1. David R Clark Director of Investment Services 1

2. I want to start a new venture because: a)My invention/discovery will help mankind. b)I want to build a company dominant in the market. c)I want to get rich. d)All of the above Pop Quiz 2

3. This show is entertainment but: Not far from the truth Hard questionsHard questions Business focusedBusiness focused Common formatCommon format Deal on the spot not realistic 3

4. Valley of Death 4

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6. Technology 1.What is the product? 2.What is the value proposition? 3.Is there protected Intellectual Property? 4.What stage of development? 5.Are there barriers to development success? Equity Funding 101 Equity Funding 101 Note the word “product” 6

7. Market 1.What is it? 2.How big is it? 3.Is there independent evidence of demand for your product? 4.Who are the competitors? 5.What is the differentiator? 6.What are the barriers to entry? Equity Funding 101 Equity Funding 101 7

8. Management 1.Who are you? 2.What domain expertize? 3.What entrepreneurial experience? 4.How much “skin” do you have in the game? Equity Funding 101 8

9. Attractive Investment? 1.What is the deal? 2.When do I “cash out” and how? 3.What are the key milestones? 4.What is the funding strategy? Equity Funding 101 The “exit” 9

10. Recommended Documents (In order of importance) 1.Investor Presentation 2.Executive Summary 3.Elevator Speech 4.One Page Summary 5.Business Plan 6.Customer Brochure 10

11. Why a Business Plan that nobody reads? Business Strategies Product Development Sales & Marketing FinancialOthers Management in sync (Equity Funding World) Sell the venture Due Diligence

12. Business Plan 1.What is the technology? 2.How big is the market? 3.Who is on the Management Team? 4.Is this a good deal? 12

13. Preliminary Remarks No proprietary warnings About 20 pages without exhibits About 6500 -7500 words 10 or 12 pt Times New Roman/Arial Spellchecker Flesch-Kincaid Readability (Readers Digest = 65; Harvard Law Review = 30) Table of Contents and page numbers Target reading level. 13

14. Technology Detailed description of the problem Set up the Value Proposition What is the solution 5 th grader rule Product Description Feature  Function  Benefit Intellectual Property State of Development Also known as the “pain” statement Note the word “product”

15. Market Need Market Size Competition Direct & Indirect Competitive Response Differentiators Pricing Strategy Sales Strategy and process Revenue sources Market 15

16. Management Team Who is on the team Domain Expertise Entrepreneurial Experience Board of Advisors

17. Attractive Investment Pro Forma P&L – 3-5 years (or Exit) Assumptions driving the numbers 20X in 5 years Pro Forma Balance Sheet Cap table Funding Request Pro Forma Cash Flow The ‘Deal’ and Liquidity Events Use of Funds Integrated timeline

18. Integrated Timeline ($K) Development Sales & Mkting Cash Balance Investment AlphaBetaProduction Hire Sales Sign 1 st Distr 1 st Sale $20 $150$350 $110$15$135$90$205$120 Continued Sales “Dry powder”

19. Cosmetics & Presentation Lots of graphics and color Puppies & Kittens Professional binding with heavy paper Double sided printing May want to consider a Marketing Communications advisor The objective is make it easy to read

20. What really happens 1.Read the first paragraph 2.Look at the financials $ Revenue line 3.Look at Management Team Is there a ‘hook’? How much & 20X N5? Can they pull this off? 20

21. Biggest Mistakes by Entrepreneurs 1.Talk too much about the technology and not the business. 2.Cannot articulate assumptions driving revenue and expenses. 3.Failing to involve former entrepreneurs. 4.No independent market validation (1% fallacy; “no competition”) 5.Failing to realize that investors want to ‘cash out’ - not get a share of profits. 6.Not understanding IP issues. 21

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23. The Management Team Version 1.0 Product Inventor FinanceMarketing

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25. The Management Team Version 2.0 Chief Executive ProductDevelopmentFinance Sales & Marketing

26. Chief Executive The key player Overall strategy of the venture “Face” of venture to investors Lead presenter Assemble the Management Team Raise equity funding & The Exit Operations 26

27. Financial strategy of the venture Pro Formas Funding rounds or traunch strategy Negotiation & Term Sheets Financial operations Cash management Creditor management, e.g. factoring Expense control Vendors Chief Financial Officer Key “Pre-Money” tasks 27

28. Chief Technical Officer “Build” the product Program Management Investor milestones Launch milestones Product support strategy Logistics IP protection Manufacturing 28

29. Chief Marketing Officer Marketing strategy Product launch Marketing communications Sales strategy Drive revenue Distribution Sales organization 29

30. Chief Executive Executive Product Development DevelopmentFinance Sales & Marketing Marketing The Management Team Version 2.0 30

31. Chief Executive Executive Product Development DevelopmentFinance Sales & Marketing Marketing The Management Team Version 2.0 31

32. The Management Team Version 2.0 Chief Executive Executive Product Development DevelopmentFinance Sales & Marketing Marketing 32

33. Who is the Entrepreneur? Who on the Management Team has raised equity funding before? How much and how many times? Who has brought a product to market before? This can be done. Just get creative. 33

34. So How Do We Do This? Don’t not have a plan Advisors Gray hair and scar tissue Can become investors Equity positions for management Work for ‘piece of action’ Keep it simple Realize an Investor may want to put his/her people in – especially CEO or CFO Not a fiduciary 34

35. Board of Directors & Advisors Fill roles temporarily Accepted by Investors Consulting roles Legal, Marketing (not Sales), Manufacturing, Technical, etc. Use ‘Star Power’ of BOD/advisors Access to investors May be investors themselves Don’t forget the Investor 35

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37. The Management Team Version 3.0 Board of Directors Chief Executive Finance Product Development Sales & Marketing Advisors

38. Biggest Mistakes by Entrepreneurs 1.No seasoned entrepreneur 2.No plan to fill key roles 3.“We’ll be able to do that once we get funding.” 4.Multi-tasking to ‘cut expenses’. 5.Failure to use Board of Advisors 6.Confusing accountants with CFO’s 38

39. Equity Funding Arithmetic You and your team have invented the best thing since beer in cans You need $500K to build a prototype, hire sales people, rent facility, etc. Some investors have expressed an interest in your venture

40. Today 70.5%29.5% You figure your company is worth $1,200,000 based on IP, assets, etc. So... 1,200,000 You 500,000 Investor 500,000 Investor 1,700,000 Total Pre Money Valuation Post Money Valuation

41. In Six Months (prototype finished) 70.5%29.5% Now your company is worth $2,500,000 So... 1,762,500 You 737,500 Investor 737,500 Investor 2,500,000 Total

42. In Two Years (sales people, revenue) 70.5%29.5% Now your company is worth $4,000,000 So... 2,820,000 You 1,180,000 Investor 4,000,000 Total

43. Alternate Arithmetic You need $500K to build a prototype, hire sales people, rent facility, etc Some investors have expressed an interest in your venture Divide funding into rounds $200K for prototype $150K for sales people $150 for facilities, etc.

44. Today 85.7%14.3% You figure your company is worth $1,200,000 based on IP, assets, etc. So... 1,200,000 You 200,000 Investor(1) 200,000 Investor(1) 1,400,000 Total

45. In Six Months (prototype finished) 85.7%14.3% Now your company is worth $2,350,000 So... 2,013,950 You 336,050 Investor(1) 336,050 Investor(1) 2,350,000 Subtotal 150,000 Investor(2) 150,000 Investor(2) 2,500,000 Total 80.6%13.4% 6.0% 6.0%

46. In Two Years (sales people, revenue) 80.6%19.4% Now your company is worth $3,850,000 So... 3,101,483 You 748,517 Investor(1&2) 748,517 Investor(1&2) 3,850,000 Subtotal 150,000 Investor(3) 150,000 Investor(3) 4,000,000 Total 77.5%18.7% 3.8% 3.8%

47. Milestones create “valuation inflection points” So What? $500K up front Your share - 70.5% Your share - 70.5% Your value - $2.8M Your value - $2.8M $500K (200/150/150) Your share - 77.5% Your share - 77.5% Your value - $3.1M Your value - $3.1M 47

48. So where’s the money? So where’s the money? Venture Capitalists Probably too early Probably too early Angel Networks Texas Angel Networks Texas Angel Networks GUST GUST Government & Education Initiatives SBIR/STTR SBIR/STTR Texas Emerging Technology Fund Texas Emerging Technology Fund Texas Transform Texas Transform Private Funds Targeted Technologies Targeted Technologies T3DC T3DC

49. Do you want to be rich? Do you want to be rich? Do you want to be King?

50. Clever technology or a good idea is not enough. There must be a strong management team around the technology. Know the market and competitive landscape. The objective is to sell the company. The Take Away The Take Away 50

51. David Clark Director Investment Services T3DC 210.558.3915 dclark@t3dc.org 51