October 30, 2001 Bruce Rothney Managing Director Is Everything Going to be OK? The new reality, and its implications for private equity.

October 30, 2001

Bruce Rothney

Managing Director

Is Everything Going to be OK?

The new reality,

and its implications for private equity

RBC Capital Markets

Extensive Corporate Relationships

80 analysts covering over 800 companies

30 analysts covering technology and communications

Ranked #1 Overall by Canadian Fund Managers

- Reuters Survey 2000

Ranked #1 for ideas and #3 for quality by US investors

- 2000 Greenwich Associates Survey

80 analysts covering over 800 companies

30 analysts covering technology and communications

Ranked #1 Overall by Canadian Fund Managers

- Reuters Survey 2000

Ranked #1 for ideas and #3 for quality by US investors

- 2000 Greenwich Associates Survey

Focused and Credible Research

“RBC DS, the best domestic M&A

house in Canada” - Euromoney 2000

Results in 2000:• advised in 14 of the 20 largest transactions involving Canadian targets• eighth ranked advisor in North American

Technology and Communications M&A

“RBC DS, the best domestic M&A

house in Canada” - Euromoney 2000

Results in 2000:• advised in 14 of the 20 largest transactions involving Canadian targets• eighth ranked advisor in North American

Technology and Communications M&A

Top M&A Advisor

One of North America’s leading growth investment banks

Pro-AMS Trust

RBC Capital Markets

Expanding North American Retail Distribution Capabilities

Combined North American Retail Sales Force:

Investment Advisors: 3,772

Total Assets Under Management: US$168 Billion

Combined North American Retail Sales Force:

Investment Advisors: 3,772

Total Assets Under Management: US$168 Billion

Largest Canadian Retail Distribution Network

Comparison of Canadian Investment Dealers

$0

$20

$40

$60

$80

$100

$120

RBC DS BMO NesbittBurns

Merrill LynchCanada

CIBC WorldMarkets

Scotia Capital TD Securities

Retail Assets Under Management

(C$ Billions)

0

300

600

900

1,200

1,500

1,800

Number of Retail Brokers

AUM Brokers

RBC Capital Markets

Provideseed capital

Start-up

Provideventure

capital &merchantbanking

Growth

Placeequity

securitieswith

institutionalinvestors

Expansion

Manageentrance

into publicequity

markets

IPO

Issuefollow-on

equity & debtsecurities

Addl. PublicFinancings

Providecomprehensive

follow-onsupport

Research& Trading

Mergers &Acquisitions

sell-side/buy-side

Advisory

RBVI RBC Cap Partners

EPPG

RBC Capital Markets

KBI Banking

RBC Financial Group - Life cycle approach to financing

What a difference a year makes

The Bubble has Burst - Then and Now

Then

Real economy captivated by technology Moving from bricks to clicks

Tremendous IPO & M&A returns Public/private take-out “Bubble”

Virtually unlimited new VC capital formation Billion dollar funds New VC’s entering the game Corporate investment arms established Crossover funds played the quick flip

Thousands of VC funded technology and communications companies

Now

Limited (or negative) growth in IT spending Telecom spending at support levels

Exit opportunities are limited Collapse of unrealistic growth expectations

Only experienced VC’s can raise capital Some funds completely written off Some VC’s are in survival mode Corporate investment arms are reducing or

eliminating their investment activity Crossover funds are focused on public market

opportunities, if anything at all

Investment levels have returned to pre-bubble levels

Then

The Latin word for

“close your eyes and open your mouth”

is prospectus

Dogbert Venture Capital

The picnic’s over

Now

Nortel Picnic

U.S. Investment Returns (as of June 30, 2001)

Returns are down significantly

Source: Venture Economics & National Venture Capital Association

Fund Type 3 Mths 6 Mths 1 Year 3 Year 5 Year 10 Year 20 Year

Early/Seed (3.3%) (14.3%) (20.6%) 81.4% 55.1% 34.5% 22.4%Balanced (2.6%) (13.6%) (16.1%) 46.3% 35.5% 24.7% 16.6%Later Stage (2.7%) (11.3%) (16.3%) 28.3% 24.6% 25.4% 17.4%Buyouts 2.2% (1.7%) (7.2%) 6.1% 11.9% 14.4% 16.5%Mezzanine 0.0% 2.6% 20.8% 11.0% 11.3% 12.2% 11.6%

All Private Equity 0.4% (6.0%) (11.3%) 20.1% 21.7% 20.2% 17.8%

Source: Venture Economics & National Venture Capital Association

* Based on returns from venture capital funds with 60% and above concentration in a particular industry

Industry 3 Mths 1 Year 3 Year 5 Year

Communications (7.0%) (38.3%) 69.7% 43.4%Computer Related (0.6%) (12.1%) 7.3% 0.6%Internet Specific (8.2%) (27.7%) 35.7% 33.8%Biotech/Pharmaceuticals 3.3% 12.4% 60.6% 42.5%Medical/Health 3.7% (6.3%) 12.9% 12.6%

The New Reality

U.S. Exit Summary of VC-Backed Companies (as of June 30, 2001)

M&A is currently the only available exit

Source: Thomson Financial/Venture Economics & National Venture Capital Association

* Value of IPO based on shares offered

0

100

200

300

400

500

600

# o

f E

xits

1996 1997 1998 1999 2000 YTD 2001

M&A IPO

391

295 274

486 533

160

$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

Val

ue

of

Exi

ts (

US

$ B

)

1996 1997 1998 1999 2000 YTD 2001

M&A IPO*

$20.3 $12.7 $13.0

$55.9

$92.1

$10.7

The New Reality

U.S. VC Fund Raising

Experienced VC’s continue to raise capital

Source: Thomson Financial/Venture Economics & National Venture Capital Assoc.

* 2001 figures have been annualized based on six months figures to June 30, 2001

$0.0

$30.0

$60.0

$90.0

$120.0

$150.0

$180.0

Fu

nd

s R

aise

d (

US

$ B

)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001*

Venture Capital Buyout/Mezzanine

The New Reality

Canadian Investments (as of June 30, 2001)

Canadian investing ahead of 2000 pace, for now

Source: Macdonald & Associates Limited

$0

$1

$2

$3

$4

$5

$6

$7

1998 1999 2000 H1 2000 H1 2001

Inve

stm

ent

(C$

B)

0

200

400

600

800

1000

1200

1400

1600

# o

f C

om

pan

ies

Capital Invested Companies Funded

The New Reality

U.S. Investments by Quarter (as of June 30, 2001)

The U.S. reverts to early 1999 levels

Source: National Venture Capital Association

$0

$5

$10

$15

$20

$25

$30

$35

Q1

1998

Q2

1998

Q3

1998

Q4

1998

Q1

1999

Q2

1999

Q3

1999

Q4

1999

Q1

2000

Q2

2000

Q3

2000

Q4

2000

Q1

2001

Q2

2001

Inve

stm

ent

(US

$ B

)

0

200

400

600

800

1000

1200

1400

1600

1800

2000

# o

f C

om

pan

ies

Capital Invested Companies Funded

The New Reality

Difficult times often produce opportunities

1972/73 - Intel

1985/86 - Microsoft, AOL, Apple

1990/91 - Oracle, Cisco

Criteria for success

Cash, patient investors, great fundraising capability Far easier to find “pile-on” money than lead investors

Partnerships / alliances

Management

Real markets / lead customers

Self evident value proposition lower capital cost, reduce operating expenses, increase efficiency………

Reduced investor returns means competing for less capital

What Does this Mean for Great Private Companies

Industries going “no-bid”

Anything “dot com”

Photonics

Travel related

Industry Opportunities

Energy and power technology

Life sciences

Other leading edge technologies, like quantum computing and nanotechnology

What was hot, is now not

What Does this Mean for Great Private Companies

Terms of Investment

The investor is clearly in the driver’s seat

What Does this Mean for Great Private Companies

1999/2000 2001

Purchasers Mostly new investors Requires significant support from existing investors

Valuation Multiple of revenue / engineers Cashflow based (down-rounds and performance ratchets are commonplace)

Offering Size Often larger than originally planned for, with no identified use of proceeds for the additional amount

Shrinking in absolute terms, but increasing in percentage terms as valuations fallLead conditional on hitting minimum to meet plan

Liquidation Preference Last money in, first money out Double or triple dips (or more)

Liquidation Event At value less than purchase price Any event

Anti-Dilution Clause Weighted average Full ratchet

Protective Provisions On senior and par security issuances On debt, asset sales, capex and operational decisions

Board Representation Membership Control

Option Dilution On existing options On options to be issued

Investor Returns As converted to common Guaranteed return to IPO (2-3x)

Purchase Rights First offer First refusal (trump right)

President's List No mention Right to direct pro-rata share

Definition for success

Same goals, different scale Returns in line with historic levels

Emphasis on acquisitions Private to private deals and roll-ups

Exiting an investment in years (rather than months)

How should Angels and VCs behave?

Take their time - cash is KING

Handcrafting companies - less capital, more time

Low entry valuations

Conservative milestone phased funding structures

4 to 7 years to liquidity

Less deals started, more time to effect each one

Everyone can’t be Barry Bonds

Implications for Angels

Many VC’s are fully invested with no liquidity in sight

U.S. finds who gorged on dot coms are suffering

Canadian funds who filled up on photonics have limited options

Angels can play a more prominent role in building/funding promising management teams

VC Firms are being very conservative with respect to investing in new names

Focused on existing portfolio - protecting their best companies

Increased emphasis on due diligence

With public markets all but shut down, a strong desire to “keep powder dry” with existing cash

VC’s are facing the same challenges as their portfolio companies

Difficulty attracting new investment

Performance is not meeting previous expectations

Weaker players are disappearing

The venture capital landscape is changing

Implications for Angels

In Conclusion...

The biggest risk we all face,

is not being willing to continue taking risks

Angels are more important than ever