Increasing Shareholder Value for ABC Company

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MIT Enterprise Forum Fall Workshop
!_at_
Managing Your Burn Rate Insights, Techniques,
and War Stories from Experience
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Managing Your Burn Rate
MIT Enterprise Forum Fall Workshop

• Agenda
• Introductions
• The Current Market
• Panel Discussion
• Audience/Panel QA

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Managing Your Burn Rate Panel
MIT Enterprise Forum Fall Workshop

• The CEO Perspective
• Jim Brown
• InvisibleHand Networks
• The CFO Perspective
• Jake Fennessy
• SOFTRAX
• The VC Perspective
• Bic Stevens
• ZeroStage Capital
• The Moderator
• Bryan Pearce
• Ernst Youngs Venture Capital Advisory Group

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MIT Enterprise Forum Fall Workshop
Current Market Overview
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MIT Enterprise Forum Fall Workshop
US VC Investment 1Q 1999 2Q 2002
Source Ernst Young / VentureOne
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Seed/First Round US Investment 1Q 1999 2Q 2002
Source Ernst Young / VentureOne
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MIT Enterprise Forum Fall Workshop
Software Segment- Seed Round
6.0
5.0
5.0
4.5
4.0
3.3
Median (M)
3.0
2.7
2.6
2.0
1.8
1.8
1.0
1.2
1.2
1.0
1.0
1.0
0.8
0.0
1996
1997
1998
1999
2000
2001
2002
Median Raised
Median PreValuation
Source Ernst Young / VentureOne
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MIT Enterprise Forum Fall Workshop
Software Segment- First Round
14.0
16
13.0
14.4
14
12.0
12.9
12
10.0
10.7
9.5
10
8.0
8.0
8.8
Median (M)
7.8
8
Months
7.5
6.0
7.0
6.0
5.0
6
4.8
6.1
4.0
4.6
4.0
4.1
4
3.0
3.4
2.0
2
0.0
0
1996
1997
1998
1999
2000
2001
2002
Median Raised
Median PreValuation
Median Time Between Financings Seed Round to
First Round
Source Ernst Young / VentureOne
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MIT Enterprise Forum Fall Workshop
Software Segment- Second Round
40.0
20
37.0
18.4
18
35.0
16
30.0
30.0
13.6
14
13.7
11.7
25.0
12
12.4
13
Median (M)
10.5
Months
20.0
10
20.2
19.3
18.7
8
15.7
15.0
13.8
6
10.0
10.0
9.5
4
8.6
6.0
6.0
5.0
2
5.0
5.0
0.0
0
1996
1997
1998
1999
2000
2001
2002
Median Raised
Median PreValuation
Median Time Between Financings First Round to
Second Round
Source Ernst Young / VentureOne
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MIT Enterprise Forum Fall Workshop
Software Segment- Later Round
90.0
20
85.0
19
18
80.0
17
16
15.9
70.0
14.5
54.8
14
14.7
60.0
12.9
12
12
50.0
Median (M)
Months
10
40.0
37.2
8
33.2
34.8
30.0
6
26.5
20.0
20.0
4
15.4
6.3
10.5
10.0
5.0
2
4.0
11.0
7.8
0.0
0
1996
1997
1998
1999
2000
2001
2002
Median Raised
Median PreValuation
Median Time Between Financings Second Round to
Later Round
Source Ernst Young / VentureOne
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MIT Enterprise Forum Fall Workshop
Venture-Backed IPOs Software
Pre-Bubble
Bubble
Post-Bubble
Source Ernst Young / VentureOne
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MIT Enterprise Forum Fall Workshop
Venture-Backed MA - Software
Pre-Bubble
Bubble
Post-Bubble
Source Ernst Young / VentureOne
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MIT Enterprise Forum Fall Workshop
Were not advising companies for growth Were
Advising them for Preservation Paul
Deninger, Chmn. CEO, Broadview Money talks,
cash screams Bob Dylan
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What are the typical components of cash burn?

• Inflows
• Equity Investment
• Debt Financing
• Sale of capital rights assets
• Collection of revenues and grants
• Outflows
• Payment of expenses
• Capital purchases
• Repayment of debt/redemption of shares
• Additions to inventory, pilot beta equipment
  etc.

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Techniques being used by companies - Equity
Investment

• In the absence of an active IPO market, companies
  must focus on other alternatives for equity
  financing
• There is a spectrum ranging from 3Fs, through
  Angels, VCs, Strategic Investors, Private Equity
  and IPO depending on the stage
• Strategic investors may include customers,
  suppliers, distribution channel partners which
  can bring not only money, but also
  accreditation, contacts and significant
  reductions in time to market (via access to
  established distribution channels, regulatory
  know-how, rapid prototyping, extended research
  capabilities etc.)

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Techniques being used by companies - Debt
Financing

• Difficult, but not impossible for early stage
  companies to borrow/establish a line of credit
• Consider not only banks, but also other sources
  including
• Angels
• Suppliers
• Customers
• Banks are often willing to pair a bank loan with
  an equity financing deal from established VCs,
  Private Equity funds or serial Angel investors
  which have contacts in the banking community

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Techniques being used by companies - Sale of
Capital Rights Assets

• There are many opportunities to raise cash
  through the sale or license of certain technology
  or limited geographic or field of use rights
  often to a large corporate partner(s) that may
  be looking for access to new products or where
  both can benefit from leveraging the corporate
  partners RD capability, distribution channels,
  sales force etc.
• E.g. sale of Japanese distribution rights for a
  biotech screening technology for 4M
  significantly minimized dilution of equity, and
  accelerated product sales in that market

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Techniques being used by companies - Sale of
Capital Rights Assets

• Can also sell or out-license certain applications
  of technology in another (non-core) vertical
  market in order to generate additional funding
• Dont wait too long to make these decisions you
  dont want potential buyers to be in a vulture
  frame of mind

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Techniques being used by companies -
Acceleration of revenues grants

• In current market, its imperative to focus from
  the outset on commercial revenue producing aspect
  of the business, since this is the form of due
  diligence that all investors do understand!
• Profit and cash flow are two separate issues
  growth typically requires cash to fund further
  development as well as A/R, Inventory, Equipment
  etc.
• Consider asking customers for up-front payments,
  deposits, progress payments or prepaid license
  fees to generate funding to finish product
  development or enhancements etc.

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Techniques being used by companies -
Acceleration of revenues grants

• Research grants and research partnerships (that
  may also involve debt or equity funding) can be
  an important source, frequently without dilution
• Create a strong focus on building revenues (and
  resizing and restructuring expenses) to get to
  break-even or profitability as soon as possible
  whether or not you have a product concentrate
  on really delivering on a smaller number of
  focused opportunities appropriate to the actual
  resources of the enterprise

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Techniques being used by companies - Control of
expenses

• The objective is to curb spending without
  halting growth
• A continuous review of whether expenses are truly
  necessary relative to the stage of development of
  the company, and the progress that is being made
  relative to important funding milestones is
  essential
• Proper internal controls and policies around
  budgeting, purchasing, contract administration
  and payments are critical to ensure that the
  progress of the business against plan can be
  reliably monitored

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Techniques being used by companies - Control of
expenses

• Companies are deploying a number of
  cost-tightening moves including
• Changing compensation structures to include more
  non-cash compensation (e.g. stock etc.)
• Renegotiate supply contracts (discounts for
  prompt payments, better pricing, extended payment
  terms)
• Examine current or future occupancy costs
  consolidate and sublease
• Reviewing limiting initial feature sets of
  offerings
• Laser-focus on marketing and advertising
  expenditures
• Benchmarking against comparable companies
• Outsourcing and use of contract resources (incl.
  Offshore)

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Techniques being used by companies - Control of
expenses

• Explore opportunities for incentives from
  Government and others to partially offset cost of
  research, training, relocation, expansion etc.
• Investigate use of shared-service situations

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Specific techniques for reducing human resource
costs

• People often represent one of the biggest line
  items in an early stage company cash saving
  techniques can include
• Hiring freeze
• Retraining/re-deployment
• Reduced overtime
• Unpaid time off
• Deferred compensation
• Transfer staff positions to outsource/contract
  labor
• Reduction in force

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Techniques being used by companies - Additions
to inventory, beta equipment

• Focus is key carefully consider the number of
  product variations and beta sites you can fund
  and support may be increased by having
  suppliers or customers participate in funding
  through prepaid arrangements, vendor-supplied
  equipment, consignment inventory, customization
  fees, payments for exclusivity arrangements etc.
• Consider use of debt or leasing for equipment
  components
• Examine levels of inventory or Equipment for
  resale being carried and consider opportunities
  to switch to just in time purchasing

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MIT Enterprise Forum Fall Workshop
Panel Discussion
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Managing Your Burn Rate
MIT Enterprise Forum Fall Workshop

• Panel Discussion
• How have the rules changed with regard to speed
  versus survival?
• How important is focus as it applies to
  managing burn rate?
• What key assumptions should a venture-backed
  company be working under currently?
• What are boards/investors telling their portfolio
  companies today?
• What is corporate America most focused on now?
  What are they buying?
• What is the appliance strategy to capital
  expenditures?
• How can venture backed companies move more
  quickly from denial to acceptance in todays
  venture funding environment?
• What are the key success factors for
  communicating conditions to your people and
  keeping them motivated?
• How can a third party observer effect/manage
  change?
• What steps should leadership take in imposing
  cost-cutting measures?
• What techniques are companies using to manage
  burn rates?
• What non-traditional funding sources are
  available?
• How are revenue models changing?
• How viable is the MA exit currently?

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MIT Enterprise Forum Fall Workshop
Audience Questions for our Panelists