Sources of Capital in the MidAtlantic Region

1
Sources of Capital in theMid-Atlantic Region

• BIO-IT Coalition
• October 20, 2004

2
Key Points

• The sources of capital in the region
• Focus on angel VC investing
• Practical example of VC deal terms

3
The Spectrum of Capital Sources

• Friends Family
• Angel
• Venture Capital
• Private Equity
• Debt Financing
• Grants
• Clients vendors

4
Angel Capital

• What is an Angel?
• Term coined in the 1990s to describe investors
  in Broadway productions
• Today private individuals who invest skills and
  money into startups
• What are Angel ?
• Seed, pre-institutional, early stage investors
• Typically investments of 10,000-1 million
• Some deals are only appropriate for angels

5
Types of Angels

• Individuals
• Groups
• Active Angels Investors (VA)
• Maryland Angels Council (MD)
• WomenAngels.net (DC)
• Washington Dinner Club (DC)

6
What do you need to get Angels interested?

• Focused on personal characteristics of the
  entrepreneur and market potential of the
  business.
• Angels tend to be more flexible when it comes to
  geography or industry focus.

7
Angel Capital

• Pros of Angel
• On average, less time than a VC to meet with and
  receive funds from an angel.
• Due diligence may be less involved
• Willing to accept a lower rate of return
• Typically willing to take more risk and invest
  earlier
• Tend to be more permissive investors
• Will invest in smaller deals
• Tend to invest in all industry sectors

8
Angel Capital

• Cons of Angel
• Impact on subsequent rounds of financing
• May not be willing or able to do follow-on
  investment
• Still want to have influence on how business is
  run
• May turn out to be more trouble than their worth
• No national reputation to leverage
• Lower level of ongoing involvement

9
Venture Capital

• What is Venture Capital?
• Professional investors investing other peoples
  money
• Types of venture
• May be focused on specific stage of investment
  (i.e. early, late, expansion)
• May only invest with syndicate
• May only invest as lead or co-lead
• Industry focus
• Geographic focus

10
Venture Capital

• Pros
• Larger investments with follow-on
• Likely to bring managerial and technical
  expertise to the table
• Experts in realizing liquidity
• Cons
• Likely to be involved in management of business
• Will want substantial portion of company for
  investment (40-60)
• Want to see 5-10X return on money within 3-5
  years with clear exit strategy
• Experts in realizing liquidity

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What are VC looking for?

• a large, rapidly expanding market
• people / management that can get the job done
• a unique and defensible technology idea that can
  be commercialized
• a strategy that has a strong sustainable
  competitive advantage
• a reasonable price per share

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Regional Life Science VC

• NEA (MD)
• Emerging Technology Partners (MD)
• ASM Resources (DC)
• Toucan Capital (MD)
• Maryland DBED (MD)
• InterSouth (VA)
• Edison Ventures (VA)
• Mara Ventures (VA)
• Neuro Ventures (VA)

13
The Reality of Heathcare VC Investing in DC
14
VC Financing Deal Terms A Founder Should
Consider
15
Founders Psyche

• Optimism coupled with skepticism
• Paternalistic
• Belief that majority ownership is important

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Key Components of the Term Sheet

• Non-Economic Terms
• Control
• Standstill
• Preferred Voting Rights
• Board Seats
• Use of Proceeds
• Economic Terms
• Liquidation Preference
• Dividends
• Anti-Dilution
• Capped/Uncapped Participation
• Optional Redemption

17
Non-Economic Terms Perspective

• Control
• Utmost in founders and managements mind
• Naïve belief that by retaining over 50 of shares
  retain control
• Board can almost always fire the CEO (average
  venture-backed company has 3 CEOs before exit)
• Standstill
• Coupled with short execution timeframe of term
  sheet puts founder under extreme pressure
• Preferred Voting Rights
• Ability to block subsequent financing rounds
• Ability to limit use of debt
• Ability to block sale of company
• Board Seats
• Expected, non-issue
• Use of Proceeds
• Operations
• No repayment of debt
• No distribution to current stockholders

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Implication of Economic Terms
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Conclusion

• Control is the most important issue for most
  founders
• As deal evolves, control naturally transitions
  from founder/management to board
• Founders may not understand the economic
  implications of the various deal terms
• Highest valuation is not the best if it results
  in future down rounds
• Recognize that raising capital results in two
  necessary transitions
• Owner to minority shareholder
• Owner to manager/employee

20
Contact

• Tim Howard, Managing Director
• Capital Strategy Group
• Phone [phone]
• E-mail thoward_at_capitalstrategygroup.com
• Andrea DAmbrosia, Vice President Business
  Development
• National Capital Companies, LLC
• Phone [phone]
• E-mail andrea_at_nationalcapital.com