sdfl

1. ELEC5701 Venture Financing sdfl David Rowe Investment Manager Uniseed Management Pty Ltd d.rowe@uniseed.com

2. Uniseed – Funding Early Stage R&D • Established 2000, a $61m ‘open ended’ fund • Focus on commercialisation of University R&D • Operate with financial and commercial discipline • An early-stage, pre-seed fund • Initial investment of $250k-$500k • Invest Up to $2 million / investment • Aim to bring in co-investment, leverage initial capital • 19 co-investments, 16 second rounds, 11 third rounds, 7 fourth rounds, 3 fifth round, 1 sixth round + grants • Relationships with Australian and International VCs • 40 investments to date; 2 exits; current portfolio of 18 companies e.g. QRX, BT Imaging

3. Other Commercialisation Funds • Sydnovate – USyd • More focus on IP protection, consulting & licensing • Sydnovate fund: $50-100k, more proof of concept • TransTasman Fund • MonashU, UAdelaide, UAukland, FlindersU • $30m open-ended fund, up to $2m • ANU Connect Ventures • ANU and ACT opportunities • $30m open-ended fund, up to $2m

4. Why Raise Capital?!

5. The Financing Options

6. When Bootstrapping is Not Preferred • Bootstrapping worked for HP, Microsoft, Apple, Dell and eBay – and Atlassian! • Many business models benefit from raising additional capital while building revenue. • Technology companies typically raise capital in exchange for equity in the business. • One note: you should always be a bootstrapper – even if you raise capital • Raise as little as possible <x-ref Matt’s hockey stick> • Leverage non-dilutive funds e.g. EMDG, CommAus

7. Good Reasons to Raise Equity Finance The bottom line: raising equity finance provides the working capital to enable a company to sustain a higher burn-rate than if utilising organic/internal resources…

8. Speaking of Burn Rate… Webvan an online "credit and delivery" grocery business that went bankrupt in 2001 Successful founders… e.g. Louis Borders Hot investors… e.g. Benchmark, Sequoia Raised a whack of cash...i.e. Over $500m Built a Titanic, when demand was much less Danny Rimer (now Index Ventures i.e. Skype): “Webvan was my billion dollar bonfire…” CNET hailed Webvan as one of the greatest dotcom disasters in history [Jun’08]

9. Stages of Venture Investment IPO

10. From the Founder’s Perspective... • Our company was founded four years ago with seed capital of $50,000, • We got a government grant of $75,000 nominally valuing the company at $125,000. • Angels put in another $125,000 three years ago for one-third of the company valuing it at $375k. • Our first VC put in half a million for 40% of the company valuing it at $1.25million two years ago. • Last year another 2 VCs put in $1.5m for 40% of the company valuing it at almost $4 million. • Next year the plan is to raise another $3.5m for 30% valuing the company at almost $12 million! • We hope to trade-sale for $25-30m within 3 years!

11. But Nothing is Free: Equity Dilution...

12. OK Then: What’s my Slice of Pie? ESOP Help! I’m being diluted...

13. OK Then: What’s my Slice of Pie? But my company valuation is going up...

14. OK Then: What’s my Slice of Pie? E$OP And so it my net worth!!

15. Venture Capital: how VCs work • Raise a fund: $40m+ • High net worths (HNW), partners, pension funds (part of their ‘alternative’ asset allocation) & financial institutions • 10 year horizon: then return funds + profits • Objective: superior returns; 10x -> 50% IRR • Invest money: years 3-5 • Employ ‘large licks’ into companies that ‘fit’ the fund • Early stage first, then later stage + ‘follow-ons’ • Drive exits: years 5-10 • Finish investing year 5, then ‘work out’ portfolio • Out of 10: 2 fail; 2 lose $$; 3 break even; 2 make (lots) of $$ • Keeping the lights on: VCs need to eat too… • Management fee of 1 - 2.5%pa of funds deployed • Carry (profit share) of 20-25% of returns above investment

16. IRR: Bang for my Buck • IRR = Internal Rate of Return • Technically: IRR is the discount rate where NPV of cashflows equals zero. • Practically: a measure of ongoing value creation considering the ‘time value of money’. • Allows ready comparison of investment options.

17. Angel Funding: how HNWs work • Angels invest their own money • Invest smaller amounts at earlier stage, lower valuations • Value add in experience, hands-on, business and finance intros • Potential liability in excessive control, non-commercial terms, etc… • Two “exits” for an Angel • Firm might be sold quickly for $2-10m, make 2-5x • Firm goes on to raise VC and IPO, Angel becomes passive, rides early exposure • Take Angels seriously • Be prepared, passionate and professional • Often need a product/prototype, market analysis, go to market strategy • And be nice… • Typical terms: Term Sheets, Shareholders Agreements, Rigour required • Businesses seeking $100k-$1m equity capital • Angel investors expect >10% equity • Finding Angel funding • Australian Association of Angel Investors (www.aaai.net.au) • Sydney Angels (www.sydneyangels.net.au) + Sidecar Fund

18. What to look for in an Investor • Look for: • Synergies • Complimentary skills/personalities • Track-record, network • Etc… • Expect: • Further rounds of funding • Existing investors have capacity • More VCs coming in • Remember: • 5+ years is a long time… • The VC will have control…

20. One Year on... How is The Funded Going? • Members: up 13% • Reviews: up 11% • Comments: up 12% • Not too well by the looks of it...

21. What Does an Investor Look For? $ • Guy Kawasaki: “Investors are actually looking for a reason not to do a deal…” • The Venture Funnel: • 2000 business plans in [over 300/yr] • 200 moderately credible [1 or 2 a month] • 100 potentially investible [1 a month] • 40 for due diligence [3-4 in parallel] • 10 get funded [2-3/yr] • To be VC-ready,you need to think like a VC • Aim for 5-10x in 3-5 years • And have plan...

22. Investment Ready: Build the Plan • Deep expertise, clean track-record • Experience growing companies, ability to execute plans • Synergy with venture capital management team PEOPLE • Compelling products & disruptive technology • IP ownership: who owns it, clean freedom to operate • Ability to protect and defend the intellectual property IP • Barriers to entry • Growing, large, definable market • Awareness of the competitive landscape MARKET • Rapid growth and ability to scale • Clear strategy to execute the route to market • Capitalisation plan (how much money required?) GROWTH • Identifiable sales cycle & pipeline, revenue streams • Sustainable margins & ability to leverage scale • Clear path to break-even and maintain profitability MODEL • Clear path to exit • Key exit options: IPO; trade sale; share buy-back • Creation of significant returns to investors & founders EXIT

23. The Pitch: Tell me a Story... • Telling a good story won’t sell rubbish, but it will prevent a gem going unnoticed • Tagline (1 sentence) > Elevator pitch (1 min) > presentation (20 min) • The key points (apart from the other stuff): • What is the problem • What is exciting about your... X? • How much do you need? • How far will you get with that cash? • How much will I, errr... we make? • And to get the best deal, you want multiple investors interested • Stalking at conferences, coffee shops is OK... • E.g Open Coffee Club, but VC sightings are rare in Aus • Ideally work via introductions • E.g. Networks e.g. Innovation Bay ; other Entrepreneurs e.g. Matt • But don’t shop it around too much... and don’t just post it out. • If a “No” – say thanks, learn and keep moving forward...

24. I Blew It... : VC Anti-Portfolios

25. Getting to Yes: Investment Terms The Investor will invest up to a total of AU$750,000 in exchange for Series A Preference Shares at a pre-money valuation of $550,000. Share price to equal Pre-money Valuation / # Shares on issue, following the extinguishing of any outstanding Equity Liabilities. Preference rights include 1x Liquidation Preference, Conversion Ratioof 3:1, Anti-Dilute with Full Ratchet and Drag Along of minority shareholders. Investor to have first right of refusal on future Equity raisings. Company must consent to Critical Business Matters being subject to Special Majority Approval including the Investor Director. The Company shall reserve an employee share option plan (ESOP) of up to 10% of the fully-diluted capital, allocated subject to SMA. Investment subject to full due diligence and all conditions precedent being met. EtcEtc Etc…

26. Basic Investment Terms • Pre-money Valuation • Perceived value of your business/IP/beermat • Sets price per share equity issued at i.e. pps = Value/#shares • Ordinary Share Investment • Simplest form, often used by Angels • All Shareholders have similar rights • Convertible Note • Increasingly used by Angels and VCs • Avoids valuation issue at time of investment • Typically when another financing is anticipated • Note attracts interest (10-15%) and a discount (20-40%) on next round (*if* the next round investor is sympathetic) • PLUS typical terms required by the investor e.g. liquidation pref

27. Valuation: Art vs Science • Discounted Cash Flow (DCF) • Time value of money – future operating free cash flows discounted at appropriate rate to net present value • Hmmm… you are pre-revenue, EBIT for the next 3 years is negative, discount rate 40-50% (risk) • Relative Value/Industry Comparables • Industry multiples e.g. P/E, revenue multiple or EBITxe.g. Internet Industry (239) Value/EBIT = 20.22x • Recent acquisition data e.g. Microsoft acquired Greenfield Online in 2008 for US$486m on approx $30m EBIT (16x) • Hmmm… M&A values dropping, can I believe your 5 year forecast, assumes flawless execution, what about competitors (including MSFT) • “Venture Metrics” • You look like a seed round, so I think you are worth $XXX • Post money val for this round shouldn’t exceed likely val at next round • Hmmm… I need to see 15% of the company at exit to make 5x

28. More Investment Terms • Preferred Share Investment • More typical structure used by VCs • Additional rights over Ordinary Shares including… • Liquidation Preference • In the event of liquidity event (e.g. exit, wind-up) the Prefs receive any payout ahead of Ords • After Liquidation Amount paid out (could be a multiple) then Prefs convert to Ords • Board and Veto Rights • Investors to have board representation (usually while holding >15%) • Investors to have veto right over critical business matters e.g. changing business plan, taking on debt, issuing new shares • Employee Share Option Plan (ESOP) • Pool of Shares/Option to be allocated to management/staff • Effectively dilutive, managed by Board/Investor

29. The Cap Table: Another Round…

30. More (Severe) Investment Terms • Conversion Ratio • Prefs to convert to not one, but a number of Ords (e.g. 1:3) • Leverages up the Prefs and increases effective payout • Anti-Dilute • Provides protection to Prefs in a ‘down-round’ i.e. lower pps • Effectively awards more shares to maintain equity • Tag Along & Drag Along • If a shareholder sells their stake, then others to have the right (tag along) or obligation (drag along) to join the transaction • Effectively allows the Investor to effect liquidity/exit events • “Pay to Play” • Sometimes introduced by incoming investors on ‘tough’ rounds • Extinguishing old rights (e.g. convert to Ords) unless you participate fully i.e. pay up. “Cash is king”…

31. $60-$100m Yr5 EXIT? Spinout A ‘Real Life’ Example Total Funds Raised: $16.3m Equity + $4.8m Grants Valuation $600k $5m $9m$13m $22m 1) Seed Round $1m 2) Series A $3m + ClimateReady $2.7m 3) Convertible Note $1.8m 4) Series B $4m + Industry Institute Grant $2.1m 5) Strategic Investor (B-2) $500k 6) Series C $6m + Working Capital (debt) $3m

32. THANKS! Thoughts, questions? Oh yeah: Sparrow (www.adaptiveelearning.com) sdfl David Rowe Investment Manager Uniseed Management Pty Ltd d.rowe@uniseed.com