Early Stage Capital Goes

Global

November 2, 2004 Shari Loessberg

1

Agenda

�Emerging Markets Money: Spectrum

�The Heart of a Deal: Overview

�G-Lab Resource Bank: Launch

�G-Lab Framework: Mechanics

How can you raise early stage capital

for G-lab companies today?

Emerging Markets Investment Spectrum

Form Domestic Int’l “Friends & Family” X Angel X Angel Group X Government X Special Govt & Acad Incubators X Multi-lateral Orgs X Venture Capital Limited X Private Equity X X Foreign Direct Inv & Funds X

Informal Investors

�Typically, provide earliest money

�Investment rationale often mixed: emotional, relational

�Angels vary in degree of sophistication andprofessionalism across regions

�Successful entrepreneurs best source forangels and angel networks

Informal Investors:Help your Company Get Them

�Local connections and networks matter most here

�Lawyers can advise on standard mechanics of local investment practices

�Engage your Company on how to vigorously pursue angel investment from existing stockholders, supporters, advisers

Informal Investors:Advantages & Disadvantages

ÅEasiest terms; modest investor expectations

ÅLack of formality; rapid closing

ÆSmaller pools of capital: inability to follow-onin later rounds of financing

ÆTypically, fewer and weaker connections tobuild business

ÆBadly documented deals may gum up laterinstitutional rounds

Non-Profit Investors

�Broad range of international organizations involved: IMF, IFC, OPIC, World Bank/IBRD, EBRD, others

�Local government and academic centers invest to stimulate enterprise and commercialization of local research

�Mixed investment rationale: social, economic development, other public policy concerns

Non-Profit Investors:Help your Company get Them

�Frances text

Non-Profit Investors:Advantages & Disadvantages

ÅInternational money can be an importantstamp of approval

ÅWell-run incubators provide both financial andhuman capital: new clusters attract (or retain)talent, suppliers, and customers

ÆSlow, bureaucratic decision-making andoversight; lots of strings attached

VMixed investment rationale skews risk/rewardanalysis

Institutional Investors

�US venture capitalists very reluctant to investin emerging markets; often use local co-investor when they do

�Outside US, true venture capital investmentas a class much less developed

�Private Equity fund investors badly burned in90’s, only now beginning to return

�Big international funds typically invest inlarge, well-established firms and sectors

Institutional Investors:Help your Company Get Them

�Research the VC and PE firms that activelyinvest in your region/your sector

�Work the G-Lab Resource Bank

�Leverage connections from your Companyand all relevant MIT and Sloan alumni networks

�Assist your Company in polishing its businessplan and presentations

Institutional Investors:Advantages & Disadvantages

ÅGold standard international networks

ÅImmense reputational value

ÆPercentage ownership stake may be high

ÆBig funds still nursing big losses; typically risk averse

ÆAlmost impossible to attract VCs outside ofvery narrow technology sectors

Investment Process:The Heart of the Deal

�Initial Discussions: Company presentations,business plan submission

�Evaluation by investor: Due Diligence�Mix of technical, financial, team

�Preliminary Agreement: Term Sheet

�Legal “Papering” the Deal: Closing

Investment Process:The Heart of the Deal

�Initial Discussions: Company presentations,business plan submission

�Evaluation by investor: Due Diligence�Mix of technical, financial, team

�Preliminary Agreement: Term Sheet

�Legal “Papering” the Deal: Closing

A Closer Look: Term Sheets

�US VC & PE model: �Pervasive, relevant framework �Not necessarily Best Practices

But, bear in mind: �Legal system considerations �Size and formality considerations

Deal Definitions: “Term Sheet”

�guts of the business deal

�NOT a “legal” document

�short (~5-8 pages)

�Investor offers its template

Deal Definitions: “Valuation”

�In very early deals, valuation is set bycomparables and market standards

�“Pre-money”: value before financing

�“Post-money”: pre-money plus financing

�Investor’s stake stated as a % of total enterprise value

Deal Definitions: Control

�Governing Body: • Board of Directors • Class votes

�Information Rights: • Inspection, Management reports

�Company Restrictions: • No merger, big deals without approval • Limits on spending, hiring

Deal Definitions: Economic Power & Investor Protection

�Employee Incentives: • Vesting schedules • Option Pools

�Protections and Preferences• Seniority upon liquidation • Anti-dilution protection • Dividends

Investment Considerations

�Regardless of the contract and deal structure, it’s ultimately a tradeoff between control and cash

�Loss of “control,” esp. for Founders, can occur at many levels and layers: operating, strategic, tactical, emotional

Summary on Deal Mechanics

�Vital, critical, essential to have seasoned professionals who know legal, financial, accounting landscape and the culture

�If you are one of these professionals, get maximum value from your asset

Traditional Resources: Credit

Unglamorous, but vital:Unglamorous, but vital:�Trade Finance (for exporters)

�Domestic Bank lending--lower interest ratesglobally �. . . as well as non-investment sources of

capital: �Commercial (bank) credit �Trade finance

• Vendor credit • Customer credit

Traditional Resources: Investment

International sources: �Investment Funds: AIG Capital Partners

• AIG-Brunswick Millennium Fund • New Europe Fund • Asian Opportunity Fund • Brazil Special Situations Fund • Blue Voyage Fund • Southern Cone Fund • Silk Road Fund

www.opic.gov

numerous others . . .

Longer-Term Trends

�1 year ago, Argentina, Brazil and Turkey all threatened to default as US market dragged

�Market has bottomed out in last 6 months

�Given low US rates, some now searching for higher returns abroad

Longer-Term Opportunities

�Stronger domestic private equity systems

�Domestic pension fund privatization:�Chile �Brazil �Poland �Russia