A Battered Telecom Sector Chaos Or an Opportunity ??? Shastri Divakaruni General Partner

1. A Battered Telecom Sector Chaos Or an Opportunity ??? Shastri Divakaruni General Partner Continuum Ventures shastri@continuumventures.com August 8, 2002.

2. Operations of a VC Fund

3. Stages of a VC Fund • Formation – Partners, Roles, Equity, Niche etc. • Fund Raising – Road show, Validation and acquire LPs • Investing • Deal Flow, Screening, Selecting and establishing a value • Term Sheet and Equity negotiations • Agreements on Governance • Building Value for the Portfolio Company • Harvesting – Design & facilitate an exit • Liquidate and Distribute to partners (LPs + GPs)

4. Positioning for a Fund Size/Stage Investor Risk Public Markets Levered Buyout (KKR, etc.) Execution Expansion & Consolidation ML, GS, CSFB, etc. Finance Focus IPO Markets Market & Execution • Special Situation • Players • eg: Bowman • Merchant Bankers • Madison Dearborn • Soros Group Growth Market Focus Product, Market & Execution • Private Placements • (Several) Investment Focus Development Technical Focus • Large VC firms • Institutional VCs Technology, Product, Market & Execution Early Stage, Seed, and Start-up • Angels Minor Minor Majority Total Control Nurture Influence/ Facilitate Guide Control Role Dominance < 10% 10 – 25% 25 – 50% > 50% Ownership

5. Investment Focus: An Example • System & Subsystems • Routing & Switching • Transmission Systems • Access Loop (Last Mile) • Media Gateways • SAN/NAS Systems • Breakthrough Applications • Enterprise Productivity • Integration of Applications • Technology & Tools • Process Technology • CAD/CAM Tools 20% 10% 10% 25% 35% • Infrastructure Software • Enabling Platforms • SAN (Virtualization) • Network Middleware • QOS • Multimedia Content Handling • Security • Next Gen Integrated Circuits • Security • Wireless- Multiprotocol Chips • SAN Protocol Chips • Special Purpose ASICS • Multimedia Integration • Power Saving Devices

6. Components Chips Subsystems Systems Infrastructures/w OperationsManagement EfficiencyEnhancers Understanding the Value Chain Euphoria & Bullish Markets Gloom & Bearish Markets Ride the Value Chain • Philosophy: • Leverage broad trends in industry • Focus on attractive segments (target areas) • Invest in multiple areas of value chain Next GenerationService Operators

7. Multi-Stage Investing: Investor Expectations Formation Seed Series A Series B Series C Series D Mezzanine Exit • Seed & Series A • Feasibility • Core Team • Engineering • Marketing • Biz Dev • Positioning Advantage • Sustainable Competitive Advantage • Customer Validation • Create barriers to entry • Series B & C • Product / Productization • Customer Acceptance • Operations Infrastructure • Execution • Engineering • Sales • Marketing and BD • Financial Controls • Product shipments • Revenue Forecasting • Series D & Mezzanine • Market Acceptance • Product and Sales Scaling (expansion) • Multi-Functional Teams • Organization • Product Margins • Production • Financing • Customer Satisfaction • Financial Integrity

8. Forces Influencing Investment Decision Technology Trends Portfolio Intrinsic Value Investment Decision Market Pull & Needs for Products Status of Financial Markets Competition

9. Screening Criteria:A Template Approach A minimum of 70 points needed for consideration. Criteria varies per investment stage.

10. Investment Process Partner Contacts Extended Network TAB VC Referrals Spin Ins Deal Flow Appraisal Partners/Industry Experts/TAB Due Diligence & Approval Rigorous Methodology Syndication & Funding $$$ $$$ Investment Committee Approval Governance & Nurturing Board Of Director and/or Operational Participation

11. Nurturing • Knowledge Network in Action • Early Stage: High Leverage • Network of experts: SME • Proven Methodology • Operating expertise • Entrepreneurial history • Leverage extended network • in industry relationships • Continuous refinement Investing Harvesting • Rigorous process for • Qualification • Syndicated Investments • Value oriented approach • Milestone based financing • Relationships with bankers • Relationships with strategic buyers • SBIC leverage enhances • return A Fund’s Advantage:Designing An Exit Dealflow & Screening Continuous Improvement

12. Selected Market Data & Dynamics Source: CSFB

13. Dramatic Growth in New Companies and Market CapTechnology Companies and Market Cap by Size Now vs. 1990 # Companies Market Cap ($Bn) Category > $1 Bn $100MM - 1Bn < $100MM 322 $2,807 # Companies Market Cap ($Bn) 582 $210 33 $194 118 $38 759 $23 134 $5 2001 1990 $237 1663 All 285 $3,040 16.5% CAGR 24.7% CAGR Source: Factset based on data from 4/9/90 and 10/31/2001.

14. Moore’s Law of Nasdaq Ran Out of Gas in Y2K January 1983 - Present Doubles in 1 year Doubles in 2 years Doubles in 4 years Doubles in 8 years

15. Performance of Top IPOs of 1999 and 2000 Top 50 IPOs of 1999 Top 50 IPOs of 2000

16. Continued Volatility Results Multiple Short Market Windows # of Negative Pre-Announcements (1) (1)3 weeks into each quarter

17. M&A MarketTechnology Mergers & Acquisitions, 1993-2001 $ Billions YTD # of Deals • 35 • 65 • 95 • 120 • 164 • 228 • 487 • 833 • 289 Source: Securities Data Company as of 10/31/2001. Incl. Domestic and Int’l transactions, pending or completed, with transaction value >$50MM, excl. share repurchases.

18. Acquirors willing to accept significant earnings dilution for promise of significant growth opportunity • Acquirors typically accept zero to small amount of earnings dilution in exchange for growth prospects • Little tolerance for cash burn Accretion/Dilution • Many bidders drove up valuation • Public market offered liquidity events for startups, driving up valuation • Few acquirors in this market • Public market more stringent; therefore, fewer startups obtaining liquidity Valuation • Revenue could be more than one year away • Revenue and Clear path to profitability • Must be at least in customer acceptance and scaling mode Time to revenue • Potential for customers • Small base, many in trial stage • Highly concentrated revenue • Quality, well-financed and diversified customer base with recurring revenue stream Customer base Perceptions Towards Strategic Transactions Have Changed in This Difficult Market Environment… THEN: MAY 1999 NOW: June 2002

19. Resulting in a Challenging Near Term Environment Current Status • Consolidation activity has slowed significantly from the torrid pace of early 2000 • Operating issues have forced many traditional acquirers to focus internally • Market volatility has created uncertainty as to “true values” and hesitancy to make commitments • Uncertainty over proper valuation levels remains • Many sellers focused on last year’s valuations • Valuation analysis has returned to traditional earnings and cash flow based methodologies • Consolidators no longer playing with “funny-money” Valuation • Public equity markets have become less forgiving of ill conceived or poorly executed transactions • Heightened scrutiny of both long term strategic and near term financial implications of any transaction • Integration plans must be well thought out and expertly communicated to the market at time of announcement • Earnings dilution is a major concern Public MarketScrutiny

20. Many Potential Buyers Have Seen Their Share Prices Plummet PERCENTAGE CHANGE IN STOCK PRICE SINCE MARCH 1, 2000 Comm. Equipment eBusiness Internet Infrastructure Nortel Lucent Alcatel Cisco i2 Ariba C1 Siebel Inktomi Akamai VeriSign InfoSpace Semiconductors Optical Internet JDSUniphase New Focus Intel Broadcom PMC-Sierra Conexant Sycamore Corvis Amazon Yahoo! AOL eBay Note: Corvis and New Focus data is from IPO Pricing of $36.00 and $20.00, respectively. Let’s not forget the companies that have gone bankrupt:

21. As a Result, Companies Have Begun to Use Cash To Fund Their Acquisitions • With stock prices at record lows, the notion that cash is king is being reinforced • In particular, large cap companies with depressed P/Es are using cash as their preferred acquisition currency • Sellers prefer liquidity in these uncertain times • Interest rates are at unprecedented lows • Many companies are taking advantage of the convertible market’s tremendous appetite for technology issues to build “war chests” SELECTED ACQUIRORS USING CASH AS ACQUISITION CURRENCY

22. VC Returns Under PressureCumulative Vintage Year Performance of U.S. Venture Capital Funds Pooled IRR average % Source: Venture Economics Information Services

23. Recessions Are Followed by Market Rallies Overviews of Previous Recessions • There have been 5 recessions in the U.S. since 1969 • The average recession lasted for 12 months and resulted in a 2% contraction in GDP • During recessionary times, the S&P 500 has not demonstrated significant drops, except in ‘73 - ’75 (-23%) • Markets begin to recover one quarter before the trough and gain an average of 23% in the following 6 months Expected Timing of Recovery by Sector

24. Revenue Base (in quarter going public) Revenue in Sight $10M + Time to Profitability 6 - 8 Quarters Profitable Now Valuation Metrics Revenue Multiples P/E Multiples* The Bar is Set Higher for IPOs 20002002 * Depends on Industry segment and Supply

25. Implications Don’t Count On: • Return to “irrational exuberance” any time soon • Indefinite losses will be bankable • Me-too, undifferentiated companies will be bankable • Valuations on private financings will hold up Plan To: • Focus on business model, sponsorship, uniqueness, barriers • Develop alternative financing plans, merger partners • Shift business models to accelerate profitability and cash flow • Finance ahead of needs when windows present themselves

26. Summary • We get back to the Basics of Venture investing • Amid the chaos, it is an opportunity for those who understand the technology and the industry • Our expectations should be realistic. Implied correlation between public and private market valuations • We may have been set back to 80’s type of investing – with proper risk/reward structure • Equity markets are still good – Private equities have higher reward for those who can tolerate higher risk • This cycle will continue. Stay tuned……