trendlines investment thesis pre ipo

SC Capital Management LLC September 2014

What is Trendlines’ Opportunity Pre-IPO?

sccapital.co

Key Investment Highlights

•  6-1 leverage in seed-stage Israeli companies via gov’t program •  Isreali gov’t funds are non-recourse – that’s right, free money* •  True incubator business model produces optimal risk controls •  “Manufacturer” of startups focusing on agtech & medtech verticals

Leading Isreali “Incubator” business model

Recent exits offer glimps into powerful emerging national network •  Silicon Valley at a national scale – network effects in Israel •  Identifiable sourse of alpha derived from operational skill rather

than financial/biotech engineering •  IPO to fuel Trendlines’ micro VC brand into global ecosystem

Path from backwater investment co. to global micro VC leader

49x •  Investors can expect valuation to rise significantly as the market

understands the value creation going on inside this company •  Disintermediating financial-professional investors

“We invest in, incubate, and support early-stage, high-promise medical and agricultural technology companies in Israel, a global leader in start-up ingenuity. We do so with passion, in partnership with innovators and investors, in an environment that encourages curiosity and fosters collaboration. Simply stated, we create and develop companies to improve the human condition.”

Trendlines Group LTD

Owner of two gov’t-franchised incubator licenses

46 portfolio companies, 3 exits in 12 months +1 in process

$160m raised by Trendlines and its portfolio companies to date

$8m in cash + Toronto IPO planned for September 2014

Trendlines Medical: Best Incubator 2010 and 2014 (Israel’s Office of the Chief Scientist of the Ministry of Economy)

9 revenue-stage companies

Taken 2 companies public on the Tel Aviv Stock Exchange

Not a venture firm - no LP structure – true “incubator”

Trendlines, Investors, Founders


Focus: Life Science Technologies

source: Trendlines


Fundamental approach

source: Trendlines

Trendlines Group LTD Invests primarily through three incubators

Medtech – incubator license

Agtech – incubator license

Labs – internal proprietary IP concepts

Typical investment: è$100k cash

èLeveraged by $600k in gov’t grant to portfolio co èCompanies incubated in-house for minimum of two years èAdditional support over two years averages $450k per co è20-50% equity stake in portfolio co’s èAvoids biotech/pharma concepts

èMajority owned and developed èExisting IP portfolio

Trendlines Financials

SC Capital Management LLC

Audited 000s Jan -‐ June 30 FY FY FY INCOME STATEMENT 2014 2013 2012 2011

Income Gain from changes in fair value of investments in porGolio companies 8,562 23,494 8,637 6,723

Income from companies to porGolio companies 2,282 3,601 4,027 4,470 Group's share of losses of companies accounted for under equity method, net (738) (434) (310) Income from contracted R&D services 753 1,621 1,238 52 Financial income 1 201 33 721 Other Income 158 259 267 669

Total Income 11,756 4,944 5,131 5,602

Expenses OperaWng G&A 3,104 4,679 3,946 4,378 MarkeWng expenses 199 315 139 121 R&D expenses, net 573 1,244 869 120 Financial expenses 812 560 204 235

Total Expenses 4,688 6,798 5,158 4,854

Income before income taxes 7,068 (1,854) (27) 748 Income taxes 2,360 6,186 2,642 2,928

Net Income and total comprehensive income 4,708 16,723 5,968 4,543

IFRS accounting combines capital and income accounts….. Non-cash capital adjustment

audited by Ernst & Young

Net Income includes items not present in GAAP accounting

Audited 000s FY FY BALANCE SHEET 30-‐Jun-‐14 2013 2012

Cash 3,600 3,934 2,918 A/R 4,280 1,070 958 Short-‐term loans 342 760 625

Total Current Assets 8,222 5,764 4,501

Long-‐term investment 807 Investments in PorGolio Companies 77,267 72,214 43,855 Investments in Companies, equity method 647 110 20 PP&E, net 618 654 366

Total Non-‐Current Assets 79,339 72,978 44,241

TOTAL ASSETS 87,561 78,742 48,742

Trade and other payables 657 881 675 Deferrred revenues 2,832 3,087 2,168

Total Current LiabiliWes 3,489 3,968 2,843

Deferred revenues 506 1,340 730 Loans from Israel Chief ScienWst 4,986 4,955 4,231 ConverWble debenture warrants 2,149 Other L/T liabiliWes 7 4 398 Deferred taxes 15,392 13,032 6,846

Total L/T LiabiliWes 23,040 19,331 12,205

Equity: Share capital 100 96 87 Share premium 20,752 19,628 15,208 Reserve for share-‐based payment transacWons 1,288 1,701 1,418 Retained Earnings 35,260 29,867 13,912 Non-‐controlling interests 3,632 4,151 3,069

Total Equity 61,032 55,443 33,694

TOTAL LIABILITIES & EQUITY 87,561 78,742 48,742

Issued in connection with IPO – 10% unsecured

cash of $2,619, partial proceeds of Inspiro sale, in A/R

$1,724 due in current period, remaining balances not due for more than four years

audited by Ernst & Young

Loans from Israel Scientist = gov’t incubator program.

Selected accounting items – some clarification on cash EsWmated source/(uses) of cash, 000s Jan-‐June FY FY FY InvesWng 2014 2013 2012 2011 Equity investments in porGolio companies (305) (1,974) (3,510) (5,237) Proceeds from sale of investments in porGolio companies 2,977 1,318 524 3,070 Disposal of investments in porfolio companies Purchase PP&E (20) (373) (210) (78) proceeds from restricted deposits with more than one year restricWon & bank deposits (713) 565 1,880 (1,532) Financing Issuance of common stock 4 4,349 2,142 2,397 Issuance of shares to non-‐controlling interests 162 166 288 116 Proceeds from issuance of ConverWble Debentures 2,126 Loans from chief scienWst 153 386 2,547 3,736 OperaWng Costs OperaWng, G&A&M (2,757) (4,310) (3,459) (4,384) R&D, net (573) (1,244) (869) (120) Financial Income (expenses) (37) 194 (35) (180) Income tax 0 0 0 Income Income from services to porGolio companies 232 413 610 949 Income from contracted R&D services 753 1,621 1,238 52 Financial income Other Income 158 605 (91) 1,141

Income total 1,143 2,639 1,757 2,142

NET TOTAL 2,159 1,716 1,055 (70)

Trendlines is an investment company that produces high returns using operating leverage instead of financial leverage.

Fixed costs rising as Labs incubator ramps

Company does not break out write-offs but I estimate $1m over life of company or about $200k per year – not a significant concern

Financial Summary

Companies in incubaWon 14 Incubator graduate companies 30 Public companies 1

45

Assumes no exits, no incremental revenue, no additional capital raising other than IPO

Use of IPO Proceeds Fund core business of creaWng and developing porGoilio companies 4,000 Follow-‐on investment in porGolio companies 700 Establish overseas incubators 900 Trendlines Labs unit expasion 900 Balance -‐ for W/C and general 2,000

excluding 11 write-offs to date

Includes public company holding

EsWmated sources & uses of cash next 12 months*, 000s Current cash 8,300 Follow-‐on investments in porGolio companies (700) Cash required for operaWons (6,734) New seed investments (500) Overseas incubators (900) Trendlines Labs unit expasion (900) Cash income 2,500 IPO Proceeds, net 7,500 8,566

Burn rate/month 353 Runway/months 24

*$1.7m current portion LTD is responsibility of buyer of portfolio companies

Qualitative Factors For Trendlines •  Leverages Israeli ecosystem & network •  Fail budget per company is small •  Intensive incubation method selects

winners and screens losers fast •  Established downstream investor/exit

channels – VC, industry, IPO •  Incubation environment: multiple peers/

mentors/advisors dedicated full-time •  Emerging superior incubator brand

improves deal flow – also able to leverage alumni network

•  Significant IP portfolio in Labs unit •  Tapping into global micro VC and

startup growth story •  Experienced team can navigate global

medtech regulations + able to engage in regulatory arbitrage

•  Proprietary deal flow – well-defined exit strategy

For Investors •  Participate in micro VC w/o fees &

expenses common in LP structures •  Pure aligned with management via

common – no carried interest, back end •  IPO price is a big discount to the

potential market value of existing portfolio

•  Rare opportunity to invest in publicly-traded seed stage/micro VC

•  VCàMicro VC asset class likely to gain wider acceptance with investors

•  Ability to own the premier micro VC investor in a top startup/tech region of the world

For Founders •  Proven team vastly improves success

rate and founder economics •  Access to network, advisors, capital

from publicly-traded company

Israel – Startup Nation

Category Ranking

R&D Spending #1

Scientific Research #1

Public Spending on Education #1

Business Innovation #1

Cyber-security #1

Entrepreneurship #2

Economic Resilience During Crises

#4

Source: IMD World Compe22veness Ranking 2013

è 10.2% of workforce in high tech and the highest density of start ups in the world


ACADEMIC INSTITUTIONS

ISRAELI MILITARY

SEASONED ANGEL INVESTORS

SUPPORTIVE GOVERNMENT

ESTABLISHED MULTINATIONALS

RESEARCH INSTITUTIONS/ INCUBATORS

VIBRANT LOCAL AND INTERNATIONAL VC INDUSTRY

EXPERIENCED ENTREPRENEURS

Vast and growing network


290 of the world’s largest

companies have chosen Israel for R&D

The Israeli VC Environment Mature Funding Ecosystem – similar to Silicon Valley

Angels & Incubators Up to $20M

Micro-VC Funds $20-50M

‘Big’ Local Funds >$100M

Mega-VC Funds >$300M

No Israeli Funds

Source: Giza Venture Capital and Vintage Investment Partners

Incubation

Seed

Series C+

Series A

Series B

Accel, Battery, Bessemer, Canaan, Index, Lightspeed, Norwest, USVP, Venrock, Corporate VCs

Aleph, Carmel, Cedar, Gemini, Genesis, Giza, Greylock, JVP, Magma, Marker, OrbiMed, Pitango, Sequoia

Glilot, Inimiti, lool Ventures, TriVentures, YL Ventures

Angels, Elevator, Office of the Chief Scientist, OurCrowd, UpWest Labs

Trendlines, premier firm in this space

èForeign investors dominate the investment scene – 82% of the investments (compared to 50% in 2005)

IPOs Returning – Recent Israeli VC- Backed NASDAQ IPOs

•  Israel has 70 companies listed on NASDAQ- more than all Europe combined

•  50% of the Israeli companies listed on the AMEX, NASDAQ and NYSE stock exchanges closed out 2013 with gains of 30% or higher. The value 9 companies more than doubled and 3 tripled

Source: Rhodium

The Israeli VC Environment M&A of VC-Backed Companies - Dramatic Increase in # and Size

Source: IVC Research center

How Big is Seed Stage Startup Market? 5,000 microVCs can fund 100,000 startups/yr @ $500K/startup = $50B/yr

Q: How many people are entrepreneurs? How many startups get started every year? • ~1% of Humanity is “Entrepreneurial” (def’n: “can create a $10M rev/yr business”) • 1% x 7B ppl = 70M entrepreneurs, who create 1-5 businesses lifetime (75 yrs) • entrepreneurs could create ~1-5M new startup businesses every year !

Q: How much capital is needed globally to fund seed stage startups? • Assume 1M-5M startups/yr x $50K-$1M funding/each • Low: 1M x $50K = $50B/yr <-> High: 5M x $1M = $5T/yr !

Q: How many metros? How many investors? How many investors / startups / metro? • 1 “micro-VC” can fund 10-20 startups/yr * $50K-$1M = ~$1-10M annual budget • 500+ global metros with population >1M+ people can generate ~100-1,000 startups / yr • guesstimate = min 100K+ startups/yr total across top 100-200 global metros • 5-50 VCs / metro * 200 metros = 1,000-10,000 VCs globally • FUTURE: 5,000 VCs can deploy $10M/yr each, or $50B/yr in ~100,000 startups

!31

Source (data and fonts): 500 Startups

Capital Raising Highlights: •  Total raised to date: $23m pre-IPO •  2012 - $7m @ $49m premoney •  2014 - $10m+ @ $68m premoney IPO

K e y V a l u e D r i v e r s

3 to 5 Years

Small company innovating in niche corner of investing world

Company becomes best-in-class in discrete, mature investment category experiencing rapid

growth and adoption

Today

Skilled team scales on execution and focused strategy

Company symbolizes values, beliefs and dynamism of Israel, the richest startup nation

Company trades at discount to book Company trades at premium to market when value of IP, team and network gain visibility

$68m $200m +

Summary Observations

Company invests in narrow, local verticals Company expands horizons geographically to tap global growth and powerful micro VC trend

Company attracts attention of small investors Company garners interest from global VC funds looking for team, platform and portfolio

trendlines investment thesis pre ipo

Small Business & Entrepreneurship