1. LAUNCHING YOUR STARTUP Understanding Venture Financing Jim Butterworth Idea to Market Workshop Ukraine, September 2008

2. Launching Your Startup Understanding Venture Financing A Primer on Venture Capital Financing Your Venture Other Startup Considerations Raising Venture Capital The Transition from Idea to Execution Business Planning Peace and Prosperity Through Science and Collaborationwww.crdf.org

3. My Background 28 years in technology-related ventures in all capacities Founder / CEO, venture capital firm Founder / CEO, early Internet company Corporate finance / M&A, global investment bank Technology marketing Programmer / engineer Owner / inventor of 14 issued and pending patents worldwide Education Bachelor of Industrial and Systems Engineering, Georgia Institute of Technology Master of Business Administration, Amos Tuck School at Dartmouth College Peace and Prosperity Through Science and Collaborationwww.crdf.org

4. Impact of U.S. Small Businesses 25.8 million U.S. businesses Small businesses represent: 99.9% of total businesses 50% of the private work force 41% of high tech jobs 75% of net new jobs 41% of private sales 52% of private sector output 97% of all U.S. exporters with 29% of export value Produce 13-14x patents per employee (and 2x likely to be among the 1% most cited) Peace and Prosperity Through Science and Collaborationwww.crdf.org

5. Impact of Venture-Backed Companies In the U.S.: $1.8 trillion in revenue in 2003 (9.6% of all sales) 10.1 million jobs in 2003 (9.4% of employment) 600,000 new net jobs from 2000-2003 In Europe: 1.0 million jobs in 2004 630,000 new net jobs created from 2000-2004 Highest growth rates in biotech, health care and medical devices Largest absolute growth in university spin-offs Peace and Prosperity Through Science and Collaborationwww.crdf.org

6. Impact of U.S. Universities Established > 4,100 new companies since 1980, 2/3 of which were still operating Executed > 30,000 active technology transfer licenses (including > 4,500 in 2003), generating > $1.3 billion in license income Launched > 2,200 new commercial products between 1998-2003 Performed > $30 billion of R&D in 2001 Filed 8,000 U.S. patent applications in 2003 Peace and Prosperity Through Science and Collaborationwww.crdf.org

7. What is Venture Capital? A cash investment made by professional, institutionally backed investors to emerging growth businesses Generally made as cash in exchange for equity (ownership) in the investee company Usually high risk, but with the potential for above-average returns Peace and Prosperity Through Science and Collaborationwww.crdf.org

8. U.S. Venture Capital Market Peace and Prosperity Through Science and Collaborationwww.crdf.org

9. European Venture Capital Market Peace and Prosperity Through Science and Collaborationwww.crdf.org

10. Types of Venture Capital Private Professionally managed Return on investment focused May bring network, business advice, credibility, etc. Corporate Manage risk Distribution networks Product R&D Operational skills Spin-outs Academic Intellectual property Spin-outs Government Create new jobs and grow economy Offer cash, tax incentives, in-kind Stem brain-drain Angels Network, business advice, credibility, etc. Live vicariously The 3Fs Peace and Prosperity Through Science and Collaborationwww.crdf.org

11. Venture Capital Investment Criteria Management Team Track record Relevancy Bet on the jockey, not the horse! Concept Solves real problem Favorable market dynamics Disruptive Unfair advantages & sustainable competitive advantages Proper capitalization Peace and Prosperity Through Science and Collaborationwww.crdf.org

12. The Venture Capital Numbers Game Receive 1000s of business plans each year Read 100s of plans Meet with dozens of companies Fund a handful Portfolio expectations: 60% die or go nowhere (living dead) 30% yield 2-4x in 4-7 years 10% (hopefully 20%) are tremendous successes (e.g., 10x, 100x, 1000x!) Peace and Prosperity Through Science and Collaborationwww.crdf.org

13. How Venture Capital Funds Work General partners (GPs) manage the fund Capital comes from institutional limited partners (LPs) Singularly focused: ROI GPs get an annual fee Once LPs get investment back, GPs get a portion of the profits LPs get the remaining profits Peace and Prosperity Through Science and Collaborationwww.crdf.org

14. Venture Capital Economics VC Fund IX, L.P. LP 1 GP LP 2 LP 3 Portfolio Company 1 Portfolio Company 2 Portfolio Company 3 Portfolio Company 4 Portfolio Company 5 LP 4 $100 Management $10 Portfolio Company 10 Portfolio Company 9 Portfolio Company 8 Portfolio Company 7 Portfolio Company 6 $10 2% Peace and Prosperity Through Science and Collaborationwww.crdf.org

15. Venture Capital Economics VC Fund IX, L.P. LP 1 GP LP 2 LP 3 Portfolio Company 1 Portfolio Company 2 Portfolio Company 3 Portfolio Company 4 Portfolio Company 5 LP 4 Portfolio Company 10 Portfolio Company 9 Portfolio Company 8 Portfolio Company 7 Portfolio Company 6 $180 $20 $100 $25 $40 $35 Peace and Prosperity Through Science and Collaborationwww.crdf.org

16. Financing Your Venture Not all startups require external funding Cash flow comes ultimately and most importantly from customers, NOT from investors Benefits of external funding Cash –Faster growth –Staying power –Competitive positioning –Credibility Value-add investors –Credibility –Customer/partner introductions (Keiretsu effect) –Management expertise Peace and Prosperity Through Science and Collaborationwww.crdf.org

17. Financing Options Non-Equity Personal funds Personal debt Grants and awards Customer pre-sales Venture leasing Receivables financing Business loans In-kind contributions Joint ventures Equity Venture capital Angels The 3Fs – Friends, Family and Fools Corporate direct investment Equity is the most expensive form of capital! Peace and Prosperity Through Science and Collaborationwww.crdf.org

18. Major Financing Questions How much? When? From where / whom? What terms? Security Valuation Control Timing Peace and Prosperity Through Science and Collaborationwww.crdf.org

19. Raise Money from a Position of Strength Have cash in the bank Prepare to build your company without any outside investment (bootstrap) Seek to secure multiple competing offers Raise money when you can, not when you have to (Sun Tzu – In times of war, prepare for peace) Have a call to action Peace and Prosperity Through Science and Collaborationwww.crdf.org

20. Seek True Value-Added Investors Understand your business Operating experience Domain and/or geographic experience Rolodex / network Relevant portfolio Relevant limited partners (in your space) Deep pockets / courage to stay the course Peace and Prosperity Through Science and Collaborationwww.crdf.org

21. Fundraising Process 0123456789101112131415161718 Business Plan Submissions Investor Presentations Term Sheet Negotiations Final Documentation Funding Budget 4-5 months, or more Peace and Prosperity Through Science and Collaborationwww.crdf.org

22. LAUNCHING YOUR STARTUP Understanding Venture Financing Jim Butterworth Idea to Market Workshop Ukraine, September 2008

23. LAUNCHING YOUR STARTUP Raising Venture Capital Jim Butterworth Idea to Market Workshop Ukraine, September 2008

24. Launching Your Startup Understanding Venture Financing A Primer on Venture Capital Financing Your Venture Other Startup Considerations Raising Venture Capital The Transition from Idea to Execution Business Planning Peace and Prosperity Through Science and Collaborationwww.crdf.org

25. Lifecycle of a Startup Conception / Invention Seed Stage Formation / incorporation Market research Product research Early Stage Product development Team formation Infrastructure build-out Launch Growth Stage Expansion Phase Exit Post-Exit Peace and Prosperity Through Science and Collaborationwww.crdf.org

26. Lifecycle of a Startup Conception / Invention Seed Stage Formation / incorporation Market research Product research Early Stage Product development Team formation Infrastructure build-out Launch Growth Stage Expansion Phase Exit Post-Exit Peace and Prosperity Through Science and Collaborationwww.crdf.org

27. Startup Fundamentals Solid foundation = best chance of funding your venture Peace and Prosperity Through Science and Collaborationwww.crdf.org

28. Pour a Solid Foundation Market-driven concept Talk to prospective customers Assess market and competition Resolve legal issues upfront Satisfy prior employment obligations Incorporate properly Check intellectual property rights Spin-out cleanly Form a solid team Management, board, advisors, professionals Teamwork begets success If possible, kick-start the business Spin-out / acquisition Key customer Peace and Prosperity Through Science and Collaborationwww.crdf.org

29. Be Market-Driven! Purchase decisions are based on relationships – understand your customers Understand and model your customers economic benefit: How are they currently solving the problem? How will their work processes change by using your product? What is their economic benefit / ROI? Your product / service must be better, faster and cheaper Peace and Prosperity Through Science and Collaborationwww.crdf.org

30. Protect Your Assets! Peace and Prosperity Through Science and Collaborationwww.crdf.org

31. Cash Flow is Your Life Blood! CFIMITYM Cash flow comes ultimately and most importantly from customers, not from investors Profit is not cash flow Capitalize properly Peace and Prosperity Through Science and Collaborationwww.crdf.org

32. Business Planning The plan is useless; its the planning thats important. General Dwight D. Eisenhower, on the success of his D-Day invasion plan The process of uncovering and identifying what creates and drives value in your business, and the risks involved A business plan is an output of the business planning process Peace and Prosperity Through Science and Collaborationwww.crdf.org

33. Output of the Business Planning Process Business plan (narrative) Pro forma financial statements PowerPoint pitch (12-13 pages) Elevator pitch (1-2 minutes) Peace and Prosperity Through Science and Collaborationwww.crdf.org

34. A Business Plan… Describes all the critical internal and external elements and strategies for guiding the direction of your company Communicates how you will create sustainable value Identifies risks and uncertainties and communicates how you will manage them Describes the companys structure, objectives and future plans Peace and Prosperity Through Science and Collaborationwww.crdf.org

35. Uses of a Business Plan (Internal) Refining your product / service strategy Identifying key customers Identifying milestones and timelines Helping set objectives & performance metrics Managing risk and uncertainty Motivating and focusing employees Analyzing capital budgeting decisions Facilitating new product development Integrating new acquisitions Facilitating restarts, restructuring and turnarounds Peace and Prosperity Through Science and Collaborationwww.crdf.org

36. Uses of a Business Plan (External) Attracting key employees Educating potential investors Arranging strategic alliances Obtaining large contracts with strategic customers Facilitating mergers and acquisitions Peace and Prosperity Through Science and Collaborationwww.crdf.org

37. The 12-13 Page PowerPoint Pitch 1.Summary (1) Mission statement What is the idea? How will it create value? Timeline / milestones Expected results Specific request (e.g., $) Peace and Prosperity Through Science and Collaborationwww.crdf.org

38. The Mission Statement To create [value/EVA] by [product/service] for/to [customer(s)] by… Strategic Objective 1 Strategic Objective 2 Strategic Objective 3 Peace and Prosperity Through Science and Collaborationwww.crdf.org

39. The Mission Statement Peace and Prosperity Through Science and Collaborationwww.crdf.org

40. Mission Statement Example To be Ukraines leading producer of A- class widgets to the _______ sector by: Securing exclusive purchase contracts with 3 of the top 10 customers of A-class widgets in Ukraine; Creating proprietary manufacturing methods for the highest yield of A-class widgets; and Building a world-class team of research & development scientists and engineers. Peace and Prosperity Through Science and Collaborationwww.crdf.org

41. The 12-13 Page PowerPoint Pitch 1.Summary (1) Mission statement What is the idea? How will it create value? Timeline / milestones Expected results Specific request (e.g., $) 2.Market Overview (2) Substantiation of need The opportunity (size, trends, etc.) Markey validation Identification of prospective customers Peace and Prosperity Through Science and Collaborationwww.crdf.org

42. Major Pain Points What is the major pain your customers face currently and/or in the future? Cost Convenience Growth Focus Time-to-market Regulatory compliance Why are alternative products/services not addressing the pain (fully)? Why wont this change? Peace and Prosperity Through Science and Collaborationwww.crdf.org

43. Favorable Market Dynamics The market is large for our product/service: Size stat 1 Size stat 2 Size stat 3 The market is growing for our product / service: Growth stat 1 Growth stat 2 Growth stat 3 Market trends favor us: Trend 1 Trend 2 Trend 3 Peace and Prosperity Through Science and Collaborationwww.crdf.org

44. The 12-13 Page PowerPoint Pitch 1.Summary (1) Mission statement What is the idea? How will it create value? Timeline / milestones Expected results Specific request (e.g., $) 2.Market Overview (2) Substantiation of need The opportunity (size, trends, etc.) Markey validation Identification of prospective customers 3.Description of Product / Service (2) Overview of product / service, including high- level technology description Specific value proposition (including qualitative & quantitative customer benefits) Correlate product / service features & benefits with market needs Value chain dynamics Peace and Prosperity Through Science and Collaborationwww.crdf.org

45. The 12-13 Page PowerPoint Pitch 4.Operating Plan (2) Production / manufacturing Marketing / distribution Sales & marketing plan 5.Competitive Environment (2) Sustainable competitive advantages Alternatives Competition (existing and potential Peace and Prosperity Through Science and Collaborationwww.crdf.org

46. Whats Proprietary About Your Idea? Competitive Advantages Proprietary IPR Exclusive distribution Exclusive content / sources Proprietary manufacturing Proprietary integration Installed base / customer contracts Unparalleled capital structure Unparalleled scale, scope and/or focus Team with unique expertise and/or access First mover advantage Distinguish between momentary and sustainable Must correlate to strategic objectives Peace and Prosperity Through Science and Collaborationwww.crdf.org

47. The 12-13 Page PowerPoint Pitch 4.Operating Plan (2) Production / manufacturing Marketing / distribution Sales & marketing plan 5.Competitive Environment (2) Sustainable competitive advantages Alternatives Competition (existing and potential 6.The Team (1) Management expertise & relevance Board, advisors, professionals & others Identify key hiring needs 7.Financials (1-2) Pro forma snapshot Key metrics / drivers Funding requirements (optional) Peace and Prosperity Through Science and Collaborationwww.crdf.org

48. Financial Projections (in thousands) 2007200820092010 Revenue driver 1 (1) Revenue driver 2 (2) Cost driver 1 (3) Net Revenue – Cost of Sales (4) = Gross Profit – SG&A (5) = Pre-tax Income (Loss) Notes (1)Assumption 1 (2)Assumption 2 (3)Assumption 3 (4)Assumption 4 (5)Assumption 5 Numbers will prove wrong! Key is to understand drivers and assumptions since… Peace and Prosperity Through Science and Collaborationwww.crdf.org

49. Funding Requirements Does your venture need external financing? How much & when? Venture capital, debt, etc. Capital structure considerations Options plans, etc. Position vis-à-vis in-kind contributions Use of proceeds; e.g.: Staff$200,000 Technology & IPR development150,000 Equipment & facilities200,000 Other legal, operations, SG&A and misc.100,000 Reserve (net of cash on hand)100,000 Total$750,000 Peace and Prosperity Through Science and Collaborationwww.crdf.org

50. The 12-13 Page PowerPoint Pitch 4.Operating Plan (2) Production / manufacturing Marketing / distribution Sales & marketing plan 5.Competitive Environment (2) Sustainable competitive advantages Alternatives Competition (existing and potential 6.The Team (1) Management expertise & relevance Board, advisors, professionals & others Identify key hiring needs 7.Financials (1-2) Pro forma snapshot Key metrics / drivers Funding requirements (optional) 8.Road Map (1) Major accomplishments 90-day plan Horizon Peace and Prosperity Through Science and Collaborationwww.crdf.org

51. The 12-13 Page PowerPoint Pitch 9.Appendix (as long as you want) Market details (e.g., surveys) Product details Operating & financial details Résumés (CVs) Articles / research reports Patents & IPRs Key contracts Brochures Peace and Prosperity Through Science and Collaborationwww.crdf.org

52. The Elevator Pitch One of the most important outputs of business planning Convinces the target person to schedule a longer meeting with you Empowers and enables the target person to convince other appropriate people to become interested in your idea Resonates, demonstrates sincerity Communicates a sense of value, empathy and urgency No more than 1-2 minutes! Peace and Prosperity Through Science and Collaborationwww.crdf.org

53. Part I Summary Pour a solid foundation Protect your strategic assets (like IPRs) Value is in the business planning, not the business plan Be concise and to the point with pitch materials Be top-down customer-driven, not bottom-up product-driven Peace and Prosperity Through Science and Collaborationwww.crdf.org

54. Fundraising Lessons Network to gains access to VCs Dont get hung-up on confidentiality Be persistent Be humble yet confident, and always courteous and professional Embrace and learn from rejection Be greedy in the long-run (any % of something > 100% of nothing!) Peace and Prosperity Through Science and Collaborationwww.crdf.org

55. Believe In Your Idea! The wireless music box has no imaginable commercial value. David Sarnoff Associates, in rejecting a proposal for investment in the radio in the 1920s We don't like their sound, and guitar music is on the way out. Decca Recording Co., rejecting the Beatles in 1962 Theres never going to be a market for the telephone, and therefore we have declined the offer to take a license. Chairman of Western Union, in its annual report from the late 1800s Who the hell wants to copy a document on plain paper? National Inventors Council, as told in 1940 to Chester Carlson, founder of XEROX Peace and Prosperity Through Science and Collaborationwww.crdf.org

56. Attributes of a Successful Entrepreneur Problem solver Decisive Leader & motivator Humble Passionate Persistent Optimistic Professional High integrity Critical path doer Impatient / bias toward action (with analysis) Rejoices in others victories Focused on the long-term goal Peace and Prosperity Through Science and Collaborationwww.crdf.org

57. and … Just Do It! Peace and Prosperity Through Science and Collaborationwww.crdf.org

58. Closing thoughts… Focus on the long-run What goes around comes around Friendships last longer than jobs Dont let greed blind the objective Make the most of the experience Listen & learn Failure or rejection is what you make of it Entrepreneurship is a lifestyle choice Balance your risk & return Seize opportunities Lifes short, have fun! Peace and Prosperity Through Science and Collaborationwww.crdf.org

59. LAUNCHING YOUR STARTUP Raising Venture Capital Jim Butterworth Idea to Market Workshop Ukraine, September 2008