From Invention to Start-Up: Money - Angels and Strategic Partners November 28, 2006

1. From Invention to Start-Up:Money - Angels and Strategic PartnersNovember 28, 2006 Susan Preston Entrepreneur-in-Residence Ewing Marion Kauffman Foundation AND Director of Attorney Training and Professional Development Davis Wright Tremaine

2. Proof-of Concept Product Design Product Development Manufacturing/ Delivery Discovery Financing Life Cycle Product Dev Idea Pre-seed Funding Seed Funding Expansion/Mezzanine Start-up Funding Financing Operating Cap. Founder Venture Funds Friends and Family Institutional Equity Angels Loans / Bonds Angel Groups Government Grants/Loans Seed Funds

3. Venture Capital Statistics: Investments in US • 2005 – invested $21.7 billion (2,939 deals) • 2004 – invested $20.9 billion (2,876 deals) • 2003 – invested $18.9 billion • Increase due largely to late stage investments: • $9.7 billion in 2005 • $7.2 billion in 2004 • $4.9 billion in 2003 • Less than 2% in early/seed stage Source: NVCA

4. Venture Capital Investments by Stage of Development ($s in Millions) Source: MoneyTree

5. Venture Capital Investment: Historical and 2006 Projected Source: MoneyTree

6. Average VC Deal Size Per Financing Round ($ Million) Source: NVCA

7. US Angel Investments • 2005 – invested $23.1 billion (49,500 deals) • Increase of 2.7% in $’s over 2004 • Increase of 3.1% in deals over 2004 • 2004 – invested $22.5 billion (48,000 deals) • 2003 – invested $18.1 billion • 227,000 active angels • 20% Healthcare/medical devices and equipment • 18% Software • 55% in seed/start-up • 43% in post-seed/start-up (10% increase over 2004) Source: Center for Venture Research

8. Who Are Angels? • Angels are accredited investors who: • Expect a financial return • Believe in giving back to their communities • Invest locally and regionally • Participate in the investment process • Show interest in personal relationships with companies and employees • Offer wisdom and guidance to entrepreneurs

9. Financial Attributes of Angels • Provide early-stage investment dollars • Invest smaller dollar amounts per investment • Partially fill funding gap left by venture capitalists (VCs) • Invest individual wealth • Can tolerate loss of entire investment • Have diversified portfolios • Invest with “patient money”

10. Angels and VCs – Similarities • Selective in investments • Requirements for an investable company • Expectation of return on investment - scalable • Similar investment terms (though angels can and often are – or must be – simpler) • Bring the attributes of a professional investor

11. Angels and VCs –Differences • Venture capitalists: • Invest on “home-run” theory • ROI is ultimate goal • Investing 3rd party money • Often more demanding and actively involved than angels: • Control often issue • Can requirement board and advisor approval and corporate actions • Angels: • Invest for returns – may be more modest expectations • Social /community aspect to investments • Individuals investing their own wealth • Patient money

12. Investment Preference 39 groups reporting

13. $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 Startup/Seed $2.00 $1.50 $1.00 $0.50 $0.00 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006* *2006 Estimated Value Valuations Of Venture Capital Seed/Startup Rounds ($Millions)

14. Valuation: Expected ROIs

15. Finding Angel Investors • Angel Organizations: • Several in Puget Sound area including: AoA, PSVC, Seraph Capital Forum, Zino Society, Keiretsu Forum, Tacoma Angel Network, Bellingham Angel Network • Professional Service Providers • Investment Forums • Business Plan Competitions • Professionally-funded Start-ups • Venture Capitalists • Corporate Boards

16. Forms of Investment Debt (note) Equity (stock) Options Warrants Debt: collateralized, non-collateralized, interest in cash or stock (deferred?), convertible (at election or automatic?), length of time, etc. Equity: common vs. preferred, dividends, many other terms discussed below

17. Professional Investors • Angels, venture capital, corporations typically receive: • Preferred stock • Convertible debt with warrants or additional stock • Provide more than money: Can be proactive in developing business through (“win together”): • Company building experience • Company functionality experience • Industry experience • Contacts for partners, customers and follow-on financing

18. What Professional Investors Are Looking for: Investable Companies • Clear path to profitability • Solid management • Realistic business concept and plan • Scalable business • Competitive edge/Technical superiority • Market acceptance • Realistic financial projections • Realistic valuation • Clear, well-articulated exit strategy Bottom line: Opportunity for financial return

19. What Professional Investors Are Looking for: Investable Companies • How does an investor make this determination? • Passion of entrepreneur (presentation) • Team track record – individually and together Entrepreneur’s ability to succinctly articulate vision and mission • Entrepreneur seeks advice of trusted, experienced, honest advisors • Coachable entrepreneur

20. What Professional Investors Are Looking for: Investable Companies • How does an investor make this determination? • Competitors researched and understood • Clear market differentiator • Value proposition for customer clearly evident • Market access strategy clear and realistic • Comprehensive summary of risks (and plans to cope/address) • Profit potential – good margins • Marketability of company – M&A exit • Type, timing and realistic purchasers

21. Term Sheets: Debentures • Convertible Debentures (Notes): • Automatic upon event or investor controls conversion • Note term • Interest: cash or stock; payment schedule; part of conversion • Security interest/collateralized?

22. Price Use of Proceeds Dividends Liquidation preference Anti-dilution provisions Redemption Protective provisions Information requirements Registration rights Right of first refusal Co-sale rights Option pool Founder vesting Inventions agreements Term Sheets: Preferred StockRights, preferences and privileges of preferred stock

23. Summation • Angels invest primarily in seed/start-up rounds • Angels represent patient money • Angels are becoming sophisticated investors • Angels make excellent advisors and mentors • Many companies will need only angel investors • Be open, coachable and realistic • Show your commitment, passion and drive • The essence of due diligence: • So what? • Who cares? • Why you?