Early Stage Investing S EED AND E ARLY S TAGE I NVESTING

W O O D S I D E F U N D I V Managed Risk Fewer losses than perceived Return for success is substantial Close partnership and supervision Staged financing Window on Technologies and New Businesses High Potential Return Low initial valuations Opportunities for leverage Higher upside potential Creates Jobs and Provides Economic Development Why Seed and Early Stage Investing? S EED AND E ARLY S TAGE I NVESTING

W O O D S I D E F U N D I V V ENTURE C APITAL S TATISTICS Venture-backed investments hit a record $9 billion, far exceeding the previous record of $7.6 billion in the second quarter Seed and start-up investing was at an all time high of $914 million, about 10% of total disbursements. The number of companies receiving funds increased 40% to 993 compared to 707 companies a year earlier; 18.4% or 183 were seed/start-up stage companies. The average funding per company increased 70% to $9.1 million versus $5.4 million a year ago. Technology-based companies accounted for $8.1 billion, or 90% of all investments, with Internet-related companies comprising $5.2 billion in 473 companies. Silicon Valley dominated all areas receiving over $3.3 billion or 36.8%, compared to New England at 10.3% and New York at 7.6%. Highlights of the Third Quarter 1999 Source: PWC MoneyTree Report

W O O D S I D E F U N D I V Source: Venture Economics V ENTURE C APITAL D ISBURSEMENTS

W O O D S I D E F U N D I V V ENTURE B ACKED IPO S Source: Venture Economics

W O O D S I D E F U N D I V A VERAGE V ALUATION OF V ENTURE B ACKED IPO S VS. M&A S Source: Venture Economics