Raising Money in Small Companies November 11, 2004

Raising Money in Small Raising Money in Small CompaniesCompanies

November 11, 2004November 11, 2004

Dale H. MunkDale H. Munk

Raising Money in Small Raising Money in Small CompaniesCompanies

November 11, 2004November 11, 2004

One Man’s ViewOne Man’s View

BackgroundBackground-Farmer from Southern Idaho-Married, Five Children-MBA from the Other School in Utah-Business Locations Boston, San Diego and Provo-Focused on Small to Medium Sized Companies /

Troubled

MoneyMoney

-Almost All Businesses Need It

-You Need Much More than You Think

-Bad Things Happen if You Can’t Get It

-Survive or Capitalize on Opportunities

Three Primary Three Primary Sources of FinancingSources of Financing

-Venture Capitalists

-Angel Investors

-Strategic Partners

Three Primary Three Primary Sources of FinancingSources of Financing

-Venture Capitalists

-Angel Investors

-Strategic Partners

Dramatic UpheavalDramatic Upheaval

-First Quarter, ’00 the Zeneth-$29 Bil

-Last Quarter-$5.9 Bil

-Last Quarter at-Q4, 1998 Levels

Dramatic UpheavalDramatic Upheaval

-In Q1 2000, Invest in Any Crazy Idea

-Today, Better Have a Great Plan

-Startup Investments are Sparce

-Old Deals are on Life Support

Vulture CapitalVulture Capital

-Waiting to Pick the Bones

-Greed and Fear-Mostly Greed

-Demand 50%-70% of the Company

-Ruthless with Management

A Kinder, Gentler A Kinder, Gentler ViewView

-Providing Fuel for Ideas

-Facilitate the Advancement of Technology

-Take Big Risks / Should Get Big Rewards

Vulture Capital ScenarioVulture Capital ScenarioLocal Current ExampleLocal Current Example

-Three Founders Raied $2 Mil from Friends and Family

-Worked Like Dogs for Eight Years

-Suffered

-Went to VCs for Rescue

Vulture Capital ScenarioVulture Capital ScenarioLocal Current ExampleLocal Current Example

-Took 60%, 25% and 25% in Three rounds

-Founders Now Hold 1.2% But are at the Bottom of the

Waterfall. Will Get Nothing

-Lost Their Jobs to Boot

Qualify for Venture CapitalQualify for Venture CapitalIf You HaveIf You Have

-A Credible Management Team

-A Large Market

-A Great Idea With a Great Bus Plan

-A Credible Exit Strategy

Qualify for Venture CapitalQualify for Venture CapitalIf You HaveIf You Have

-Ability to Provide 5-10 X Investment

-Over 3-5 Years

-Implying Ability to Create $50-100 Mil Valuation

How They Think?How They Think?

-Philosophy of 3 of 10 is Good Enough

-A Few Losers, A Few Winners, A few Marginal

-Parametric Technologies

-It is About Managing Risk

Managing RiskManaging Risk

-Take Controlling Position (50%-70%)

-Invest in Seasoned Management

-Conduct Extensive Due Diligence

-Invest Small Amounts in Many Deals

Managing RiskManaging Risk

-Insist on Preferred Stock, Liquidation Preferences, Anti-Dilution

Provisions and Dividends

-Require Board Seats

-Seek Veto Power on Major Decisions

-Get in Your face

Where Do They Get Their Where Do They Get Their Money?Money?

-Wealthy Individuals

-Insurance Companies

-Pension Funds

-Other VC Funds

Venture CapitalVenture Capital

-About 700 (1300) in the US

-Industry Preference

-Geographic Preference

-Round / Class Preference

Venture CapitalVenture Capital

Questions?

Three Primary Three Primary Sources of FinancingSources of Financing

-Venture Capitalists

-Angel Investors

-Strategic Partners

AngelsAngels

-Wealthy Individuals

-Diversifying Their Own Portfolios

-Usually Not Part of Organized Group

AngelsAngels

-More Hands Off than VCs

-Less Sophisticated Risk Evaluation

-Move More Quickly

-Easier to Control

AngelsAngels

-Pay Higher Price

-Willing to Do Seed

-Invest Smaller Amounts

-Less Staying Power

AngelsAngels

Questions?

Three Primary Three Primary Sources of FinancingSources of Financing

-Venture Capitalists

-Angel Investors

-Strategic Partners

Strategic PartnersStrategic Partners

-Investments Leverage Their Own Business Initiatives

-ROI Not Measured by Money on Money

Strategic PartnersStrategic Partners

-Cost of the Money is Lowest

-Other Benefits: Validation, Testing, Marketing Help, Rollout

-In Your Face for All the Right Reasons

Strategic PartnersStrategic Partners

Questions?

Keys to Raising MoneyKeys to Raising Money-Assemble a Good Management Team

-Pursue a Good Idea / Test, Validate, Study it Out

-Quadruple Best Cash Needs Estimates

-Be Persistent-Hang In There

Raising Money in Small Raising Money in Small CompaniesCompanies

March 2, 2004March 2, 2004

QuestionsQuestions