www.soltusgroup.com

Raising Capital In A Recession

Chris KauzaManaging DirectorMarch 27, 2009

@ChrisKauza720-318-3400

www.soltusgroup.com

» Overview / Current Market Conditions» What Do You Need & Why?» Sources of Capital» Positioning Your Company» The Pitch – Negotiation, Terms, etc.» Pitfalls To Watch out For» Wrap Up / Next Steps

Promises

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Who Are You?Business Growth and

Development

Capital & Business Development Sustained Expense Improvement Strategic Partnerships World Class Advisory Boards People / Process / Technology

mobilized for performance

Corporate Development andCompliance

Investment Banking (M&A, Management Buyout, Strategic Capital Development, etc.)

Financial Restructuring Business Valuation Services

(IRC 409A and FASB 123(r) / 141 / 144)

IT Operations and Strategy

Full Life-cycle IT Development and Management

Data Center Operations and Management

Operation and Project Mgmt. Outsourcing and IT Optimization

Thought Leadership: Implementation & Management

Custom Research (primary and Secondary)

Product / Market Strategy Social Media / Web 2.0

Marketing Market Feasibility Analysis

• Aerospace• Financial Services• Telecommunications• Technology• Mobile Service Delivery

• Manufacturing• Software• Internet / Online Businesses• Government• SaaS Businesses

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Back In Black?

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Free Fallin'

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» 61%* of Americans play video games – up 2% from last year:– 35% are online (up 2%)– 87% are PC-based (down (3%)– Xbox most popular online platform– Wii fastest growing platform

» Online Virtual Worlds growing and projected to continue growing**

» Increasing integration of Social Media and Virtual Worlds**

– Business models continue to evolve– 36% visit Virtual Worlds to play games

Pinch Me

* NPD Group** Parks & Associates reports

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» Bad...but still getting worse

» 20 Dentists in Minneapolis

» “I know a VC...”

» Connections – now more than ever...

» What's next?

Where Are You Going?

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» M&A /Consolidation / Management Buyouts

» Partnerships– Strategic

• Operating capital or market expansion– Tactical

• Outsourcing

» Increase Operating Capital to expand into new markets

» Let's see some recent examples...

If I Had A Million Dollars

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» Twitter:– Raised $35Million in a Series D round from

Benchmark Capital ($21M) and Institutional Venture Partners ($14M)

– Additional funds from previous investors (Spark Capital & Union Square Ventures)

» Twitter should have ~$50M in Cash on hand

» ...but what about revenue???– (...maybe I should tweet that...)

Money

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» Management Buyouts & M&A

» Raised $4 Million

» Digini + Vyk Games = Blade Games– Game development & China-based

outsourcing services– Development tools

» Initial Funding was provided by– California Technology Ventures (Digini)– China Seed Ventures (Vyk Games)

Join Together

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» Emergent Game Technologies raised $12.5M in a fifth round (5 firms involved; avg. ~ $2.5M each)

» GameFly acquires Shacknews Ltd., supported by Sequoia and Lehman

» Image Metrics (facial animation) raises $6.5M in a Series B from Saffron Hills

» Machinima raises $3.85M (MK Capital) and adds 5 new Board members

» Harmonix (Guitar Hero / Rock Band) earns $325M (to date) against their earn-out provision with Viacom

Dirty Deeds Done Dirt Cheap

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» Existing Portfolio Investments– ...maybe, if you're lucky...

» Management Buyouts and Mergers & Acquisition (M&A)

» VCs still looking for that 10x return– >70% want to be on Board of Directors vs. day-to-

day involvement (<5%)

» “What's Popular” (a SAFE investment)???– Renewable Energy, Education, Web 2.0, Mobility

– Infrastructure / Government Stimulus – related (shorter-term play)

– Technology (new, improvements, etc.)

Live and Let Die

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» How a VC assesses your relative performance in their portfolio (they hope)

» Anything you can do to credibly enhance your equity valuation?

A View To A Kill(ing)

Failures 4 0%Viable / Potential 3 15%Solid 2 50%Superstars 1 100%

Out of 10 Funded Deals

Venture Funded IRR

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» What specifically do you need?– cost of capital? Take a WACC at it...– structured how?

» When needed?» How structured?

– Cash– Debt / Line of Credit– Equity– Hybrid / Other (Factoring, MOUs, LOIs, etc.)

» Why do you need it? Used how?

It's A Long Way To The Top

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Room At The Top

Seed Foundation

Growth

Expansion / Internal Management

Business Maturity

Time

Phases of Business Maturity

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» Debt– Loans (Banks, SBA, “Friends & Family”)

» Equity– Angel– Institutional– Strategic– Partnerships

» Other Sources include:– Business Development Authorities– Specialty Banks– Revenue / Customers

Strangers In The Night

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» Evaluating the Business - “The 5 Cs”1. Character2. Capacity3. Collateral4. Capital5. Conditions

» Investors1. Cautious

Want to avoid most of what they see Typically fund only fund 1% or less of what is

reviewed Kawasaki, “Top 10 VC Lies”

Walk This Way

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» Looking for ways to say “NO!”– Unrealistic claims

– Spelling / punctuation / grammar – it matters

– Content / format / mathematical errors

– Incomplete / vague / unsubstantiated information

– Too defensive / aggressive• “Can I work with them?

• “Will they take care of my money?”

Desperate But Not Serious

Success Factors Company View Investor ViewManagement Team 2 1Growth Potential 3 2

1 3

Market 4 3Product 5 5

Return On Investment(ROI)

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» Real Numbers from Real Analysis creating Real Results!

» Financial performance is important...– Established revenue model– Cash flow– Profitability (now? Future? When?)

» ...but you also need:– Compelling and viable product– Understand market uptake– Customers who pay; pipeline– Realistic competitive assessment?)

What It Takes

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» Management?– Successful track record (previous exits,

sales, etc.)– Industry experience and reputation– Dedication / passion / commitment to the

business– Vision and ability to persuade– Knowledge / intelligence / skill level /

competence– Leadership and team building skills

• Best and brightest– Ability to hire well – especially key hires

Let's Stay Together

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» Deal Killers– Overall poor business explanation (37%)– Unrealistic projections (23%)– Weak competitive analysis (27%)– Weak / poor management team (15%)

» Know your business and what it is worth

» Committed? What should be the Investor's commitment level?

Who'll Stop The Rain?

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» Many mistakes are attributable to:– Owners do not understand the process

– Owners do not know how / where to look for money

– Owners may lack the necessary contacts

– Owners underestimate the time required

– Opportunity Cost• At the end of the day, you still have to

run and grow the business– Who's minding the store???

Why Can't We Be Friends?

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» “Recession is a prelude to Growth!”– Hyatt / Burger King / FedEx / Microsoft / CNN /

MTV / GE / Sports Illustrated / HP / Wikipedia

» Walking the tightrope– Business model vs. investor timetable– Enough runway?

• Plan cash flow for 8 – 14 months• Business goals vs. investor objectives

(objections?)

» ...but you still need to manage Cash Flow during this process...

We Gotta Get Out Of This Place

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» Negotiation, Terms, etc.– How to emphasize “what” when discussing

company's value

» “Walk Away” conditions?– Know before going in - “they” do

» Compromise points– “loss of equity” vs. “loss of control”– Leverage logic and emotion in the deal

process to your advantage

Hold Your Head Up

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» Lower your expectations...but don't “fire sale” your business– Markets are down 30% - 60% (avg.)– Know what you are worth and why

» Flexibility is key

» Alternative structures

» Integrity

So Into You

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» Intellectual Property– Critical for Life Sciences; Important for

Technology

» Due Diligence Items, including:– Business planning– Representation– Contingent liabilities

You Oughta Know

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» Terms– Anti-dilution– Control

» Equity Valuation– FASB 141 & FASB 144– 409-A / FASB 123(r)

Bad Company

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» How to find us– www.soltusgroup.com– Facebook:

http://www.facebook.com/pages/Soltus-Group/75340850784

– Twitter: @SoltusGroup

» Downloadable Handout– Valuation Report describing

• What is a 409-A Option Valuation• Why it matters to you / your investors• How to get the best valuation• Use discount code “GDC09”• www.soltusgroup.com/Valuation/Report

Where Do We Go From Here?

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Thank you!

Chris KauzaManaging DirectorMarch 27, 2009

@ChrisKauza720-318-3400