GLecture78FinancingFundraisingDealTermsv3

FINANCIALS FUNDRAISING & TERM-SHEETS GITANJALI SWAMY

1

STRATEGIC FINANCIAL MANAGEMENT Definition: the application of financial techniques to strategic decisions in order to help achieve the decision-maker's objectives

Strategy: a carefully devised plan of action to achieve a goal, or

the art of developing or carrying out such a plan

Finance: the business or art of managing the monetary resources of an organisation

Management: the organising and controlling of the affairs of an organisation or a particular sector of an organisation

2 Source: TBD

STRATEGY FROM HARVARD BUSINESS SCHOOL Fundamental to the success of any company and to any effort to develop strategy is having a proper goal for business clearly

Purpose: How will your organisation achieve its desired financial position?

To achieve this, you must ask:

WHAT future position do you aim to reach? WHERE are you now? HOW - are you going to get there?

3

BREAKING THE STRATEGY DOWN

Immediate needs

Short Term requirements

Medium/ Long Term Requirements

4

IMMEDIATE NEEDS

Cash Pressures: Income Flows; Expenditure; and Capital/ one off expenditure

Resources it can utilise

Current position ensure this is correct before moving on

5

SHORT TERM REQUIREMENTS 6-12 month plan

Action points to turn these into financial strategy

Realism

Cash and accrual budgets for next ,and following 5 years

Systems in place to support the strategy

Alignment of strategy with corporate plan

6

MEDIUM / LONG TERM REQUIREMENTS

Income streams new/ different?

Expenditure investment into future income streams. Address the imbalance of revenues and expenditure

Finance what type is most suitable?

Reporting and managing the strategy

7

TOOLS OF THE TRADE

8

KPIs

Financial Statements

Cash Flows

Forecasts

Project Budgets

Mment Reports

Budgets

Business/ corporate

plan

TOOLS

SALES FORECAST EXAMPLE Months Jan Feb Mar TotalProduct/Service #1

Units Sold 30 40 50 120Price per Unit $300 $300 $300 $300Total Sales $9,000 $12,000 $15,000 $36,000Product/Service #2Units Sold 70 70 80 220Price per Unit $500 $500 $500 $500Total Sales $35,000 $35,000 $40,000 $110,000Product/Service #3Units Sold 2 2 2 6Price per Unit $3,000 $3,000 $3,000 $3,000Total Sales $6,000 $6,000 $6,000 $18,000

Total-All Product/Service Sales $50,000 $53,000 $61,000 $164,000 9

COST OF PROJECTED PRODUCT UNITS SOLD BUDGET

Months Jan Feb Mar TotalProduct #1Units Sold 30 40 50 120Cost per Unit $45 $45 $45 $45Total Cost $1,350 $1,800 $2,250 $5,400Product #2Units Sold 70 70 80 220Cost per Unit $150 $150 $150 $150Total Cost $10,500 $10,500 $12,000 $33,000Product #3Units Sold 2 2 2 6Cost per Unit $300 $300 $300 $300Total Cost $600 $600 $600 $1,800

All ProductsTotal Cost $12,450 $12,900 $14,850 $40,200

10

GROWTH (OR START-UP) EXPENSES

11

A Cash Available Now1 Purchase fixed assets( Land, equip., building, vehicles)

(See Fixed Assets Acquisition Budget Worksheet)2 Remodeling costs (fixtures, signs, paint, cleaning)3 Installation fees (equip., phones, leased equip.)4 Deposits (utilities, lease, phone, leased equip.)5 Fees and licenses, certifications6 Special one-time legal fees (specifically for growth/start-up)7 Special accounting and/or other professional fees8 Pre-opening labor expense9 Pre-opening training costs

10 Beginning inventory of merchandise or materials11 Supplies (letterhead, forms, price tags)12 Promotion (grand opening, prizes, give-aways)13 Advertising (initial media, direct mail, coupons)14 Other rxpenses (one-time, specifically related to growth/start-up):

14a14b14c14dB. Total Growth (or Start-up) ExpensesC. (A - B ) Beginning Cash Balance

Cost

FINANCIAL WORKSHEETS COMPLETED

Salaries/Wages & Benefits (Fully loaded including payroll taxes) Consultants Marketing Budget Overhead Expense Miscellaneous Expense Sales Forecast Cost of Projected Product Units Sold Fixed Assets Growth (or Start-up) Expenses Existing Debt

12

FIXED EXPENSES (COSTS)

13

$0

$2,000

$4,000

$6,000

0 100 200 300 400

Number of Product/Service Units Sold

Fix

ed E

xp

ense

s (C

ost

s)

VARIABLE EXPENSES (COSTS)

14

$0

$500

$1,000

$1,500

$2,000

$2,500

0 100 200 300 400

Number of Product/Service Units Sold

Var

iab

le E

xp

ense

s (C

ost

s)

BREAK-EVEN

15

Past

Future We Create

Future We Accept

Present Traditional extrapolation

Future-based migration path

Stretch

Fit

Future Were Exposed to

WORK BACK FROM THE FUTURE

16

PUTTING IT TOGETHER: THE CASH FLOW CURVE

17

Cumulative Cash Flow in $

Time

Burn Rate

Date of First Cash Flow Positive

Maximum Financing Needs

Date of Cumulative Cash Breakeven

PUTTING IT ALL TOGETHER: SOURCES & USES

18

NEW VENTURE MODELS

19

Seed Product Dvpt. Market Dvpt.

Estabd. Business

Stages

Concept

Independent Start-Up

Business Unit Marketing Engineering

Self - funded Acquisition

Venture Capital Funding

Spinout Internal Joint Venture Strategic Alliance

Corporate Ventures

Source: TBD

WHAT IS PRIVATE EQUITY? Private Equity is an asset class consisting of securities in operating companies that are not publicly traded. Investments in private equity most often involve either an investment of capital into an operating company or the acquisition of an operating company.

20

Source: TBD

PRIVATE EQUITY VALUE ADD VS. STAGE

21

Research Seed/ Project Finance

Venture Early Stage

Mid/Late Venture

Growth Equity

Buyout Public Market

Pipe

Gui

danc

e Str

ateg

y &

Fu

ndra

isin

g

Prod

uct/S

ervi

ce

Man

agem

ent

Bus

ines

s D

evel

opm

ent

Sale

s

Mar

com

Fina

ncia

l En

gine

erin

g

Plan

ning

Cor

pora

te

Fina

nce

IP

Prod

uct

Plan

Ea

rly

Rev

enue

Pro

fit

Leve

rage

Ope

ratio

ns

P(success) = 30% Reqd IRR = 100%




Idea is Feasible

Technology Works

Customer Buys

Product Stable

Market Expansion

Valuation Risk Source: Dr. Gitanjali Swamy, MGMT-E2790 Lectures, Harvard University 2011

PRIVATE EQUITY

22

Venture Capital: Pre-protability, high growth or

disrup8ve technology Dominant posi8on - Typical 20-50%

ownership Pro-rata investment Use of term sheets to mi8gate risk

and guarantee return Board control Valua8on is what someone else will

pay for it

Growth Equity: Growth, Expansion Minority posi8on in high growth Growing, protable, rst ins8tu8onal Valua8on is typically based on more

conven8onal models

Leveraged Buyouts: Protable, Pre-leverage Control posi8on Typical 80-100%

ownership Use of commercial paper (debt)

Returns through levering capital structure to greater eciency (ITS etc.)

Leverage of 70-80%

Corporate VC: Strategic synergies: Strategic rather than nancial metrics Invest in companies Returns through parent market

advantage Minority or control

Others: Angel, Mezz Debt

MGMT-E2790, Harvard University, Alternatives: Private Equity, Dr. Gitanjali M. Swamy

INVESTMENT PROCESS

FILTER Investment Thesis Fit Financial Returns Analysis - Stage Risk/Return, IRR - P&L, Cashflow, EBITDA, Growth Firm fit - Stage - Leverage strength Readiness & Milestones

TARGET LIST

RE- EXAMINE PURSUE

DILIGENCE Quality: Pattern Recognition People: Evaluation Management team Opportunity Market size Competition Product Business Model Context Market timing Market growth Market disruption Deal Financials Price & Valuation Capitalization Structure

THESIS BUILDING

ZUCI PROPRIETARY & ADVISORY NETWORK

ACADEMIA

INTERMEDIARIES

LARGE COMPANIES ADVISORY INCUBATION

SOURCES

Investment Committee one pager Financial Risk/Return Evaluation Portfolio Strategy Fit

Investment Committee Diligence Go Ahead

Investment Committee/Team Presentation Deal team detailed investment proposal Investment Committee/Team Recommendations to Deal Team

Investment Committee Emergency Veto on Terms

NEGOTIATION Structure - Common equity - Convertible preferred - Common Debt - Convertible preferred Economics - Pre/Post Money Valuation - Cumulative dividends - Pro-rata investment Governance - Board seat - Veto and approval rights Downside Protection - Liquidation preference - Auto conversion - Redemption Exit -IPO/ Strategic Sale - Tag along rights

Final Decision: Deal Partner

23

TERM SHEET: STRUCTURE Common equity: Issue is investor protection

Suppose A takes $10M for biz plan from investor B for 50% Next day A liquidates company and distributes $5M to B !!

Convertible preferred: Most common

Key question is conversion price Typically conversion price is re-adjusted with dilution Many types of anti-dilutive strategies

Common Debt: Stringent interest rates

Typically converts at valuation of next round with interest rate

24

TERM SHEET: ECONOMICS Pre/Post Money Valuation

Pre-Money= before investment Post-Money=after investment Valuation is an art form

Cumulative dividends Dividends are rare in institutional Private Equity But buyback/dividends is an underutilized form of exit

Pro-rata investment Very common in VCs = Handcuffs Guarantees investor rights in future rounds Pro-rata = in proportion to current ownership

Interest rate and conversion: For debt structures

25

TERM SHEET: GOVERNANCE Board seat

Typically Private Equity Investors need at least one Often have representation in relation to ownership In extreme cases have board control But creates conflict and moral hazard if they are also subsequent

investors

Veto and approval rights Require special approvals on large expenditure > $50k Require veto rights allowing them to overturn board decisions on

certain key aspects such as CEO selection, dilution etc.

26

TERM SHEET: DOWNSIDE PROTECTION Liquidation preference

1x = Simple preference 2x = double dipping etc.

Anti-dilution provisions

Full ratchet = full preservation % of investor ownership Weighted average = partial preservation % of investor ownership

Auto conversion

Automatic conversion of preferred into common at IPO or acquisition

27

TERM SHEET: EXIT Registration Rights

Demand Rights: Require registration (for an IPO) after a certain period. May list S-3 registration or piggy-back rights on all company registration

Tag Along Rights: Enables the investor to tag along on any stock sale

Drag Along Rights: Enables the investors to force or drag the investor to sell their shares if needed

Right of First Refusal: The investor has the first right to buy any equity offered by the company at a price. Redemption Rights: Require that the company redeem or buy-back a certain % of preferred by specified date

28

TERM SHEET: OTHER Reserved or employee pools:

Typically set aside 10-20% and avoid investor dilution

NDA and Non-compete for employees, founders Key employee contracts and Key Man insurance Vestation clauses: typically 4-5 vestation of equity with a first year cliff vestation. Expenses and timelimits

29

MANAGEMENT DIRECTORS, INDEPENDENT DIRECTORS AND VC DIRECTORS Management directors (usually 1-2)

must maintain open communications provide timely, adequate and pertinent information delivering both good and bad news promptly in a balanced manner. prepare board meetings to enable in depth conversation respond positively to board input.

Independent directors

work as a team with fellow board members serve as a sounding board and mentor to the CEO. chair or participate on board committees mediate between management and investor directors serving as

disinterested directors.

30

MANAGEMENT DIRECTORS, INDEPENDENT DIRECTORS AND VC DIRECTORS VC Directors must

understand the competitive position maintain awareness of developments in industry sectors. help companies close business outside the board room, share company knowledge from the portfolio experiences contribute knowledge plus experience during liquidity events. lead role in financing. attract management team members It is critical for VC directors to understand and differentiate

between their responsibilities as directors and their role within a particular fund.

31

TRANCHES OF INVESTMENT

32

Round A B C D E F Date 20-Jan-95 20-Jan-95 30-Sep-95 30-Apr-96 24-Oct-97 31-Jul-98

Amount $ 600,025.00 $ 999,975.00 $ 1,000,002.00 $ 7,000,000.00 $ 11,750,000.00 $ 12,000,000.00 Price/common share N/A N/A $ 1.05 $ 1.62 $ 6.00 $ 6.75

In event of liquidation or sale

Paid out after Series B-F

Paid out after Series C-F

If not converted, paid out after Series D-F

If not converted, paid out after Series E & F

If not converted, paid out after Series F AND participates prorata in common

If not converted, paid out after liabilities AND participates prorata in common

In event of IPO No change No change Converts to common Converts to common Converts to common Converts to common Voluntary conversion to common Not convertible Not convertible

Convertible with >66 2/3% vote of round

Convertible with >80% vote of round



Dividend

Immediate quarterly payments of LIBOR + 1%

After Jan. 1, 2000, annual payments of 8% face value





Mandatory redemption?

Yes: 3 equal annual increments beginning January 17, 2000

Yes: 3 equal annual increments beginning January 17, 2000 No No No No

Anti-dilution Yes Yes Yes Yes Yes Yes

Demand registration rights

Demand rights granted upon request of >50% of Series A-D

Demand rights granted upon request of >50% of Series A-D

Demand rights granted at the earliest of (a) July 31, 1999, (b) six months after IPO or (c) the request of >50% of Series A-D

Demand rights granted at the earliest of (a) July 31, 1999, (b) six months after IPO or (c) the request of >50% of Series A-D

Demand rights granted at the earliest of (a) July 31, 1999, (b) six months after IPO or (c) the request of >50% of Series E

Demand rights granted at the earliest of (a) July 31, 1999, (b) six months after IPO or (c) the request of >50% of Series F

Source: Metapath Case, Harvard Business Review

CAPITALIZATION STRUCTURE

33

STOCK

Preferred Stock Common

Warrants & Options

Names C D E Total CE %

Bessemer 955,416 1,015,386 166,667 1,432,500 264,410 3,834,379 27.23% Norwest 2,461,542 435,833 260,282 3,157,657 22.42% Northwest Networks, Inc. 2,317,500 2,317,500 16.46% USVP 769,230 125,000 3,372 897,602 6.37% Michael Tennican 61,542 124,206 185,748 1.32% Other E Shareholders 1,230,832 1,230,832 8.74% Silicon Valley Bank 3,792 3,792 0.03% Stock Purchases under option plans 711,874 711,874 5.05% Outstanding Options 1,743,200 1,743,200 12.38%

TOTAL 955,416 4,307,700 1,958,332 4,461,874 2,399,262 14,082,584


EXIT SCENARIOS

34

SALE Extra CE from participation Total CE % Value of holdings Multiple

Bessemer 143,334 3,977,713 25% $ 27,751,326 5.97 Norwest 374,819 3,532,476 22% $ 24,645,034 3.73 Northwest Networks, Inc. - 2,317,500 15% $ 16,168,510 161.64 USVP 107,501 1,005,103 6% $ 7,012,303 3.51 Michael Tennican - 185,748 1% $ 1,295,909 12.96 Other E Shareholders 1,058,522 2,289,354 15% $ 15,972,141 2.16 Silicon Valley Bank - 3,792 0% $ 26,456 Stock Purchases under option plans - 711,874 5% $ 4,966,534 Outstanding Options - 1,743,200 11% $ 12,161,789

Total 15,766,759 $ 110,000,000

Sale assumptions: Price of sale: 110 M ($)

Value of common w/o participation $ 7.81 Value of common w/ participation $ 6.98

(participation taken in stock)


UNDERSTANDING VALUATION VCPE Investment Valuation is a combination:

Return requirements for PE fund Stage or Risk of Investment Use of Debt Capital Milestones/progress Comparables in PE market (Transactions) Comparables in Public market (IPOs) Comparables in M&A Negotiation capabilities of each party

35

VALUATION: VENTURE

36

Investment Rounds! Stage 1! Stage 2! Investment Amount! $5.0 ! $10.0 ! Required Stage 1 ROR! 50.0%! 30.0%! Years to Terminal Stage! 5.0 ! 3.0 ! Shares outstanding before investment! 1,000,000 ! !

! ! ! ! ! ! Terminal Stage!

Terminal Management Share! 10.0%! Terminal Sales! $100.0 !MM! Terminal Net Margin! 5.0%! Terminal PER! 20.0 !X! Terminal Value of Enterprise! $ 100.0 !MM Return of Stage 1 Principal! $0.0 !MM! Return of Stage 2 Principal! $0.0 !MM!

Terminal Calculations! Stage 1! Stage 2! Total!

Total Terminal Value ! $38.0 ! $22.0 ! $ 100.0 !MM Return of Principal ! $ - ! $ - ! ! Equity Value Required ! $38.0 ! $22.0 ! !

! ! ! ! Terminal Share! Stage 1! Stage 2! !

Equity Ownership ! 38.0%! 22.0%! ! Pre-Money Valuation ! 38.0%! 22.0%! !

! ! ! ! Management Terminal Value ! 10.0 ! ! !

UNDERSTANDING VALUATION

Simple Two Stage Investment!! ! ! ! !Shares Outstanding (000's)! Founder! Stage 1! Stage 2! Terminal!Founder! 1,000 ! 1,000 ! 1,000 ! 1,000 !Stage 1! ! 1,263 ! 1,263 ! 1,263 !Stage 2! ! ! 731 ! 731 !Management! ! ! ! 333 !Total! 1,000 ! 2,263 ! 2,994 ! 3,327 !! ! ! ! !Equity Ownership %! Founder! Stage 1! Stage 2! Terminal!Founder! 100.0%! 44.2%! 33.4%! 30.1%!Stage 1! ! 55.8%! 42.2%! 38.0%!Stage 2! ! ! 24.4%! 22.0%!Management! ! ! ! 10.0%!Total! 100.0%! 100.0%! 100.0%! 100.0%!! ! ! ! !Pre-Money Valuation ($MM)! ! Stage 1! Stage 2! Terminal!Founder! ! 4.0 ! 13.7 ! 30.1 !Stage 1! ! 5.0 ! 17.3 ! 38.0 !Stage 2! ! ! 10.0 ! 22.0 !Management! ! ! ! 10.0 !Total! ! 9.0 ! 41.0 ! 100.0 !! ! ! ! !Share Price! ! $3.96 ! $13.68 ! $30.06 !

37

VALUATION: BUYOUT

38

Source: Yell Acquistion Case, Harvard Business Review

Yell: Cross Border LBO Analysis Media, Buyout

Figures in $MM unless otherwise stated

Students of Finc-190, Gitanjali Swamy

Valua8on in pounds 1500

Uses of Funds $MM % Sources of Funds $MM % Mult. Base Drivers

Enterprise Value $2,185.5 95.2% Debt $1,584.5 69.0% 20.6x Interest Rate 8.0%

Transac8on Fees $109.3 5.0% Equity $710.3 31.0% 9.2x Apax/Hicks-Muse Preferred Return 0.0%

Total Uses $2,294.8 100.2% Total Sources $2,294.8 100.0% 29.8x Management Op8ons 10.0%

MulMples EBITDA Revenue Equity Sources $MM % Exit AssumpMons

-1 Entry Mult. 28.9x 1.9x Apax/Hicks-Muse Inv. $658.4 92.7% Exit Year 2007

2007 Exit Mult. 28.4x 1.8x Mgmt. Inv. $51.9 7.3% Exit Mul8ple 14.1x

Total Equity $710.3 100.0%

Revenue Compression 5.0% Investment MulMple 2.2 x

EBITDA Margin Compression 5.0%

VALUATION: BUYOUT

39

Actual ProjecMons Further 2000 2001 2002 2003 2004 2005 2006 2007

Income Statement: Revenue 976.8 1,131.6 1,226.8 1,347.9 1,467.3 1,580.2 1,726.6 1,845.9 Growth, % 15.9% 8.4% 9.9% 8.9% 7.7% 9.3% 6.9%

EBITDA 61.5 75.5 77.0 99.0 126.2 132.8 157.3 180.5 Margin, % 6.3% 6.7% 6.3% 7.3% 8.6% 8.4% 9.1% 9.8%

Deprecia8on - 8.06 14.82 15.17 20.80 19.67 19.93 19.66 19.66

EBITA - 53.4 60.7 61.8 78.2 106.6 112.9 137.6 160.8

Interest Expense - - - 126.8 116.8 106.8 96.8 86.8 76.8

Pre-tax Income - 53.4 60.7 (64.9) (38.6) (0.2) 16.1 50.8 84.0

Taxes 37.5% - 20.0 22.8 - - - 6.0 19.1 31.5

Net Income - 33.4 37.9 (64.9) (38.6) (0.2) 10.1 31.8 52.5 Margin, % 3.4% 3.4% -5.3% -2.9% 0.0% 0.6% 1.8% 2.8%

Cash Flow Statement: Net Income - 33.4 37.9 (64.9) (38.6) (0.2) 10.1 31.8 52.5

Plus: Deprecia8on - 8.1 14.8 15.2 20.8 19.7 19.9 19.7 19.7 Less: Increase in Working Capital - 15.4 18.6 3.2 8.7 12.4 9.2 6.4 2.9 Less: Capital Expenditures - 14.5 21.2 25.5 22.9 21.6 21.2 19.7 19.7

Free Cash Flow to Pay Debt - 42.4 50.1 (72.1) (31.9) 10.2 18.0 38.1 55.5


UNDERSTANDING PE VALUATION: BUYOUT

40

Actual ProjecMons Further 2000 2001 2002 2003 2004 2005 2006 2007

Free Cash Flow to Pay Debt - 42.4 50.1 (72.1) (31.9) 10.2 18.0 38.1 55.5

Debt: BOY Net Debt 1,584.5 1,459.6 1,334.7 1,209.8 1,084.9 960.1 Debt Paydown 124.9 124.9 124.9 124.9 124.9 124.9 EOY Debt 1,459.6 1,334.7 1,209.8 1,084.9 960.1 835.2

% Interest Rate 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%

Equity Returns - 2007: Exit Year EBITDA 180.5 180.5 180.5 180.5 180.5 180.5 180.5 180.5

Mul8ple 13.1 x 13.6 x 14.1 x 14.6 x 15.1 x 15.6 x 16.1 x 16.6 x Total Enterprise Value 2,359.5 2,449.7 2,539.9 2,630.2 2,720.4 2,810.6 2,900.9 2,991.1

Less: Net Debt 960.1 960.1 960.1 960.1 960.1 960.1 960.1 960.1 Less: Apax/Hicks-Muse Preferred Dividends - - - - - - - -

Common Equity Value 1,399.4 1,489.6 1,579.9 1,670.1 1,760.3 1,850.6 1,940.8 2,031.0 Apax/Hicks-Muse Equity 1,259.5 1,340.7 1,421.9 1,503.1 1,584.3 1,665.5 1,746.7 1,827.9 Mgmt. Op8ons 139.9 149.0 158.0 167.0 176.0 185.1 194.1 203.1 Apax/Hicks-Muse Total Proceeds 1,259.5 1,340.7 1,421.9 1,503.1 1,584.3 1,665.5 1,746.7 1,827.9 Mul8ple of Ini8al Equity 1.8 x 1.9 x 2.0 x 2.1 x 2.2 x 2.3 x 2.5 x 2.6 x


EXIT STATISTICS

41

Exits 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 20060-100MM+ M&A 90 111 100 127 141 133 123 106 166 127 127100-250MM+ M&A 20 17 30 38 67 30 15 15 26 33 29250-500MM+ M&A 7 7 8 21 33 10 5 2 9 16 17500MM+ M&A 5 1 1 9 38 3 2 1 3 2 3

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 20060-100MM+ IPO 84 38 5 2 0 2 0 1 2 5 5100-250MM+ IPO 99 60 34 72 38 7 7 8 30 19 16250-500MM+ IPO 18 16 23 98 78 9 7 9 25 11 17500MM+ IPO 10 6 10 85 89 7 6 4 11 7 6

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 20060-100MM+ M&A/IPO 174 149 105 129 141 135 123 107 168 132 132100-250MM+ M&A/IPO 119 77 64 110 105 37 22 23 56 52 45250-500MM+ M&A/IPO 25 23 31 119 111 19 12 11 34 27 34500MM+ M&A/IPO 15 7 11 94 127 10 8 5 14 9 9

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006250MM+ M&A 12 8 9 30 71 13 7 3 12 18 20250MM+ IPO 28 22 33 183 167 16 13 13 36 18 23250MM+ IPO and M&A 37 30 40 213 236 28 19 16 47 31 39250MM+ IPO 3 Yr Rolling Sum 0 0 78 228 333 310 144 28 38 40 46

ALL MEDICAL DEVICE IPOS

Sort Id Company Name Close Date Year Series

Amount Raised (USD) Post Value (USD) Coding

179 Adeza Biomedical 10-Dec-04 2004 60 292.01 Medical Devices/Equipment

303 Align Technology 26-Jan-01 2001 130 629.05 Medical Devices/Equipment

428 Animas 20-May-04 2004 63.75 319.08 Medical Devices/Equipment

577 Aspect Medical Systems 27-Jan-00 2000 52.5 290 Medical Devices/Equipment

871 Bruker AXS 14-Dec-01 2001 58.5 366.69 Medical Devices/Equipment

917 Caliper Technologies 14-Dec-99 1999 72 390 Medical Devices/Equipment

1277 Conor Medsystems 14-Dec-04 2004 78 486.78 Medical Devices/Equipment

1400 CTI Molecular Imaging 21-Jun-02 2002 182.24 779.6 Medical Devices/Equipment

1520 DexCom 14-Apr-05 2005 56.4 338.41 Medical Devices/Equipment

2095 FoxHollow Technologies 28-Oct-04 2004 63 355.48 Medical Devices/Equipment

2343 Heartport 25-Apr-96 1996 105 492.3 Medical Devices/Equipment

2424 i3 Mobile 6-Apr-00 2000 81.6 406.15 Medical Devices/Equipment

2501 Illumina 28-Jul-00 2000 96 518.78 Medical Devices/Equipment

2747 IntraLase 7-Oct-04 2004 81.9 401.64 Medical Devices/Equipment

2759 Intuitive Surgical 13-Jun-00 2000 45 330.22 Medical Devices/Equipment

2893 Kyphon 17-May-02 2002 90 637.24 Medical Devices/Equipment

3620 Northstar Neuroscience 5-May-06 2006 106.5 391.38 Medical Devices/Equipment

3668 NuVasive 13-May-04 2004 71.5 284.87 Medical Devices/Equipment

3701 Ocular Sciences 5-Aug-97 1997 118.8 387.85 Medical Devices/Equipment

3837 ORATEC Interventions 5-Apr-00 2000 56 337.09 Medical Devices/Equipment

4543 Sequenom 31-Jan-00 2000 136.5 610 Medical Devices/Equipment

4690 Sonic Innovations 2-May-00 2000 50.4 300.8 Medical Devices/Equipment

4994 Therasense 12-Oct-01 2001 114 712.5 Medical Devices/Equipment

5518 Volcano 15-Jun-06 2006 54.4 297.36 Medical Devices/Equipment

5641 Wright Medical Group 13-Jul-01 2001 93.75 397.79 Medical Devices/Equipment 42

DISTRIBUTION OF LARGE M&A

250MM+ M&A (Carlyle Subsegment w /o Healthcare)

0%

20%

40%

60%

80%

100%

120%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Other

Physical Security

Information Services

Cons/Bus Services

Communications & Netw orks

Semiconductors

Storage

IT Security

Infrastructure Softw are

Application Softw are

Wireless

Consumer Internet and Media

43 Source: TBD

DISTRIBUTION OF LARGE IPOS

250MM+ IPO (Carlyle Subsegment w/o Healthcare)

0%

20%

40%

60%

80%

100%

120%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Other

Physical Security

Information Services

Cons/Bus Services

Communications & Netw orks

Semiconductors

Storage

IT Security

Infrastructure Softw are

Application Softw are

Wireless

Consumer Internet and Media

44

Capital

FUNDING TO MILESTONES AKA OLD-FASHIONED VENTURE CAPITAL

Risk ()

Valuation

Idea is Feasible

Technology Works

A Customer Buys

Seed Funding

R&D Capital

Go-to-Market Captial

Expansion Captial





45

Source: Vinod Khosla Presentation 2003

THE FULLY FUNDED FOLLY A Customer Buys

Fully Fund

IPO (.pray.)

Capital Risk ()

Valuation

Idea is Feasible

Technology Works

46

Source: TBD


A GENERIC EARLY 90S MODEL Round Type Date Amount Raised (MM)

Pre-Money Valuation (MM) IRR Multiple

1 Seed Jan-90 $ 0.50 $ 2 101% 32.53 2 1st Jan-91 $ 3.00 $ 10 70% 8.13 3 2nd Jan-92 $ 8.00 $ 32 50% 3.30 4 3rd Jan-94 $ 13.50 $ 100 32% 1.32 5 IPO Jan-95 $ 150

Total Private Capital $ 25 Million

47


A GENERIC LATE 90S MODEL Round Type Date Amount Raised (MM)

Pre-Money Valuation (MM) IRR Multiple

1 Seed Jan-97 $ 5 $ 35 79% 18.37 2 1st Jan-98 $ 10 $ 100 65% 7.35 3 2nd Jan-99 $ 25 $ 200 59% 4.04 4 3rd Jan-00 $ 60 $ 600 52% 1.52 5 IPO Jan-01 $ 1000

Total Private Capital $ 100 Million $200

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48 Source: Vinod Khosla Presentation 2003

THOUGHT FOR THE DAY ON VALUATION

49

VCS VS. TRADITIONAL METHODOLOGIES

VCs Traditional Pre-Money/Post-Money Targets

Cost +/ Pre-Money/Post-Money Targets

Revenue Mul8ples Modied DCF Cost +/ M&A Value

Discount to IPO Revenue Mul8ples Modied DCF EBITDA Mul8ples Cost +/

EBITDA Mul8ples Price-Earnings Analysis

Secondary Market Price Less Blockage Factors

Pre-Money/Post-Money Targets Cost Approach

Discounted Cash Flow (DCF) Modied DCF (Venture) Transac8ons Analysis

DCF Transac8ons Analysis Public Company Comparables

DCF Transac8ons Analysis Public Company Comparables

Price/Earnings Analysis EBITDA Mul8ples

Secondary Market Price Less Blockage Factors

SEED

EARLY-STAGE

2nd/3rd ROUNDS

PRE-IPO

IPO

POST-IPO

Source: Tuck School, Dartmouth 2007 50

BEST VCPE: IT ISNT EASY - HUMILITY IS KEY Best Return: Google post IPO-$50Bil, 344x

Founders: Two graduate students (who didnt finish their Ph.D.s at Stanford)

Ceo: Former Ceo Novell (and he did finish his Ph.D. at Berkeley) Funder: Sequoia (Mike Moritz), Kleiner, GE Capital Growth: Organic

But Wait What if the Best VCPE firm is also the Worst VCPE firm?

51

WORST VCPE: IT ISNT EASY - HUMILITY IS KEY Biggest Loss in VC : Webvan lost $800Mil

Founders: Prior founder of Borders and Mercury Capital (MIT grad work) Ceo: Former Ceo Anderson (MBA Bradley) Funder: Sequoia (Mike Moritz), Benchmark, Goldman Growth: Organic + Acquisition

Other interesting contenders for VC Bombs Leader: Amped ($360Mil Highland Capital Partners), Procket ($272Mil - USVP ), Pets.com ($50Mil Hummer Winblad)

Biggest Loss in LBO: Washington Mutual lost $7Bil Funder: Texas Pacific Group

Other interesting contenders for LBO Bombs Leader: Capmark($2Bil KKR, Goldman) EMI ($2.7Bil Terra Firma)

52

SUMMARY Budgeting & Financials Fundraising Term sheet as a Roadmap Valuation

53

GLecture78FinancingFundraisingDealTermsv3

Documents

total sales

strategy alignment of

tbd strategy

productstotal cost

productservice sales

plan finance

income flows expenditure

expenditure resources