850 Woodside Drive Woodside, California 94062 (650) 368-5545 W O O D S I D E F U N D “Challenges and Funding of Seed and Early Stage

850 Woodside Drive Woodside, California 94062 (650) 368-5545

www.woodsidefund.com

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

OVERVIEW

Woodside Fund Background


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

INVESTMENT CRITERIA

Criteria for Selecting High Potential Companies


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

SEED AND EARLY STAGE INVESTING


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)



Trust is essential, especially when strengthening management and establishing terms.


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




Financing RequirementsCompanies need to meet the investment criteriaDemonstrated progress prior to a major first round outside of the initial syndicateBuild solid references

Successful beta sites, customers, strategic alliancesExcellent presentation materials

A cogent executive summary and powerpoint presentationA well thought out business planProfessional quality writing and graphicsDo not include price, valuation and size of financingInclude technical, financial and other details in the appendices




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?




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 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




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




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?



VENTURE CAPITAL STATISTICS

Venture-backed investments hit a record $9 billion, far exceeding the previous record of $7.6 billion in the second quarter 1999.

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


6.4 6.44.5

34.7 5.4 4.8

5.8

9.9

14

19.1

28.6

0

5

10

15

20

25

30

$ bi

llion

s

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Q1-Q31999

Source: Venture Economics

VENTURE CAPITAL DISBURSEMENTS1988-1999


81

36 39 42

127

160172

143

204

280

138

78

180

84

0

50

100

150

200

250

300

# o

f IPO

s

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Q1-Q31999

Q31999

VENTURE BACKED IPOS1987-1999



37

98

49.5

8865.6

163

82.4

209.3

66.4

164.3

72.8

229.1

119.9

435.6

0

50

100

150

200

250

300

350

400

450

$ m

illio

ns

1993 1994 1995 1996 1997 1998 Q1-Q3 1999

M/ AIPO

AVERAGE VALUATION OF

VENTURE BACKED IPOS VS. M&AS


Documents

850 Woodside Drive Woodside, California 94062 (650) 368-5545 W O O D S I D E F U N D “Challenges and Funding of Seed and Early Stage