Wayne Brown Institute

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• Wayne Brown Institute
• How to raise money
• Wednesday March 15, 2006
• Tom Linnemann
• Managing Director National Accounts
• VenCore Solutions, LLC

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• Outline
• History of VenCore
• Benefits of Debt Finance
• Cash Illustration Why Use Debt?
• Cash Flow from Debt Finance
• Risk Analysis
• Asset Based vs. Cash Flow Lending
• Life Cycle of a Start-up
• - And financing options at each stage
• Asset Based Lending
• Selecting a Partner

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• Tom Linnemann Bio
• Thirty years business experience ranging from
  Asst to the controller through CFO in the finance
  world, Operations Manager to General Manager in
  the Operations and Administration realm
• MBA with emphasis in Finance from Lehigh
  University, Bethlehem, PA.
• Previous owner of successful Finance and
  Operations consulting business to support
  financially troubled companies (turnarounds)
• Played significant role in turnaround of three
  companies in the last ten years.
• Current position evolved from a consulting
  contract into a lucrative Managing Director
  position supporting the financial needs of new
  and emerging growth companies

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(No Transcript)
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• Benefits of Debt Financing
• Preserves cash equity
• Saving cash for items that cannot be financed
  such as R D,
• Sales and Marketing and Salaries
• Extends cash runway
• Can avoid unnecessary dilution
• Can raise companys valuation
• Less expensive than the alternative, spending
  cash equity

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Cash to a Start-up is like altitude to a plane.
Can you have too much?
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• Cash Flow Illustration

• VenCore Solutions 36 month term
• Cashflows
• Monthly Rent 3,450
• Start 15 mos. 7 Mos. 9 Mos.
• Mo 1 Mo 2 Mo 3-17 Mo 18 Mo 19-25 Mo 26 Mo
  27-35 Mo 36
• Equipment Line 100,000
• Application Fee -500
• Origination Fee -1,000
• Rental Payments -6,900 -3,450 -51,750 -3,450 -24,
  150 -3,450 -31,050
• Security Deposit -15,000 7,500 7,500
• Security Deposit Interest 19 19 285
  19 70 10 90 10
• Residual -10,000
• Net Cash Flow 76,619 -3,431 -51,465 4069 -24,080
  -3,440 -30,960 -2,490
• Cumulative Cash Flow 76,619 73,188 21,723 21,792
  1,712 -1,728 -32,688 -35,178

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Risk Graph Analysis
Between months 21 and 22
Between months 25 and 26
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• Leasing Versus Bank Debt
• Features Lease Bank Loan
• Collateral Specific Equipment Blanket filing
  on all assets
• Personal Guarantees None Likely
• Intellectual Property No Likely
• Tax Advantages Full payment expensed Interest
  only
• Risk of Obsolescence None Yes
• Speed to Close 7-15 days 30 days
• Amount Financed 100 80
• Financial Covenants None Yes
• Negative Covenants None Yes
• Deposit Relationship Required No Yes
• Liquidity requirement/Security Deposit 10-15 2x
  s amount borrowed
• Warrants Only on equipment on total line
  availability
• Ability to use other assets (i.e.A/Rs) Yes No
• Outside Financing Availability Yes No
• Origination Fee 1 2
• Total Cost of Financing (Effective
  Rate) 15-30 Prime 2 to 6 Fees

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• Life Cycle of a Start-Up

Start-up

• Cash from Founder/Friends and Family
• Debt reliant on Founder Personal Guarantee
• Loan likely made directly to Founder
• SBA Loan
• Grants (SBIR, NIH)

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Life Cycle of a Start-Up
Start-up
Bootstrap from Customers
Equity from F F or Angels

• Bank debt still likely made to Founder or
  guaranteed until positive cash flow
• Possible to factor A/Rs

• Amount of debt available dependent upon cash
  position
• Venture Lease likely first form of company
  leverage

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Life Cycle of a Start-Up
Start-up
Equity from F F or Angels
Institutional VC (small, less known firm)
Bootstrap to Positive Cash Flow
Large, known VC
Strategic Partner

• Balance Sheet stronger
• Lenders terms depend on familiarity with
  investor
• Still likely need asset based lender rather
  than Bank

• Technology Banks/Venture Lessors competing for
  your business
• Terms greatly improve

• Can seek more traditional bank/lease terms
  after showing a history of profitability
• Prior to profitability likely also reliant upon
  asset based lenders

• Balance sheet stronger
• Lenders terms depend on familiarity with
  investor
• Still likely need asset based lender rather
  than Bank

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Life Cycle of a Start-Up
Start-up
Bootstrap from Customers
Institutional VC (small, less known firm)
Bootstrap to Positive Cash Flow
Large, known VC
Strategic Partner
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Life Cycle of a Start-Up
Start-up
Bootstrap from Customers
Equity from F F or Angels
Institutional VC (small, less known firm)
Bootstrap to Positive Cash Flow
Large, known VC
Strategic Partner

• The Banks suddenly all want to be your friend
• Consider relationships before selecting least
  expensive option long term relationships
  weather storms better than new and untested
  relationships

Cash Flow Positive Company
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• Asset Based Lending
• Value of Hard Assets (Long-term Assets)
• Liquid Assets and Current Assets
• A/Rs vs. Contracts
• Used vs. New Equipment
• Value of IP. Should I pledge this as
  collateral?

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• Other Factors to Consider
• When to select a banker or finance partner
• Their knowledge of Industry
• Their ability to sell to his organization
• Their introductions to Partners, Service
  Providers, Investors

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• Financial Services and Emerging Growth Companies
  Coming Together
• Tom Linnemann
• Managing Director
• National Accounts
• Office [phone]
• Mobile [phone]
• Tom_at_vencore-solutions.com