1. “Push to Exit” Startups: From Investment to Exit Larry Kubal – Labrador Ventures March 11, 2008

2. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL2 Push to Exit 25 minutes, 25 slides on EXITology: Part 1: Theoretical Where do exits fit into the liquidity cycle? Past, present & future for exits. Part 2: Tactical How to talk to VCs about an exit when pitching Series A. What implications does a Series B or C have on my exit? Part 3: Just-do-it! The “when, why and how” of exits.

3. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL3 Liquidity Cycle Recovery Continues Company liquidity events VC / Angel investments in companies Company growth LP investment in VC   $29.8B in 2007, best since 2001   Up rounds exceeded down rounds for 16 th consecutive quarter   2007 IPO and M&A strongest since 2000   $34.7B in 2007, best since 2001 AngelShortcut

4. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL4 Exits Have Been Recovering Since the Bubble Burst $ (Billions) Total raised through M&A and IPO 2001-2007

5. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL5 What Does the Future Hold? Despite the positive trends, time from initial investment to exit is at an historic high of greater than 6 years!

6. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL6 Current Math of Exits vs. Investments Looks Balanced 2007 Value of M&A and IPO Exits = $53 Billion If VC Ownership = 65% at exit Results in $34.5 Billion in Distributions to LPs Balances the Current Re-Investment of LPs into VC

7. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL7 Significant Developments Flash Caution Signs Credit crunch Depressed stock market causing depressed currency for acquisitions Acquirers adopt a “wait and see” attitude Consolidation = fewer potential acquirers Weak IPO environment Depressed stock market Recession Microhoo?

8. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL8 Uncertainty of Exit Markets Creates Question Marks for Venture Returns Market values Source: Morgan Stanley Dean Witter & Co., Labrador Realism Disappointment Hype Time 1999 2000 2001 2002 2003 2004 Growth 2005 2006 ? 2007 2008

9. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL9 Push to Exit 25 minutes, 25 slides on EXITology: Part 1: Theoretical Where do exits fit into the liquidity cycle? Past, present & future for exits. Part 2: Tactical How to talk to VCs about an exit when pitching Series A. What implications does a Series B or C have on my exit? Part 3: Just-do-it! The “when, why and how” of exits.

10. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL10 Series A: What NOT to say to a VC

11. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL11 Series A Exit Talk “Necessary but not Sufficient” “That’s how we get to $50 million in year 5 AND we plan to exit either by being acquired or through an IPO.”

12. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL12 Take the Next Step “Who, What, Why, Where, and How”   Who are the potential acquirers?   What are the valuation metrics?   Why would they want to acquire you?   Where do you fit into their strategic plans?   How does the execution of your business plan fulfill/maximize exit requirements/metrics? (No IRR calculations, please.) “Push to Exit”

13. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL13 Exit Implications: Series B and Beyond   “Mo Money, Mo Problems” – or at Least Higher Expectations   Dilution   New Investor Goals Know why you are taking money:   Water in the Desert (stay alive)   Rocket Fuel (accelerate growth)   Middle Ground (fund progress) Know where you are and what the exit implications are. EXAMPLE: $8M Series B at $12M Pre-money 40% Dilution – New investor wants 10X – Exit target now > $200 million

14. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL14 Exit Implications: Strategic Investors   Easy Money with Benefits (… but often with strings attached)   Control Issues   Limitations on Exit “Strategic” Guidelines   Later better   No board seat or control of a Series   Balance   Understand motivations and history   Operating deals alone are possible

15. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL15   Historically long time from investment to exit.   Demands heightened capital efficiency. Exit Implications: Operations Build the exit metrics [efficiently] while building the business [quickly]. Time = Money

16. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL16 Push to Exit 25 minutes, 25 slides on EXITology: Part 1: Theoretical Where do exits fit into the liquidity cycle? Past, present & future for exits. Part 2: Tactical How to talk to VCs about an exit when pitching Series A. What implications does a Series B or C have on my exit? Part 3: Just-do-it! The “when, why and how” of exits.

17. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL17 When to Exit Why to Exit 6-12 Months prior to growth plateau or decline due to:   Market – market share static in a stagnant market   Competitive – rise of significant competitors   Financial – risk/reward imbalance   Other Negative - Forced   Investors are burnt out   Management is burnt out Positive - Choice   Opportunistic liquidity reward

18. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL18 Define and Prioritize the Objectives of Exiting Speed – Timing Valuation Liquidity

19. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL19 Types of Exits M & A: 85-90% of venture-backed exits   Cash sale (typically with 1+ year, 10-20% escrow)   Cash with earnout based on milestone metrics   Combination of cash & stock (public or private)   All stock IPO: narrow window   Profitable, $50 million revenue run rate, pattern of predictability   Expensive, distracting, loss of corporate privacy   Typical 180 day lockup

20. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL20 The Mind of an Acquirer 20 acquisitions per year. "We do deploy capital, but it's not for a return on capital. It's for alignment." "Who can provide solutions to help us stimulate market conditions? We need [start-ups] who can help us do things at a faster velocity." 7-10 acqusitions per year. "The pipeline of opportunities is as high as it's ever been, historically,"

21. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL21 Maximizing Exit Valuations Fit: See yourself through your acquirers’ eyes. Timing: Give yourself room. Optionality: Create multiple alternatives. Alignment: Synch up with all stakeholders Negotiate from Strength

22. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL22 Exit Execution: 4 Rules 1. 1.Don’t flush value 2. 2.Target intelligently 3. 3.Don’t waste: capital & time efficiency 4. 4.Align – Communicate – Don’t Stop

23. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL23 Push to Exit 25 minutes, 25 slides on EXITology: Part 1: Theoretical Where do exits fit into the liquidity cycle? Past, present & future for exits. Part 2: Tactical How to talk to VCs about an exit when pitching Series A. What implications does a Series B or C have on my exit? Part 3: Just-do-it! The “when, why and how” of exits.

24. L ABRADOR V ENTURES L ABRADOR V ENTURES CONFIDENTIAL24 Four Takeaway Thoughts 1. 1.The exit environment has made steady progress, though there are cautionary “danger” signs emerging. 2.Investors as well as entrepreneurs, while engaged in building a business, need to keep an eye on an exit through decision making in all stages. 3.When pursuing an exit, decide early and make sure all stakeholders are aligned with freely flowing communication. 4.Maximize exit valuation by knowing your potential acquirers and maximizing exit options.

25. “Push to Exit” Startups: From Investment to Exit Larry Kubal – Labrador Ventures lkubal@labrador.com www.labrador.com