Early Stage Financing

A Panel Discussion

October 21, 2010 2

Panellists

Suresh MadanFund Manager

Sachin MahajanInvestment Banker

Kris ShahEntrepreneur

October 21, 2010 3

Overview of Discussion

Capital requirements over a life cycle of SMECapital requirements and challenges at different stages

Venture funded modelRaising capital: Angel funding, VC, Govt fundingGrowth funding: Mezzanine financing, Publically traded, Exits via liquidity eventsEntrepreneur losses control to external funding i.e. VC

Organically funded approachAspects of organically funded companiesAdvantages and disadvantages on this approach

Implications: staffing, taxation, growth, costs

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Suresh MadanCapital Needs Over Life Cycle of SME

October 21, 2010 5

About Excalibur CapitalToronto based Hedge Fund, Operating since 1997Investment Focus Includes:

Long-short EquitySeek emerging growth companiesSeek innovative companies with large market opportunityAssist VCs to exit of their positionsBuy in private placements w equity kickerOpportunistic Investing

We look for:Management team with a credible execution plan and resourcefulness Solution to a customer problem or reducing the pain (Val Prop)Achievable business milestonesDisclosure of problems and plan to fix Your own financial commitmentAnd investment fits into our structure.

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Capital Needs over Life CycleSeed period: low capital needs, primarily for living expenses and registration to flush out idea – Founder, 3Fs, Government programs, Founder’s credit card

Start-up period: growing capital needs for successful creation of products – Incubators, IAF, Angels, Strategic Industry Participant, Corporate incubation/VC arms

Growth period: largest financial needs when Customers accept the products – VCs, BDC, Commercial Banks, Investment Funds, Factoring Firms

Mature period: dropping capital needs and financing for improving financial statements or take-out – Commercial Banks, Exchange Listing, Strategic Investment from Customers, Vendors, etc.

Recession period: urgent capital needs and many unprepared – Lending Contraction, equity markets shut

October 21, 2010 7

Pertinent IssuesDeclining Venture Funding

You may be viable but not fundableFundraising process: Complicated, time consuming, distractingYou have only one chance

VC investments are highly concentrated6 of 17 industries receive >73% of investment“Me too” company investments are commonInvestments have unrealistic expectationsLimited Portfolio Diversity

Terrible things happen when start ups run out of moneyDo not delay raising moneyBigger distraction for foundersSurvival Rates of Early Stage companies <30% in 3 years

Prior FundingNeed Accredited Investors

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What does Funding Include?

Reboot legal structureSeats on half of the board

Veto over strategic decisions Various Rights

Anti-dilution protectionRight of repurchase

Vesting by foundersFunding Linked to Performance

In tranchesAbility to fire the founder, if things do not go well

October 21, 2010 9

Where to Find Investors?

Introductions No cold-callingFunds specialize by stage, size and geography

Reference from Existing investors Who else is investing?Shop-worn deal?

Networking with other entrepreneurs MentorsBusiness Venture Competitions

October 21, 2010 10

Role of TiE

TiE Fosters EntrepreneursMentoringEntrepreneurship ForumsTiE InstituteTiEQuest Business Venture Competition

TiEQuestDifferentiators: Mentors, Investors and Multiple Stages$150,000 in prizes and opportunity to win $1mm investment

Over 25 success stories

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Capital Requirements

External Capital

Internally Generated Capital

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Sachin MahajanExternal Sources of Funding

October 21, 2010 13

BusinessModel

ServicesOffered

• Focused on providing a broad range of services to all sectors– Provision of financing, typically in the range of $500,000 to $10 million

– Sponsorship services as mandated by Canadian exchanges– Facilitation of graduation to senior exchanges– Fostering access to institutional accounts – Provision of general fiscal advisory services - including those related to

mergers, acquisitions and divestitures• Canaccord Genuity aims to become the issuer’s financial partner - supporting the

company’s efforts to achieve its business & capital markets objectives.

Canaccord Genuity Private/Public Venture Capital Group (PVC) Practice

• The PVC Group’s role is to foster the growth of compelling opportunities within the Canaccord Genuity system - providing a foundation for early stage companies to meet their capital markets objectives, thereby enabling our clients to excel within their respective industries

• As a company executes on its business plan, relationships built through PVC activities give Canaccord Genuity an early mover advantage - enabling broader marketing activities, research coverage, institutional account access, and access to Canaccord Genuity’ global platform at an early stage of corporate development

October 21, 2010 14

Typical Sources of Funding

Friends & Family Exactly as the name suggests – these are your friends and high net worth individuals who happen to be ‘family’

Typically don’t have a set return threshold – generally happy to see their money back Sub $150k investments

Angel Investors

Typically successful entrepreneurs who want to help other entrepreneurs get their business off the ground Funding estimates vary, but usually range from $150,000 to $1.5 million Look for multiples of investment as a return threshold 70% of investments are made within local area

Incubators

Incubators are essentially ready-to-go space and support infrastructure for startup companies Incubators provide a structured environment for mentoring and services needed to establish successful

companies Will typically take royalty or equity positions 3-6% in exchange for services rendered National Business Incubation Association (NBIA) has shown a success rate (still in business after five years) of

87% for companies developed within an incubator vs. outside Will assist in capital raises of $500k to $5m

Super Angel Funds

A cross between Angel Investors and VC funds Still deal in relatively small investment sizes of $50k to $250k

Typically will provide value add services like personal experience, access to VCs, commercialization options May take a board position and significant equity positions

Venture Capital Funds

Organized, institutional funded, private equity funds that focus on SME segment with high growth potential Typically provide seed funding or growth capital with eventual exit through a sale or an IPO

Size of investment varies but typically north of $1.5 million to $20m

October 21, 2010 15

Where to Find Them?

Friends & Family Look around you and talk to as many people as possible for advice Be prepared to face the consequences should the investment go sour Make sure that everything is papered properly and that the funding is out of discretionary expenditure only

Angel Investors Organizations like TiE are a good place to start Usually will find such investors locally Several websites and angel investor communities exist in almost all geographies around North America

Incubators

Although the concept has existed for several of decades its really come to the lime light in recent years Several government and non-profit organizations provide various set of services for new business ideas

See IRAP, SRED and BDC Canadian Association of Business Incubation has a list of about 130 such incubators

Super Angel Funds An extension of the Angel investor community with a more structured approach to funding the investments Angellist has a directory of such people in North America – Canadian entries are few and far between but they do

exist

Venture Capital Funds

Plethora of VC companies in and around GTA and Ottawa (Kanata) in the East and Vancouver in the West Need to match the type of business plan with the right type of VC investor – reading their website is a good start

October 21, 2010 16

Current Trends in Start up Funding

Angel investors are back in vogue due to their hands-on approach and expertise in commercializationStart-up CEOs were less likely to go back to their friends and family for additional funding

Source: The Evolving Investor Landscape: What Really Matters To Startup Entrepreneurs –Dorsey & Whitney

October 21, 2010 17

Current Trends in Start-up Funding

Interestingly, a recent survey of start-up CEOs has shown that they value (1) the speed at which the deal can get done, and (2) whether the investor understands the startup’s funding requirements as criteria that are more important to them than valuation or dilutionCEOs also welcomed the experience and the expertise that the investor brought to the table as a critical element to their choice of investorDespite the recent push towards ‘globalization’, the choice of investor was not dependent on their ability to ‘go global’

Source: The Evolving Investor Landscape: What Really Matters To Startup Entrepreneurs –Dorsey & Whitney

October 21, 2010 18

Venture Capital FundingHistorically thriving VC fund industry seems to be contracting as the size of funds has become smaller and the type of investment focus more narrow

Source: National Venture Capital Association

October 21, 2010 19

Growth FundingCapital required to expand operations and develop new products and markets after commercialization of initial ‘idea’

Debt or preferred equity financing• Senior to common equity afforded to the founders / management• Debt financing is typically accompanied by a ‘sweetener’ or minority

equity• Generally provided by late stage venture companies or specialty

Mezz funds

Opportunity to raise capital through private placements or through listing on venture exchange or OTC exchange

• Highly dilutive to incumbent equity• Provides opportunity to increase investor base and create awareness• Will need to be sponsored by an investment dealer • Creates a path to potential exit by taking company public on the

larger exchanges or sale• Needs financial and cost discipline as investors will require constant

updates and financial statements• Canaccord Genuity has a group that focuses on small private

transactions

Mezzanine Financing

Private Placement / Public Listing

October 21, 2010 20

Company Life Cycle & ListingCanaccord Genuity Services Create Value Throughout a Company’s Entire Life Cycle

Source: TSX Group.

/ LSE Candidates

Founders, Family/Friends Angel Investors Venture Capital

Candidates

Candidates

Candidates

Project / Idea Operating HistoryStable ProductionR&D / Prototype Commercial Stage

Pink Sheets / OTCBB

PVC Phase

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Kris ShahInternally Generated Capital

October 21, 2010 22

Began in 1988 as an importer and distributor of finished medical devices in CanadaEssentially a service business

Low capital requirementsProfitable businessNot a long term viable business model

Baylis Medical Company

October 21, 2010 23

In 1995 started to develop medical device accessories in Canada, launched in US in 1998

Baylis Medical Company

October 21, 2010 24

By 2002, Baylis Medical had become a manufacturer and developer of complex medical device systems and procedures

Baylis Medical Company

October 21, 2010 25

Now distributing products in over 60 countries140 employees, offices in Montreal, Mississauga, Calgary, Vancouver, London, UK, and Hong KongIn 2009 the company divested assets of the Pain Management business to Kimberly-Clark in the US

Baylis Medical Company

October 21, 2010 26

Throughout the process, the company has been financed organically or by internally generated financingAt start up, sweat equity of founders to market finished medical devices in CanadaIn early stages, revenue from the distribution business was used to develop medical device accessoriesThese in turn financed the development and commercialization of larger complex medical devices

Baylis Medical Company

October 21, 2010 27

Lessons Learned — Value

Start Up phase• Forced to learn the business from the ground up• Most critically learned to sell to physicians• Build relationships with physicians, administrators,

biomedical engineers

Early Growth Stage• How to engage physicians in a meaningful way• By seeing the companies we were distributing for, get

to see how device manufacturing companies worked

Long term• Founders retained control• Able to plan and execute for the long term• All parties have common long term goals• Forced a financially disciplined approach

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Slow growthGrowth limited by profit

Discipline imposed by external capitalLack of public profile

Can impact attracting talent or partners

Lack of stock or optionsAttracting and retaining talent

Lessons Learned — Challenges

October 21, 2010 29

Internally financing of a growth company is a viable optionAllows retention of control by founders but comes at a price of slow growth

Conclusion

October 21, 2010 30

Panel Discussion

Panellists:Suresh Madan• Fund Manager

Sachin Mahajan• Investment Banker

Kris Shah• Entrepreneur

Current issuesQuestions and Answers