1. 70-397 Venture Capital Investing Fall 2002 Slide 1 Venture Capital Investing Overview of the Course And Overview of Private Equity © Andrew W. Hannah

2. 70-397 Venture Capital Investing Fall 2002 Slide 2 Agenda Introductions Administrative stuff What is this course all about? What are you going to learn? What are we going to do in class? What are the rules of engagement? Overview of private equity Next class… © William C. Hulley

3. 70-397 Venture Capital Investing Fall 2002 Slide 3 Andrew W. Hannah Current Status: CEO, PolyTronics, Inc. Past positions: Senior Managing Director: Internet Venture Works (2000 – 2001) CFO: STORM, LLC (1999 – 2000) CFO: Internet Securities (1995 – 1999) SR. Manager: Deloitte & Touche (1987 – 1995) Education MBA: Finance and Marketing – Katz (University of Pittsburgh) BS: Accounting – (Pennsylvania State University) © Andrew W. Hannah

4. 70-397 Venture Capital Investing Fall 2002 Slide 4 A Jump Off the Deep End Internet Securities, Inc. (1995 – 1999) The Bloomberg of emerging markets Being ahead of the curve creates buzz Being ahead of the curve has its problems Financing History: Series B: $ 300,000 Series C: $ 4,800,000 Series D: $ 7,000,000 Sub Debt: $ 1,500,000 SVB Financing:$ 1,750,000 Series E (Euro$):$11,000,000 Sale of Company:$47,000,000 © Andrew W. Hannah

5. 70-397 Venture Capital Investing Fall 2002 Slide 5 Why Take on Microsoft? STORM (1999 – 2000) Favorable diligence does not always equal success Speed is life Microsoft is king Remember who you are Financing History: Series B: $5,000,000 SVB Financing:$750,000 © Andrew W. Hannah

6. 70-397 Venture Capital Investing Fall 2002 Slide 6 Timing Matters Internet Venture Works (2000 – 2001) The concept works The model doesn’t Pulling out of the spiral Its not your money Financing History Series B:$15,500,000 VentureBank:$ 1,000,000 © Andrew W. Hannah

7. 70-397 Venture Capital Investing Fall 2002 Slide 7 What Made the Difference? Internet Securities We could change the world Boot strap STORM “We” are going to be rich Prudent exuberance Internet Venture Works Riches come before the work Spend first, justify later © Andrew W. Hannah

8. 70-397 Venture Capital Investing Fall 2002 Slide 8 Your Experience With: InvestmentsAngel InvestingVenture Capital Class Work302 Work Experience 612 Your Hard Earned Dollars 1220 © Andrew W. Hannah

9. 70-397 Venture Capital Investing Fall 2002 Slide 9 Administrative Stuff My Contact Information e-mail ahannah@andrew.cmu.edu (preferred)ahannah@andrew.cmu.edu phone412 268 8832 cell 412.977.7778 (Only if important) office231F, Center for Entrepreneurship, GSIA hoursTuesdays, 5:15pm to 6:15pm, by appt My Administrative Assistant is Ann Grekila e-mailag19@andrew.cmu.edu phone412.268.3704 office231, Center for Entrepreneurship, GSIA © Andrew W. Hannah and William C. Hulley

10. 70-397 Venture Capital Investing Fall 2002 Slide 10 What is this Course All About? Making private equity investments Finding deals Evaluating their relative merits Estimating their ultimate value Building a portfolio of such deals Determining an overall investment strategy Developing tools and processes to implement that strategy Managing the deals that are made as a result of it The context in which investments are made Capital markets and competition - their effect on risk and return Investor circumstances – how context colors decision making © William C. Hulley

11. 70-397 Venture Capital Investing Fall 2002 Slide 11 What Will You Learn? The investment process and lifecycle The venture and angel equity market The language of private equity Performing diligence Developing a valuation analysis Decoding deal contract terms and structure Most importantly, you will understand how investors develop, present, make and defend private equity investment decisions. © William C. Hulley

12. 70-397 Venture Capital Investing Fall 2002 Slide 12 What are We Going to Do in Class? Develop a foundation of the definitions, theory and basic tools What is diligence? How is pre-money valuation determined? Apply, through cases and in-class projects, tools and process How do I develop deal sources? What is competitive diligence? Present project work for critical review Diligence presentations, comparative analysis of companies Meet real-world practitioners What matters in deal structure? How is valuation determined? For the most part, you will learn theory by lecture and doing the assignments and come to understand its practical application through in-class exercises, cases, discussions and panels. © Andrew W. Hannah and William C. Hulley

13. 70-397 Venture Capital Investing Fall 2002 Slide 13 The Rules of Engagement Read the syllabus, assignments and project information Expectations, grading, due dates, format are all there Hints for success are usually there, too If you don’t understand something, ask Believe it or not, I might not have stated something clearly! Be prepared to be judged by real-world rules Be on time: 6:30 to 9:00 Be able to present and participate at all times Good grades are the result of Doing the work requested – reading, assignments and projects Demonstrating interest – original thought, advance preparation Demonstrating care – accuracy, attention to detail © Andrew W. Hannah and William C. Hulley

14. 70-397 Venture Capital Investing Fall 2002 Slide 14 How Will You Be Graded 20%: Sum of the weekly assignments 20%: Class preparation and participation 10%: Midterm project write up and presentation 25%: Final project write up 25%: Final project presentation © Andrew W. Hannah

15. 70-397 Venture Capital Investing Fall 2002 Slide 15 Overview of Private Equity Who Invests in Private Equity and An Introduction to the Venture Investor © William C. Hulley

16. 70-397 Venture Capital Investing Fall 2002 Slide 16 Sources of Entrepreneurial Equity Self Financing – credit cards, savings, personal debt Vendor Financing – inventory, payables, receivables Bank Financing – revolvers, balance sheet, lines of credit Family and Friends – loans, common stock, partnerships Public Sector – SBIR, SBA, DARPA, BFTC, PTIA Venture Investors (VIs) Angels – high net worth individuals and families Venture Capitalists – professional investment fund managers Corporate Capitalists – strategic investment fund managers © William C. Hulley

17. 70-397 Venture Capital Investing Fall 2002 Slide 17 Focus: Venture Investors (VIs) Angel Investors Have made money doing something else Typically invest close to home and expertise Venture Capitalists Are paid to generate above-market returns Typically invest with a particular stage, market, return in mind Corporate Capitalists Are paid to generate returns and corporate synergy Typically have a very narrow industry or technology focus All three have common characteristics Build portfolios of deals over a long period of time Have established and use clear selection criteria Have developed a process for sourcing, evaluating and valuing Are subject to market pressures that affect their perception of risk/return © William C. Hulley

18. 70-397 Venture Capital Investing Fall 2002 Slide 18 Who are These People? Angel Investors Typically invest $10,000 to $250,000 Make as many as one hundred times as many investments as VCs Are much more likely to invest in seed and early stage deals Are much more likely to syndicate or share deals with others Venture Capitalists Typically invest $1MM to $10MM Are much more likely to invest in early to late stage deals Are much less likely to syndicate (Until recently) In 1999 There were approximately 600 firms in the United States About 3800 investment professionals With $134B under management Making approximately 7000 new or follow-on investments © Andrew W. Hannah and William C. Hulley

19. 70-397 Venture Capital Investing Fall 2002 Slide 19 What Do VIs Think About? Sourcing how do I find quality opportunities? Evaluating what makes a good deal good? Valuing what’s it worth? Structuring who owns what? who control what? Negotiating how do I negotiate terms, valuation, control? Supporting what do I commit besides money? Harvesting how do I make money? © William C. Hulley

20. 70-397 Venture Capital Investing Fall 2002 Slide 20 Next… Questions We Might Ask Are venture and angel investors different? Does portfolio theory matter? How do investors decide what kinds of deals to do? How do investors gather information? How do investors make investment decisions? How are valuation, contract terms and expectations related? How are valuation, terms and competition related? What happens after you write the check? © William C. Hulley

21. 70-397 Venture Capital Investing Fall 2002 Slide 21 For The Next Class WA pp 1 – 27 Info Card A: Summarize an interesting article about venture capital © Andrew W. Hannah