1. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ AGENDA, Thursday, 26 October 2006 Meet Your Assistant Teachers Financing Technology Ventures

2. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ Meet Your Assistant Teachers •Anne Louise Johansen •Baya Tuvshintugs •Esben Christensen •Hjalte Højsgaard •Knud Lundgaard-Karlshøj •Lars Høy

3. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ FINANCING Technology Ventures •Financing Technology Venture John Heebøll •SEEDCapital Denmark Peter Tøttrup •Vækstfonden Eric-Alan Rapp

4. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ FINANCING Technology Ventures Agenda •Capital: for what ? •The Sources: Origin of Capital •Types related to Business Development •Investors: types •The Capital Market •The Investor’s Judging Criteria •Evaluation of Companies •Example

5. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ Capital: for what? Business Development! Risc Minded Patient Competent Time Cash flow

6. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ The entrepreneur’s most important Capital Sources •FFFFamily, Friends & Fools •In KindOther people’s ressources •Your first customer:The more pain, the better •Investors’ moneyLast resort

7. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ Origins of Capital •You make it unnecessary Live on a Rock Start selling ! In kind •You have it:Savings, personal fortune •You get it:Grants •You borrow it:Loan capital •You sell shares:Share capital private equity

8. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ GRANTS •Public Industrial Development Programs •Ministerial focus area •Private Foundations •Etc.! See www.finansieringsguiden.dkwww.finansieringsguiden.dk Comments: •Dream-capital for start-ups •Hard to find but it happens •In EU: limit: 100.000 EUR •Grants are taxable income, but expenditures are tax deductable.

9. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ LOAN CAPITAL •Banks •Credit Institutions like FIHFIH •Private debt providers •Special products like Vækstkaution, Mezzanine capital etc. Comments: •Cheap for the entrepreneur – Expensive for the Company Paied back by the company. The entrepreneur preserves ownership •Personal collateral mandatory in the start-up phase. If business flops: repayment after personal tax. No tax-deduction! •Investor runs a business •Never forget it in the momentarily enthusiasm

10. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ LOAN CAPITAL - 2 The Convertible Loan •Normal interest and repayment profile •Can be converted into share capital on specific conditions and specific milestones Comments: •Some advantages in the start-up phase Less initial dilution of the founders. Investor may convert to preserve ownership at new funding rounds. • Check the conditions Investor gets a strong handle bar Conversion right linked to milestone specifications. Eg.: conversion rate linked to quantified performance.

11. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ SHARE CAPITAL – private equity Investor buys shares in the company •At kick-off with the founders •Later: at capital increase (Funding rounds) Comments: •Expensive for the entrepreneur – Cheap for the Company Nothing to pay back - but founders are diluted. Think about that, when valuation passes a gazillion. •Possible mismatch in longterm objectives The investor wants a rapidly expanding business – to be sold at the right time, whereas the founders may have completely different personal goals and they are probably also more risk adverse

12. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ EXIT The inherent consequence of equity financing Investor converts assets to cash •IPO: Initial Public Offering Rare but rewarding •Trade Sale Acquisition •Management buy-out/buy-in Not best but ROI > 0 •Earn-outs Even worse but ROI > 0 •Repayment of loans Not sustainable for VC •Enforcing preferences Cutting the loss

13. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ Capital and Business development •Ante - Kick-off Pre-seed investment: own ressources, grants, in-kind, FFF Venture Cases: also special share capital •Start-up Seed investment: share capital, special loans, own money •Growth and commercial development Early stage, 2. round etc.: share capital, special loans Time Cash flow Technology wears out Inflection Point: first customer!

14. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ Investors Pre-seed FFF Innovation environments Seed – Early Stage SEEDCapital Denmark Business Angels Venture Capital companies (VC) Vækstfonden Second round, follow-on VC and Corporate Venture Capital Credit Institutions Banks Vækstfonden Some stock exchanges like First North

15. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ The Danish VC Market Investments in mio. DKK DOT-COM collapse September - 11

16. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ The Investors Valuation Criteria 4P •Perspectives Pain, quantified pain-relief, exit-op. •Persons Track records, competencies, ambition •Platform Proof of principle, concept, value, pull, profit •Process The project acc. to the Business Plan Comments: •Must be a Venture Case: ROI > 10 in less than 5 years. (126 rule) •The team is the singlemost important precondition •Platform: the more commercial proofs, the better. Commercial proofs reflect risk and competence

17. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ The Investors Perceived Valuation - 1 Valuation Time IPR estbl. First solid customer feedback. Growth potential substantiated Proof of Principle. Proof of Concept. Proof of Market Proof of Expandability Exit opportunities substantiated Proof of Profit Proof ofGrowth

18. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ The Investors Perceived Valuation - 2 Management Market Potential Saleability Valuation

19. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ Dancing with Woolves Or how to deal with investors •Capital always Wins •Your adversary has done this many times •Your adversary is not dependent on you •Your adversary has lots of time Negotiating tactics: •Freedom of Maneovre Never enter negotiations without having fall-back positions. •No major payments that jeopardize your project Your investor will find out at ”due diligence” •Don’t go for money unless you can do without Make that clear from the beginning •If you are asked for exclusivity: it costs (all claims cost) Exclusivity reduces your freedom of maneovre •Try to get more investors into the game – transparently •The more proofs before investment – the better •Strategic partners also an asset •Get yourself a management team before opening the game

20. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ EXAMPLE: GBQ Ltd. PRECONDITIONS Kick-off: DKK 125.000 + DKK 250.000 Founders + pre-seed investor Private equity + convertible loan First Milestone: DKK 500.000 Pre-seed investor: private equity Second Milestone: DKK 5.000.000 Venture Capital Company: private equity Exit: Profits (EBITDA) > 20 mio. DKK EBITDA: Earnings Before Interest, Tax, Depreciation and Amortization. P/E ~ 10

21. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ Kick-off DKK 125.000 shares and DKK 250.000 loan Shares: founder + pre-seed investor Loan:Pre-seed investor DKK 125.000 is paied to the bank account of the newly formed company. (DKK 10.000 is paied in start-up costs) Convertible loan, DKK 250.000 is paied to the bank account Total input of cash: DKK 375.000

22. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ 1. Milestone Contribution through capital expansion Loan converted into shares at the same time DKK 500.000 is paied to the bank account Total input of cash at MS1: DKK 875.000

23. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ 2. Round Contribution through capital expansion New VC investor enters DKK 5.000.000 is paied to the bank account Total input of cash at 2R: DKK 5.875.000

24. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ Exit Rule 126: 100 mio T/O, 20% revenues (EBITDA) in 6 years Profits (EBITDA) = 20 mio. DKK. (T/O ≈ 100 mio. DKK, 30 – 60 employees) P/E ~ 10 Price:10 X 20 mio. DKK = 200 mio. DKK • Founder: 36.9% 74 mio • Investor A23,1%46 mioROI = 60 • Investor B40,0%80 mio ROI = 15

25. Institut for Produktion og Ledelse Danmarks Tekniske Universitet John Heebøll VÆKSTHUS+ Phew!