Screening YOUR OWN deal

1. Screening YOUR OWN deal Rana K. Gupta Managing Director Navigator Technology Ventures Confidential

2. Agenda • Starting and screening companies • What kind of deal you have • The line of ascension • How to pursue your idea • “Buckets of evaluation” • Understanding Funding Confidential

3. 2003 Small Business Data 527,900 Business Births 554,800 Business Deaths 99.7% have <500 Employees 61% have <5 Employees 23.7M Businesses in America 2/3 survive 2 years 1/2 survive 4 years 82.5% use some form of credit $18.9B in Venture Investments in 2003 (2,847 deals) That’s 0.5% of all companies started Confidential Source: 2003 SBA data

4. Ideas Funded Succeed Spend Time 100 Ideas 10 out of 100 Ideas ? of 100 Ideas ? of 100 Deals Financing: - Very much depends on the type of deal AND the perseverance of the entrepreneur More screening: - Research - Talk with some people in the practice - Write a business plan - Determine the right type of funding Screening: - Run the numbers on the back of an envelope - Sleep on it - Reject it Type of Company - 50% of restaurants fail? The Deal Funnel Confidential

5. Agenda • Starting and screening companies • What kind of deal you have • The line of ascension • How to pursue your idea • “Buckets of evaluation” • Understanding Funding Confidential

6. Ascending the slope of business opportunities Difficulty/ Barrier to Entry/ Cost to Implement AND Potential Return Service Offer Opinion Analyze Commercialize Confidential

7. Here are examples of what I mean Difficulty/ Barrier to Entry/ Cost to Implement AND Potential Return Product - Export/Import - Distribute - Consult - Research - Newsletter - Journal Outsourced R&D Service Offer Opinion Analyze Commercialize Confidential

8. This is why the slope is so steep - Secure proprietary position - Prototype - Market research - Paying customer(s) - Distribution channels - Manufacturer - Sales - Team - Rigorous financing Difficulty/ Barrier to Entry/ Cost to Implement AND Potential Return - Market research - Distribution channels - Product or service differentiation - Probably up-front financing - Find paying customers - Maybe some up front financing Find a paying customer Service Offer Opinion Analyze Commercialize Confidential

9. Conclusions about the ascension line • There is a continuum of business models that you can enter • Along that continuum, you must understand what it takes to make money • Usually, the more money that goes in, the more money you can potentially make • Entrepreneurs rarely stop and think about where they are along this continuum • Be clear about what type of business you are starting • It will make all the difference as you consider how to create and grow it Confidential

10. Agenda • Starting and screening companies • What kind of deal you have • The line of ascension • How to pursue your idea • “Buckets of evaluation” • Understanding Funding Confidential

11. Buckets for evaluationof new ideas New Idea!! No Opportunity Venturable - Bootstrap - Small/Large Co. - Non-venturable Licensable Confidential

12. Definition of ‘Venturable’ • This is a commercialization opportunity • The opportunity is attractive enough for an outside party to invest its money in the company • This is usually for a product company • This requires a fast growth opportunity • VCs and Angels look to make 5-10X their investment in less than five years Confidential

13. What does a VC Deal look like? • From the MARKET side • Very large market – in the B’s and T’s • Addressable market at least in the hundreds of millions of dollars • Attractive buying cycle, i.e. consumer product mfrs, NOT insurance Cos. • From the TECHNICAL side: • Distinct product – simpler is better • Clearly defined path for product development (No miracles required!) • Excellent proprietary position to create barrier to entry • Need not be a patent • Can be trade secret/secret sauce, i.e. Sand Video • From the BUSINESS side • Dramatic sales ramp-up potential • Able to reach $50M in sales in 5 years OR • Possible 10X return in 3-5 years after investment • Revenues within two years after investment • Fundable opportunity, i.e. reasonable rounds of investment will achieve major milestones Confidential

14. Definition of ‘Licensing’ • First, you have already invented/created/own something that someone else ‘needs’ • BUT there are clearly existing companies that can commercialize this better than you could • Often these are attributes to a product • Requires significant protection around the idea – usually a patent • There has to be something for the licensee to transfer/buy from you • You’ll have to work with a lawyer • This is bad – scientists and lawyers don’t usually do great business together well • Best to find business help even when working with a licensee Confidential

15. Non-venturable - Definition • A company that grows one customer at a time • OR from some other form of investing rather than VCs • Customers • Vendors • SBIR • Factoring • Corporate funding/joint development • May take (a lot) longer to reach maturity – this may be desirable • May only reach $1-10M in annual revenues • Sale may not be the desired outcome • This is often a service company or a testing device Confidential

16. Example of non-venturable Confidential

17. Agenda • Starting and screening companies • What kind of deal you have • The line of ascension • How to pursue your idea • “Buckets of evaluation” • Understanding ‘Funding’ Confidential

18. Most people have an idea!! Then they look for funding to pursue the idea Wrong Question!! First question should be the goal of the venture: Experience Make money Business for life Sell the idea Sell the business Make $$ How much money? When? Wrong question first Confidential

19. Most important thought!! • What are your goals? • Why are you doing this? • How long do you want to do this? • What if you could sell the idea for 3X your investment in three years? Most entrepreneurs have not thought about this question well enough Confidential

20. Fundability • This is just about the most over-looked variable in a deal - by the entrepreneur • The fundability of the deal is dependent upon: • Timing • Amount of money • Milestones to be reached with that money • Who cares that those milestones are reached • Business model • Market size • Sales cycle • YOUR GOALS Confidential

21. Fundability example Easy example from the VC market – because too many people are looking to it • Say a VC wants to make 10X her investment (gee, I wonder where I found that number?) • Say you’re looking for $2M • Let’s further assume you’ll have a pre-money valuation of $3M • So, a $5M post-money valuation • You will grow to $20M in revenues in four years • Multiples in your industry are 2X revenue Confidential

22. Fundability, continued • So, here’s the math: • You say: in Yr 4, you’ll be worth ~$40M • The investor will have discounted your revenues by 50% • Meaning your revenues will only reach $10M in Yr4 • So, you’ll actually be worth $20M, in her eyes • That’s only a 4X return on her money Confidential

23. Conclusions • Too few entrepreneurs screen their own deals • This is understandable since you are often not provided the tools to do so • Understand WHAT kind of deal you have • Understand HOW to pursue your deal to derive the greatest value from it • Know your own goals for the venture Confidential