1. An Insiders View of Venture Capital John Hall Managing Director Horizon Ventures Los Altos, CA www.horizonvc.com/john-sjsu.html

2. July, 20092Copyright 2007, 2008, 2009 Horizon Ventures Agenda VC Industry Structure VC Industry Structure VC financing +’s and –’s VC financing +’s and –’s How VCs decide How VCs decide The VC dating game The VC dating game

3. July, 20093Copyright 2007, 2008, 2009 Horizon Ventures Size of Industry 198719972007 No. of VC Firms in Existence 361549741 No. of VC Funds in Existence 6879031,549 No. of Professionals 4,3686,7538,892 VC Capital Under Management ($B) 24.463.6257.1 Avg VC Capital under Mgt per firm ($M) 67.6115.8347.0 Source: Thomson Financial

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8. July, 20098Copyright 2007, 2008, 2009 Horizon Ventures Agenda VC Industry Structure VC Industry Structure VC financing +’s and –’s VC financing +’s and –’s How VCs decide How VCs decide The VC dating game The VC dating game

9. July, 20099Copyright 2007, 2008, 2009 Horizon Ventures Venture Capital Isn’t Required To Build a Great Business … Broadcom Broadcom No VC money No VC money Cisco Cisco $5M in revenue, profitable before Sequoia invested $5M in revenue, profitable before Sequoia invested Dell Dell Raised money at $60M in revenue Raised money at $60M in revenue eBay eBay $4.5M in revenue and profitable before Benchmark invested $4.5M in revenue and profitable before Benchmark invested Microsoft Microsoft Only took $1M VC after being profitable Only took $1M VC after being profitable The MathWorks The MathWorks >$300M in revenue, no VC money >$300M in revenue, no VC money SAS Institute SAS Institute > $1.9B in revenue, the largest private software company, no VC money > $1.9B in revenue, the largest private software company, no VC money Siebel Siebel Customers funded first product Customers funded first product

10. July, 200910Copyright 2007, 2008, 2009 Horizon Ventures VC Financing Comes with Costs… † Fund raising takes time away from the business Fund raising takes time away from the business Gives you a false sense of security Gives you a false sense of security Money enables costly mistakes Money enables costly mistakes Money removes spending discipline Money removes spending discipline Adds additional master(s) Adds additional master(s) You give up a lot of ownership You give up a lot of ownership Sets the exit strategy and timing Sets the exit strategy and timing † † Source: Greg Gianforte, CEO RightNow, http://cet.berkeley.edu/Resources/CETLectures.htmlhttp://cet.berkeley.edu/Resources/CETLectures.html

11. July, 200911Copyright 2007, 2008, 2009 Horizon Ventures … But it Sure Can Help 1. Cash to fuel growth 2. Strategy / business advice 3. Introductions: investors, customers, partners 4. Recruiting assistance

12. July, 200912Copyright 2007, 2008, 2009 Horizon Ventures Agenda VC Industry Structure VC Industry Structure VC financing +’s and –’s VC financing +’s and –’s How VCs Decide How VCs Decide The VC dating game The VC dating game

13. July, 200913Copyright 2007, 2008, 2009 Horizon Ventures We Live in Unprecedented Times Facing the worst economy since the ’30s Facing the worst economy since the ’30s No IPO market No IPO market Average time to M&A is 7 years, IPO is 8 years, Average time to M&A is 7 years, IPO is 8 years, Deal Status Deal Status Most deals in the last 6 months were follow on with existing investors. Most deals in the last 6 months were follow on with existing investors. New investors are asking for 30 – 40% discount from prior rounds, or are waiting for prices to fall. New investors are asking for 30 – 40% discount from prior rounds, or are waiting for prices to fall.

14. July, 200914Copyright 2007, 2008, 2009 Horizon Ventures Good Deals are Hard to Find “We kiss a lot of frogs to find the prince” -- Venture capital industry cliché

15. July, 200915Copyright 2007, 2008, 2009 Horizon Ventures Venture Grade Deals are 1/200 Source: IRS.gov VC Grade Life Style Companies AKA “Walking Dead”

16. July, 200916Copyright 2007, 2008, 2009 Horizon Ventures It’s Hard to Spot Winners Every deal has “hair on it” Every deal has “hair on it” It’s easy to find many, many problems It’s easy to find many, many problems EBAY: “On-line flea market? Come on!” EBAY: “On-line flea market? Come on!” Google: 5 CEO candidates passed before Eric Schmidt took the job. “Too many search engines” Google: 5 CEO candidates passed before Eric Schmidt took the job. “Too many search engines” It is not easy to discern a winner: It is not easy to discern a winner: Portfolio returns: 1 @ 10X; 2 @ 1X; 7@0X Portfolio returns: 1 @ 10X; 2 @ 1X; 7@0X

17. July, 200917Copyright 2007, 2008, 2009 Horizon Ventures Sources of Pre-VC Funding: Getting to First Milestone Customers Customers Consulting engagements Consulting engagements Non-Recurring Engineering (NRE) engagements Non-Recurring Engineering (NRE) engagements Retainer fees from customers Retainer fees from customers Government Government Small Business Innovation Research Grants (SBIR) Small Business Innovation Research Grants (SBIR) Big Companies Big Companies Value-Added Reseller (VAR) agreements Value-Added Reseller (VAR) agreements Divestitures – protected supplier contract with parent for a defined period Divestitures – protected supplier contract with parent for a defined period Moonlighting Moonlighting Founders waive compensation Founders waive compensation Family, Friends and Fools Family, Friends and Fools

18. July, 200918Copyright 2007, 2008, 2009 Horizon Ventures VC’s Personal Bias is a Factor Will be working together for 6+ years Will be working together for 6+ years The project must be interesting The project must be interesting Team compatibility is critical Team compatibility is critical The unexpected is going to happen The unexpected is going to happen Got to get through the hard times Got to get through the hard times

19. July, 200919Copyright 2007, 2008, 2009 Horizon Ventures So How do Most VCs Decide? VCs “fall in love with the deal”

20. July, 200920Copyright 2007, 2008, 2009 Horizon Ventures Attractive is.... Attractive is.... Big Market Big Market Open to disruption Open to disruption Customers in pain and who buy Customers in pain and who buy Growing order trend Growing order trend Strong product offering / technology Strong product offering / technology Differentiated, protected Differentiated, protected Successful Team Successful Team “A Players” “A Players” Successful Investors / Advisors / Board Members Successful Investors / Advisors / Board Members

21. July, 200921Copyright 2007, 2008, 2009 Horizon Ventures Agenda VC Industry Structure VC Industry Structure VC financing +’s and –’s VC financing +’s and –’s How VCs Decide How VCs Decide The VC dating game The VC dating game

22. July, 200922Copyright 2007, 2008, 2009 Horizon Ventures

23. July, 200923Copyright 2007, 2008, 2009 Horizon Ventures VC Dating is a Grueling Process 1. Requires mental toughness 2. You may have to talk to 10 – 40 firms to find the match. Google was turned down by 80 firms. 3. Success demands careful planning and execution

24. July, 200924Copyright 2007, 2008, 2009 Horizon Ventures Time Scales 1Introduction2 First Date 3Dating 1 to 6 weeks 2 to 12 weeks Per VC Per Funding 2 to 26 weeks

25. July, 200925Copyright 2007, 2008, 2009 Horizon Ventures It Will Be the Best Business Advice You’ll ever Get 1. Listen 2. Learn 3. Accept it 4. Bake learnings into your business plan

26. July, 200926Copyright 2007, 2008, 2009 Horizon Ventures Step 1: Introduction Goal: Get the first date Goal: Get the first date Strategy: Approach the right VC in the right way Strategy: Approach the right VC in the right way Introduction “The Pitch” DueDiligence

27. July, 200927Copyright 2007, 2008, 2009 Horizon Ventures The Right VC is critical to success VC money is not a bank loan VC money is not a bank loan Do your homework! Do your homework! Talk to start-up CEOs Talk to start-up CEOs Figure out who is actively investing Figure out who is actively investing Right sector (life sciences vs. semiconductor) Right sector (life sciences vs. semiconductor) Relevant portfolio, expertise, and synergies Relevant portfolio, expertise, and synergies Early vs. late stage Early vs. late stage Right geography Right geography

28. July, 200928Copyright 2007, 2008, 2009 Horizon Ventures The Right Way “We only look at deals that are introduced to us by people we know” – Mike Schuh, Foundation Capital

29. July, 200929Copyright 2007, 2008, 2009 Horizon Ventures The Right Way: Introduction by Referral 1. Successful entrepreneurs 2. Lawyers that work with VCs and start-ups 3. Angel investors 4. Other VCs you know 5. Other service providers: bankers, accountants, head hunters, … bankers, accountants, head hunters, … Avoid Brokers They create a buffer between you and VCs.

30. July, 200930Copyright 2007, 2008, 2009 Horizon Ventures Sales Tool: The Executive Summary Objective: To get a meeting Objective: To get a meeting One pager that covers: One pager that covers: Contact information Contact information Customer problem Customer problem Your solution (product/technology) Your solution (product/technology) Market size Market size Competitors Competitors Team Team Customer proof points Customer proof points Funding status Funding status

31. July, 200931Copyright 2007, 2008, 2009 Horizon Ventures Executive Summary Template www.bandangels.com

32. July, 200932Copyright 2007, 2008, 2009 Horizon Ventures How VCs Vet Your Exec Summary Is the referral source credible? Is the referral source credible? Is this company in my geography? Is this company in my geography? < 1 -2 hours travel time < 1 -2 hours travel time Is this a scalable business? Is this a scalable business? Is the team credible? Is the team credible? Are the existing investors credible? Are the existing investors credible? Can I possibly fall in love with the: Can I possibly fall in love with the: CEO CEO Target market Target market Problem being solved Problem being solved The technology being developed The technology being developed

33. July, 200933Copyright 2007, 2008, 2009 Horizon Ventures Rejection “We can’t kiss all the pretty girls” -Bob Kagle, Benchmark

34. July, 200934Copyright 2007, 2008, 2009 Horizon Ventures Step 2: The Pitch Goal: Get the second date Goal: Get the second date Strategy: Sketch out a compelling, exciting vision Strategy: Sketch out a compelling, exciting vision 1Introduction2 “The Pitch” 3DueDiligence

35. July, 200935Copyright 2007, 2008, 2009 Horizon Ventures “ Pitch” Advice is Abundant -- and not duplicated here Guy Kawasaki, Garage Technology Ventures Guy Kawasaki, Garage Technology Ventures www.garage.com/resources/building.shtml Brad Feld, Mobius Venture Capital Brad Feld, Mobius Venture Capital www.feld.com/blog/archives/2004/06/the_torturous_w.html David Cowan, Bessemer Venture Partners David Cowan, Bessemer Venture Partners whohastimeforthis.blogspot.com/2005/11/how-to-not-write-business- plan.html whohastimeforthis.blogspot.com/2005/11/how-to-not-write-business- plan.html Sequoia Capital Sequoia Capital sequoiacap.com/ideas/ SVASE www.svase.org/components/uploads/SVASE%2010%20Slide%20Template.ppt SVASE www.svase.org/components/uploads/SVASE%2010%20Slide%20Template.ppt

36. July, 200936Copyright 2007, 2008, 2009 Horizon Ventures Tell a Simple, yet Compelling Story Your Start-Up is everything to you But just another pretty face to the VC VCs easily drown in details Boredom sets in Your goal is simple: Get the next date

37. July, 200937Copyright 2007, 2008, 2009 Horizon Ventures Story Telling is a Skill Jerry Weissman Coach to CEOs on an IPO Road Show

38. July, 200938Copyright 2007, 2008, 2009 Horizon Ventures The Story VCs Want to Hear The Story VCs Want to Hear Big Market Big Market Open to disruption Open to disruption Customers in pain and who buy Customers in pain and who buy Growing order trend Growing order trend Strong product offering / technology Strong product offering / technology Differentiated, protected Differentiated, protected Successful Team Successful Team “A Players” “A Players” Successful Investors / Advisors / Board Members Successful Investors / Advisors / Board Members

39. July, 200939Copyright 2007, 2008, 2009 Horizon Ventures Four Pillars to any VC Pitch + Team Technology And Product Financials Market

40. July, 200940Copyright 2007, 2008, 2009 Horizon Ventures Market Size is Every VC’s Concern Source: IRS.gov VC Grade 1:200 Market

41. July, 200941Copyright 2007, 2008, 2009 Horizon Ventures 1.Market Vetting Competition Competition VC cliché: “No competition = No Market” VC cliché: “No competition = No Market” Is there room for this start-up? Is there room for this start-up? Is there any potential to grow fast? Is there any potential to grow fast? Is the market big enough to maneuver if the first niche doesn’t work out? Is the market big enough to maneuver if the first niche doesn’t work out? Market

42. July, 200942Copyright 2007, 2008, 2009 Horizon Ventures #1 Cause of Failure is the Lack of Customers Demonstrate you know your customer cold Demonstrate you know your customer cold There’s a logical reason behind the customer list There’s a logical reason behind the customer list Articulated customer segmentation Articulated customer segmentation Strategic approach Strategic approach List your marquee customers List your marquee customers Show that customers are helping Show that customers are helping Market

43. July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 43 Example: Customers Manufacturing Retail Logistics Transportation

44. July, 200944Copyright 2007, 2008, 2009 Horizon Ventures 2. Team Show off your leadership aptitude Show off your leadership aptitude Personal results, personal success Personal results, personal success Start-up mentality vs. Big company mentality Start-up mentality vs. Big company mentality Company pedigree – worked at market leaders Company pedigree – worked at market leaders Backed by blue ribbon advisors Backed by blue ribbon advisors Key: people investors trust Key: people investors trust Expect your backgrounds to be rigorously checked. Expect your backgrounds to be rigorously checked. Team

45. July, 2009 Copyright 2007, 2008, 2009 Horizon Ventures 45 Example: Corporate Organization Disclose: Experience & Holes David Engineering Doug Sales Mark CFO Bob CEO TBH Marketing 11 Engineers Cory 2 Application Engineers 1 Marketing2 Salespeople Joe CTO Rob

46. July, 200946Copyright 2007, 2008, 2009 Horizon Ventures 3.Product Test: Aspirin or Vitamin?? The product has to be compelling The product has to be compelling Customer inertia is huge Customer inertia is huge Customers change only when they have to Customers change only when they have to “Don’t fix what isn’t broken.” “Don’t fix what isn’t broken.” TechnologyProduct

47. July, 200947Copyright 2007, 2008, 2009 Horizon Ventures Feature or a Company? A Feature? A Feature? Can the incumbent add this feature to an existing product easily? Can the incumbent add this feature to an existing product easily? A Product? A Product? Part of a full-product portfolio? Part of a full-product portfolio? A Company? A Company? Can the value prop create a substantial business? Can the value prop create a substantial business? TechnologyProduct

48. July, 200948Copyright 2007, 2008, 2009 Horizon Ventures 4. Financials Financials

49. July, 200949Copyright 2007, 2008, 2009 Horizon Ventures Cash is King Revenue forecast will likely take longer to achieve, So Revenue forecast will likely take longer to achieve, So Is there enough cash to support misses? Is there enough cash to support misses? Revenue must not be too big, but not too small Revenue must not be too big, but not too small Spending plan will be scrutinized. Spending plan will be scrutinized. Net cash burn must go down over time Net cash burn must go down over time Successful CEOs are frugal Successful CEOs are frugal Financials

50. July, 200950Copyright 2007, 2008, 2009 Horizon Ventures Sequoia Capital’s Directive to CEOs 10/2008

51. July, 200951Copyright 2007, 2008, 2009 Horizon Ventures When a VC turns you down …

52. July, 200952Copyright 2007, 2008, 2009 Horizon Ventures What Can You Do? React to the business advice you received React to the business advice you received Adjust your business strategy if necessary Adjust your business strategy if necessary Polish your pitch for the next VC Polish your pitch for the next VC Incorporate learning from each interaction Incorporate learning from each interaction Simplify, Simplify, Simplify Simplify, Simplify, Simplify Clarify confusing points Clarify confusing points Address objection items Address objection items Rearrange the slide order Rearrange the slide order

53. July, 200953Copyright 2007, 2008, 2009 Horizon Ventures What Will Most VCs Do? Best case: “Fast no, slow yes” Best case: “Fast no, slow yes” Typical: Innocuous turn down, if at all Typical: Innocuous turn down, if at all They don’t want to burn any bridges They don’t want to burn any bridges Typical: No urgency Typical: No urgency Risk is reduced as time passes Risk is reduced as time passes Wait for a milestone Wait for a milestone quarter results quarter results prototype works prototype works

54. July, 200954Copyright 2007, 2008, 2009 Horizon Ventures Rejection Accept rejection gracefully Accept rejection gracefully There is no rational argument to bring the VC back There is no rational argument to bring the VC back

55. July, 200955Copyright 2007, 2008, 2009 Horizon Ventures What Might Happen? When a VC senses love, you’ll hear back When a VC senses love, you’ll hear back Be responsive! Be responsive! VC’s like working with responsive people VC’s like working with responsive people You’re building a relationship You’re building a relationship Respond to requests < 24 hours Respond to requests < 24 hours

56. July, 200956Copyright 2007, 2008, 2009 Horizon Ventures Step 3: Due Diligence Goal: Receive a term sheet Goal: Receive a term sheet Strategy: Two way test drive Strategy: Two way test drive Approach “The Pitch” DueDiligence

57. July, 200957Copyright 2007, 2008, 2009 Horizon Ventures Prepare in Advance Executive resumes & references Executive resumes & references Line up references in advance, Line up references in advance, Contact people VCs will find Contact people VCs will find Financial Quarterlies Financial Quarterlies Capitalization table Capitalization table Customer / technology references Customer / technology references Keep them updated on your progress, Keep them updated on your progress, Use them judiciously Use them judiciously

58. July, 200958Copyright 2007, 2008, 2009 Horizon Ventures Typical Due Diligence Process 1. More information (Exec. resumes, financials, cap table, personal references, etc.) 2. Present to all the partners at the VC firm 3. Meet with the VC’s “expert(s)” Portfolio companies, friends, paid consultants Portfolio companies, friends, paid consultants 4. Follow up meeting(s) at your office 5. Calls to customers and personal references 6. Calls to back-channel references

59. July, 200959Copyright 2007, 2008, 2009 Horizon Ventures Use Due Diligence as a Two Way Test Drive Check references on both the partner and the firm Check references on both the partner and the firm Call other portfolio CEOs Call other portfolio CEOs Call other VCs they have worked with Call other VCs they have worked with Can I work with this VC partner (and firm) for the next 6 years? Can I work with this VC partner (and firm) for the next 6 years? Is this a quality firm who will stick by me through dark days? Is this a quality firm who will stick by me through dark days? Does the VC listen and engage in discussion? Does the VC listen and engage in discussion? How do they react under fire? How do they react under fire?

60. July, 200960Copyright 2007, 2008, 2009 Horizon Ventures Syndication: Two Parents are Better than One For the entrepreneur For the entrepreneur Don’t want one VC with all the power Don’t want one VC with all the power More strategic minds around the table More strategic minds around the table Hedge against one VC walking out Hedge against one VC walking out For the VC For the VC Validates that the start up has legs Validates that the start up has legs More future support ($$) available More future support ($$) available

61. July, 200961Copyright 2007, 2008, 2009 Horizon Ventures Entrepreneur Resources Law firm outreach Law firm outreach DLA Piper Venture Pipeline DLA Piper Venture Pipeline www.venturepipeline.com www.venturepipeline.com www.venturepipeline.com Fenwick & West LLP Fenwick & West LLP “Darrell Kong” “Darrell Kong” Orrick, Herrington & Sutcliffe LLP’s “Total Access” Orrick, Herrington & Sutcliffe LLP’s “Total Access” "Chad Lynch" "Chad Lynch" Pillsbury Winthrop Shaw Pittman LLP’s “Back Stage Pass” Pillsbury Winthrop Shaw Pittman LLP’s “Back Stage Pass” kiran.kamboj@pillsburylaw.com kiran.kamboj@pillsburylaw.com Wilson, Sonsini, Goodrich, and Rosati Wilson, Sonsini, Goodrich, and Rosati wsgr.com/WSGR/Display.aspx?SectionName=practice/venturecapital.htm wsgr.com/WSGR/Display.aspx?SectionName=practice/venturecapital.htm SDForum SDForum www.sdforum.org www.sdforum.org Silicon Valley Bank’s Venture Exchange Silicon Valley Bank’s Venture Exchange Shai Goldman, Director, sgoldman@svb.com Shai Goldman, Director, sgoldman@svb.com SVASE, Silicon Valley Association of Startup Entrepreneurs. SVASE, Silicon Valley Association of Startup Entrepreneurs. www.svase.org www.svase.org The Enterprise Network of Silicon Valley The Enterprise Network of Silicon ValleyTensv.org Women’s Technology Cluster Women’s Technology Clusterwww.wtc-sf.org

62. July, 200962Copyright 2007, 2008, 2009 Horizon Ventures To Your New Venture Success!