850 Woodside Drive Woodside, California 94062 (650) 368-5545 www.woodsidefund.com

1. W O O D S I D E F U N D Contra Costa Software Business Incubator “Challenges and Funding of Seed and Early Stage Companies” November 18, 1999 850 Woodside Drive Woodside, California 94062 (650) 368-5545 www.woodsidefund.com

2. OVERVIEW Woodside Fund Background History Founded 16 years ago; launching its fourth fund; currently have $150 million under management Each senior partner has served as a founder and CEO of a technology company; five investment professionals Seed and early stage Computer software, Internet, e-commerce, telecommunications, networking Management Stage of Investing Industry Focus W O O D S I D E F U N D I V

3. INVESTMENT CRITERIA Criteria for Selecting High Potential Companies Market Potential Company must address a large demand-driven market; and must have the potential to attain $50 million to $100 million in annual revenues or a market value of at least $200 million, preferably $1 billion or more An exceptional management team or willingness to build it First mover advantage, proprietary technology, typically high margins and sustainable competitive advantage Required to influence key policies, decisions, and management A viable strategy for liquidity is required Target a return of at least 10 times invested dollars in 2 to 4 years Qualified Management Market Leadership Partnership Relationship Exit Strategy Return on Investment W O O D S I D E F U N D I V

4. SEEDAND EARLY STAGE INVESTING The Challenges of Seed and Early Stage Investing • Early Stage Investing is Labor Intensive • One early stage investment equals 5 to 6 later stage investments • As the size of Funds have increased, the proportion of venture capital professionals devoted to seed and early stage investing has diminished • Early Stage Funds Require Specialized Skills • It requires senior Partners who have start-up and operating experience • Early Stage Funds Must be Organized to do Early Stage Investing • A strategy for organizational development • Hiring a strong CEO and other management early • Helps increase valuations, facilitate strategic partnerships and speeds growth W O O D S I D E F U N D I V

5. SEEDAND EARLY STAGE INVESTING The Challenges of Seed and Early Stage Investing • Early Stage Funds Must be Organized to do Early Stage Investing • Resources and a willingness to help • Generating business plans • Assisting with strategic relationships • Obtaining follow-on financing • Management controls (Cash forecasts for both “plan” and “worst” case scenarios and reporting by department) Trust is essential, especially when strengthening management and establishing terms. W O O D S I D E F U N D I V

6. SEEDAND EARLY STAGE INVESTING The Challenges of Seed and Early Stage Investing Methods to Establish Trust General Partners share their entrepreneurial experience - the “Zucchini” example How to operate - trust and openness, no surprises The assessment process Testimonials are critical Entrepreneurs should do as much due diligence on the venture capitalists as the venture capitalist do on them W O O D S I D E F U N D I V

7. SEEDAND EARLY STAGE INVESTING The Challenges of Seed and Early Stage Investing • Financing Requirements • Companies need to meet the investment criteria • Demonstrated progress prior to a major first round outside of the initial syndicate • Build solid references • Successful beta sites, customers, strategic alliances • Excellent presentation materials • A cogent executive summary and powerpoint presentation • A well thought out business plan • Professional quality writing and graphics • Do not include price, valuation and size of financing • Include technical, financial and other details in the appendices W O O D S I D E F U N D I V

8. SEEDAND EARLY STAGE INVESTING The Challenges of Seed and Early Stage Investing • Marketing and Sales • What is the pricing model, what will customers pay? • Informal and formal focus groups • Test marketing • Consultants • How do you position the products to avoid market clutter? • Competition can easily be underestimated - who could become serious competitors? How can we establish a sustainable competitive advantage? • How do you reach customers -what are the likely sales channels? • When do you add market and sales resources? (They are not the same) • How good and supportable should the products be before they are sold widely? W O O D S I D E F U N D I V

9. SEEDAND EARLY STAGE INVESTING The Challenges of Seed and Early Stage Investing Pricing and Capitalization Initial valuations must be “realistic” to justify the additional effort (except for certain Internet deals) Burn-rates must be carefully managed A company should consider taking financing when it’s available There should be equity provisions for future management - typically 15% to 25% W O O D S I D E F U N D I V

10. SEEDAND EARLY STAGE INVESTING The Challenges of Seed and Early Stage Investing The Disclosure Dilemma Obtain intellectual property early Test markets earlier instead of later Other Sources of Assistance Incubators Mentors - board members and advisors Angel investors Attorneys Accounting firms Banks Venture leasing W O O D S I D E F U N D I V

11. SEEDAND EARLY STAGE INVESTING The Challenges of Seed and Early Stage Investing • How do you get in the door? • Referrals, referrals, referrals • The best referrals are: • Incubators • Successful entrepreneurs • Mentors and board members • Potential or existing customers • Professional service providers • Good presentation materials • Conferences and associations W O O D S I D E F U N D I V

12. SEEDAND EARLY STAGE INVESTING Why Seed and Early Stage Investing? Managed Risk Fewer losses than perceived Return for success is substantial Close partnership and supervision Staged financing Window on Technologies and New Businesses High Potential Return Low initial valuations Opportunities for leverage Higher upside potential Creates Jobs and Provides Economic Development W O O D S I D E F U N D I V

13. Venture-backed investments hit a record $9 billion, far exceeding the previous record of $7.6 billion in the second quarter 1999. Seed and start-up investing was at an all time high of $914 million, about 10% of total disbursements. The number of companies receiving funds increased 40% to 993 compared to 707 companies a year earlier; 18.4% or 183 were seed/start-up stage companies. The average funding per company increased 70% to $9.1 million versus $5.4 million a year ago. Technology-based companies accounted for $8.1 billion, or 90% of all investments, with Internet-related companies comprising $5.2 billion in 473 companies. Silicon Valley dominated all areas receiving over $3.3 billion or 36.8%, compared to New England at 10.3% and New York at 7.6%. VENTURE CAPITAL STATISTICS Highlights of the Third Quarter 1999 W O O D S I D E F U N D I V Source: PWC MoneyTree Report

14. VENTURE CAPITAL DISBURSEMENTS 1988-1999 W O O D S I D E F U N D I V Source: Venture Economics

15. VENTURE BACKED IPOS 1987-1999 W O O D S I D E F U N D I V Source: Venture Economics

16. AVERAGE VALUATIONOF VENTURE BACKED IPOSVS. M&AS W O O D S I D E F U N D I V Source: Venture Economics