VC Due Diligence Basics October 15 2002 Craig

VC Due Diligence Basics October 15, 2002 Craig Gomulka Draper Triangle Ventures craig@dtvc. com

Today’s Talk • Who is Draper Triangle • Our Investment Profile • Our Investment Timeline • Three Stages of Diligence • Case Study: Hypernex • Questions

Who is Draper Triangle? • Located in Pittsburgh, Pennsylvania • PA-based fund of Draper Fisher Jurvetson • First-round, early stage, lead investor • High-tech fund - Education, MEMS, Data, Semiconductor, Advanced Software, Medical Devices, Optical, Automation

The DFJ Network Timberline Venture Partners Vancouver, WA Access Venture Partners Westminister, CO Austin, TX Draper Fisher Jurvetson Redwood City, CA DFJ Portage Chicago, IL DFJ New England Cambridge, MA Draper Fisher Jurvetson Gotham New York, NY Draper Triangle Ventures Pittsburgh, PA Zone Ventures Los Angeles, CA Wasatch Venture Fund Salt Lake City, UT Draper Atlantic Reston, VA

The Expanded Network Late E-Planet Stage Mid DFJ Fund and Me. VC Early Draper International Affiliates Seed National International

Draper Triangle Portfolio

Investment Profile - We need to see… • Focus - Solve a specific problem or meet a specific need very well in a defined niche. • Billion dollar markets • Sustainable competitive advantage • Well rehearsed presentations • Realistic valuation expectations • Strong exit strategy • That you’ve done your homework on the private equity community, tell the VC what synergies exist between you and them.

Investment Profile - We need to see… • Solid Management Team – Should have domain experience – Smart, driven people – Credible references help “We buy dreams, not resumes. Draper looks for people who talk about changing the world, not building a business. When you ask them where it will be in ten years, they have an answer. ” Steve Jurvetson – Partner, Draper Fisher Jurvetson

Investment Profile - We don’t like to see • Citing ghost products as competitive advantages • Quoting your markets too far out • Raising too much money • Teams looking only for $$$ • CEO and team members who don’t know their limitations • Poor market due diligence

The Funding Timeline 1. Review business plan 2. Bring in management team to present 3. Evaluation of opportunity 4. Internal partners meeting 1 to 4 Months 5. Term sheet 6. In-depth due diligence 7. Legal documentation 8. Funding

Initial level of due diligence • Level I (after the plan and initial go/no-go) – Meet the team • Prior entrepreneurial experience • Experience in the market place • Would we enjoy working with the team? – High level understanding of • Product, Market size and Exit Potential • Competition and Differentiation • Marketing, Sales, Competitive strategy – Go or no-go decision

Secondary level of due diligence • Level II (gets more interesting now) – Market research, competitive analysis – Marketing and sales plan validation – Financial validation (numbers make sense? ) – Potential/existing customer/partner calls – Independent industry insider/expert calls – IP review, existing patent scan – Better validation of likely exit scenarios – Have we enjoyed working with the team? – Go or no-go decision for term sheet

Final level of due diligence • Level III (after term sheet, the boring stuff) – Management team background checks – Corporate and organizational (books in order? ) – Capitalization structure, benefit plan – Intellectual property (legal review) – Financials (historical audit/review, tax returns) – Existing contracts and obligations – Properties, leases and insurance – Reps and warranties in the term sheet

Hypernex Case Study: Introduction • • Location: State College, PA History: Early stage, spinout from ATMI Size: At time of investment, 6 person team Technology: Rapid crystalline microstructure analysis using X-ray diffraction • Markets/fields of use: Semi, biotech, others • Product stage: prototype completed and in use by first prospective customer • Fund raise: $1. 75 M

Hypernex Case Study: the Product • Is this a “must-have” or a “nice-to-have” for semiconductor manufacturers? • What are the hurdles to product completion? • Who do we need to hire to get us there? • Third party technologies/licenses? • Key metrics IBM will use to evaluate the usefulness of the product? – Device yield – Device performance – Bottom line/ROI

Hypernex Case Study: the Team • • Do they know the technology? Do they understand the space? Do they have contacts they can leverage? Do we have contacts they can leverage? Who else do they need to hire? Team dynamics - work together well? Are they excited about what they are doing? • How does their history check out/DD calls?

Hypernex Case Study: the Market • What are the characteristics? – Established growth, but very cyclical – Very large, over the $1 B threshold • Do we own the whole market or a small part? : Different market sizes acceptable • Who is driving the sales? • What market pain are they addressing? • What trends are in their favor?

Hypernex Case Study: the Competition • Who else makes XRD for the fab? • Who else makes XRD for the lab and could cross over into the fab? • How intimately is the company’s competitive protection tied in to their IP? • What barriers has the company created via technical, IP or even marketing/biz dev? • Why has no one else approached this market?

Hypernex Case Study: the Financials • First 12 -18 months, identify each customer, should fit precisely with the sales plan, no blind projections • What supports the assumptions? – Industry comps – Management/board prior experience ** adds credibility • What are the growth drivers of the hockey stick? – Have you become the industry leader/only solution – Effects of competition, large or small implications • Bottom line – any realistic thought put into them? There is a difference between an educated guess and POMA

Hypernex Case Study: the Exit • Which companies benefit from Hypernex • Which companies are hurt by Hypernex Both are potential buyers… • What evidence supports acquisition vs IPO – Historical instances – Strategic fit • Historical acquisition/IPO data very helpful • VCs statistically can not do low multiple deals

Thank you! 2 Gateway Center, Suite 2050 Pittsburgh, Pa 15222 Phone: Fax: For more information and FAQ (412) 288 -9800 (412) 288 -9799 craig@dtvc. com http: //www. dtvc. com