Alternative Sources of Funding for

Creative Technology Businesses

The Creative Entrepreneurship Track is made possible through

the generous support of Morgan Lewis.

Jeffrey P. Bodle, Moderator Partner, Morgan, Lewis & Bockius

LLP

Rob Weber Managing Director, Antiphony

Thaddeus Squire Artistic Executive Director, Peregrine Arts

Alan Kraus Sr. Director, Investment Group at Ben Franklin Technology Partners

Kevin Dow Deputy Commerce Director

Neighborhood and Business Services, City of Philadelphia

Rob Weber

Managing DirectorAntiphony

Compiled from 2008 and 2009 Data

The Venture Capital Environment

Is it safe to go back in the water?

US VC Investments What goes up…

Source: PWC MoneyTree™

Survey, 2009

* 2009 data includes Q1 & Q2 data.

Philadelphia VC Investments Mirror the US with more deals per dollars

Source: PricewaterhouseCoopers/Thomson Venture Economics/

National Venture Capital Association MoneyTree™

Survey, 2009

* 2009 data includes Q1 & Q2 data.

US VC Investments Moderation moving forward…

* 2009 data includes Q1 & Q2 data.

US VC Investments Where’d it go in 1998?

US VC Investments In 2008, Energy overtakes Biotech

It’s a great time to be an investor (with cash)

Source: Thomson VentureXpert, 2008

Entrepreneurs have to do more with less, or pay the price in equEntrepreneurs have to do more with less, or pay the price in equity.ity.NOTE: No data available for Q1-2, 2009

VC’s abandoning then returning (in cycles) to

Seed Stage investments

Source: Thomson VentureXpert, September 30, 2009 (YTD)

The Funding Gap Investors continues to move later stage

Source: Jeffrey E. Sohl, Center for Venture Research, 2003

Supply

Stage

Source

Demand

Pre-Seed Seed/Start-Up Early Later

Founders Angel/Angel Alliances Venture Funds

$25K $100K $2, 000K $5, 000K

Funding Gap

Secondary Funding Gap

Equity Capital for Entrepreneurs

Why?NOT because they don’t do early stage dealsNOT because of poor ROIBUT BECAUSE

They have too much money to invest andNeed to move to harvest quicker

AND NOWEntrepreneurs are doing more with lessInvestors coming back to realize the bigger (riskier) returns are in earlier stage companies

Angels & Venture Capital

Angels Activity (2008)1 Venture Capital Activity2

260,500 active angels

Invested approximately $19.2 billion in 55,480 ventures

Additional commentsAverage per deal $346KLower valuations and cautious investingNot abandoning seed/start-up investments;, but moving later stageMore larger, formal alliances and later stage investments

2,276 active fundsInvested approximately $28.08billion in 3,929 dealsAdditional comments

Avg $7.15MM/deal

100100×× more angels invested 68% of the funds in more angels invested 68% of the funds in 1414×× more ventures than VCmore ventures than VC’’s (in 2008)s (in 2008)

1

Center for Venture Research, 20092

Thomson VentureXpert,

Sector Analysis

Sector Angel1 VC2

Software 13% 18%Health/Med Dev 16% 14%Biotech 11% 17%Industrial/Energy 8% 10%Retail 12% 1%Media 7% 6%

1

Center for Venture Research, 20082

Price Waterhouse Coopers/MoneyTree, 2009

Retail and Media mainly due to a continued Retail and Media mainly due to a continued interest in social networking venturesinterest in social networking ventures

The Truth About AngelsInvest close to homeCashed-out entrepreneursValue-addedPatient Capital (?)Invest as part of group/syndicateRegional NetworksAngels and companies seeking angel funding more diverse

16.5% women angels; 15.75% woman-owned ventures sought funding (9.5% conversion)Number of women seeking investment is low; conversion is comparable.3.6% minority angels; 3.7% minority-owned ventures sought funding (11.3% conversion)

Source: Center for Venture Research, Q1-2 2007

Angels still investing first, but…63% ( ) new, first sequence investments45% ( ) Seed/Start-up, 40% ( ) Post-seed/Start-up, with more, 14% ( ), moving to Expansion Stage.Increase in Post Seed/Start-up results from aggregation of angels (groups, clubs, funds)The Funding Gap grows a bit smaller…

Source: Center for Venture Research, Q1-2 2007

Evolution of Angels

Individual AngelsTypically entrepreneurs who have cashed outContribute:

Patient capitalKnowledge and experienceMentoring

Angel Groups/ClubsSame as Individual Angels, plus:Process to recruit, “scrub” and present opportunities to Angels

Angel FundsSame as Angel Groups, plusFormal fund, usually set up as LLCsInvest as a fund, although Angels direct the investment strategy

More and more, ALL

high-tech investors are looking for…

Visionary leader & capable team“We can hire execution”

Market leadershipEmerging growth markets with sizable potential

Fundamental, compelling technology advantageDefensible competitive position

Capital-efficient business planModerate capital requirementsClear return on investment leverageEasily financed post-seed

Risks mitigated in incubation stage

Thank you!

Rob WeberAntiphony Partners, LLC

rweber@antiphony.comTwitter: robweberFacebook: robweber1Linkedin: robweber

US dominates, but Venture Capital is becoming a global phenomenon

http://www.deloitte.com/dtt/article/0,1002,cid=213801,00.html

While technology innovation and entrepreneurship have largely been a U.S. phenomenon, other countries are quietly excelling in

areas that are critical to the future of venture capital investment.

We are operating in a global economy and venture capitalists will follow the best technologies. Those countries that can marry the

innovation and entrepreneurial work ethic as the U.S. has done will become formidable economic competitors in the 21st century.

Mark Heesen, president of the NVCA

Global VC Survey Background

400 responses from VC general partnersAssets under management from <US$100MM to >US$1BBMultiple responses from same firm allowed

Source: Deloitte NVCA Global Venture Capital Survey 2008

Countries ranked with the best technologies by industry sector

TCom Semicon SW Biophar MedDev AltEnergyUS 1 1 1 1 1 1

UK 7 7 3 2 3 4

Japan 2 3 7 9 5 3

Germany 10 8 5 4 2 2

Israel 3 6 4 8 4 10

China 9 4 6 9 8 6

France 8 9 9 5 7 8

Canada 8 7 9 5

India 2 6

S. Korea 4 5

Switzerland 3 6

Sweden 6 9

NOTE: Most are developed countriesSource: Deloitte NVCA Global Venture Capital Survey 2008

Staying Current: Resourceshttp://www.thomson.com/financial/peconsult/fi_peconsult.jspwww.venturexpert.comhttp://wsbe.unh.edu/analysis-reports-0

NEWS, ANALYSIS AND PUBLICATIONS

Pratt's Guide to Private Equity Sources Venture capitalists and entrepreneurs have turned to Pratt's Guide for comprehensive, accurate profiles and insightful editorial to help them raise capital, find the right venture capital firm, and keep up-to-date. Learn more

Private Equity Week Get the insider’s look at deal activity in the private equity market with Private Equity Week’s newsletter and website. Learn more

PE Week Wire PE Week Wire is a daily dose of e-mailed news and commentary on the venture capital and private equity markets. To receive it each morning, register for PE Week Wire here. Learn more

Venture Capital Journal Trusted by industry leaders for intelligent decision making for over 30 years, Venture Capital Journal gives you the real story behind the headlines. Learn more

What is a VC Fund?

LP Interest

How Venture Capital Works

Venture FundLimited Partnership

General Partner, Mgt Co

Limited

Partners:•Hi-Net Worth Individuals•Institutions•Companies•Other VC Funds

Carried Interest

Distribution ($)

$$$

(Commitment)

Mgmt Fees Mgmt Svcs

Investment Decision

Invest

Company #1

Company #2

Company #nCompany #n

$$$

Equity

Information or servicesCapitalEquity ownership

Advisory

Svcs

Fund SetupFund SetupFund OperationsFund OperationsHarvest EventHarvest Event

Thaddeus Squire

Artistic Executive DirectorPeregrine Arts

Alan Kraus

Sr. DirectorInvestment Group at Ben Franklin

Technology Partners

Ben Franklin Technology PartnersBen Franklin Technology PartnersOf Southeastern PennsylvaniaOf Southeastern Pennsylvania

Global Creative Economy Convergence Global Creative Economy Convergence Summit October 5Summit October 5thth, 2009, 2009

Ben Franklin Technology PartnersBen Franklin Technology Partners

• Pennsylvania’s partners to drive technology based growth• Marked 25th Anniversary 2008• Nationally acknowledged model

-2008 Excellence In Economic Development Award: International Economic Development Council

-2008 Technology-Led Economic Development Award: U.S. Department of Commerce

• Part of a statewide network consisting of four regional partners

Ben Franklin Technology PartnersBen Franklin Technology Partners of Southeastern Pennsylvaniaof Southeastern Pennsylvania

Our Approach CapitalOur Approach Capital……KnowledgeKnowledge……NetworksNetworks

• Seed & grow new technology companies.

• Assist firms to develop & commercialize new products.

• Develop and implement strategies & partnerships that strengthen the “infrastructure for innovation” across the Greater Philadelphia tri-state region.

Creative Clients, Alumni & Partners Creative Clients, Alumni & Partners (a sampling)(a sampling)

36

CapitalCapital

Money & Smarts at the Right MomentMoney & Smarts at the Right Moment

Funding for Innovative Seed & Early Stage Technology EnterprisesAcross Life Sciences, I.T. and Physical Sciences (with New Energy Programs)

• $ 43 Million committed in the southeastern Pennsylvania region 2001-2008– $957 Million+ in follow-on capital raised by BFTP/SEP companies– Approximately 120 active companies in Portfolio

• $75-500K investments - up to $750K lifetime• Key Drivers Technology & Commercialization• Milestone & Budget Based Allocation of Funds• Funding accompanied by Comprehensive Business Services• Frequently Viewed by Investors as vital “Seal of Approval”

What is BFTP/SEP Looking For?What is BFTP/SEP Looking For?

Some or all of the following:

– Venture experienced business management

– Active and diverse set of directors or advisors

– Meaningful differentiation/barrier to entry. Intellectual Property may be useful but not necessarily required

– Sound business & scientific approach

– Leveraged sources of capital• SBIR, FFF, Angel, Seed/Early Stage Venture Capital, Other state funding

sources. BFTP requires at least $1-$1 match, preferably in cash.

– Ability to achieve significant milestone(s) with BFTP/SEP dollars

– Long term sustainability & job creation

– Early or established companies (post proof of concept, particularly in IT, often with beta customers &/or product sales)

• Portfolio Development Services by Investment Group staff + contracted portfolio managers & consultants– Mentoring / Consulting– Success Teams: peer-to-peer coaching– Business Plan Development– Business Development– Capital Raising Strategy– Capital Connects: presentations to venture/private investors– Management / HR Strategy– Introductions

• Customers• Investors• Management• Partners• Prospective Board Members• Resource Providers• Strategic Partners

– Board of Directors Development/Strategy/Coaching– Advisory Board Development / Strategy

BFTP Networking: Value AddedBFTP Networking: Value Added

Advantages of BFTP/SEP FundingAdvantages of BFTP/SEP Funding

•• Position:Position: BFTP/SEP funds fill a critical, often missing gap in early-stage financing

•• FollowFollow--on Investment:on Investment: BFTP/SEP investment often catalyzes additional infusions of capital

•• Patient Capital:Patient Capital: BFTP/SEP will not force the company to premature exit strategies

•• Building Value:Building Value: BFTP/SEP uses its networks, skills, resources (including portfolio managers) to accelerate company value creation

•• Cost of Capital:Cost of Capital: BFTP/SEP investment terms are favorable given high risk profile

•• Application Process:Application Process: a valuable resource of feedback for entrepreneurs

The Investment ProcessThe Investment Process Investment Process OverviewInvestment Process Overview

•• FiveFive--Step ProcessStep Process1. Submit an Executive Summary (non-confidential)2. Submit an Application3. Q&A with Technical Advisory Committee (Professors, Tech Professionals, Service

Providers)4. Comprehensive Due Diligence Review by Outside Consultant5. Presentation to Investment Advisory Committee (Regional Angels, VC’s and

Service Providers)

•• FactsFacts– The Investment Process, if approved, takes 9 – 11 weeks from application due

date to final decision (up to 18 weeks for Life Science)• Note: investment conditions possible

– Briefings offered across region ahead of each application date—Highly Recommended. Can register at: www.sep.benfranklin.org/capital/brief.html

– 4 funding rounds per year, 3 for Life Science• Due Date for round just passed. Next round due in mid-January for March 2010 decision.

– All BFTP/SEP staff and reviewers under signedconfidentiality agreements

BFTP Capital: Typical Structure of IT DealsBFTP Capital: Typical Structure of IT Deals

Particularly ideal for companies able to use capital to reach technical andcommercialization milestones that will lead directly to exit or significantlyreduce risk of next investment round. Some flexibility depending on company.

• Convertible Debt

• Stand-alone, detachable warrants, (usually at $0.01/share exercise price, with the number of shares to be determined by next round’s price)*

• Lien on technology– No personal guarantee!

• Non-voting board observation rights

* Terms subject to change without notice

Thank You!

www.sep.benfranklin.org

Kevin Dow

Deputy Commerce DirectorNeighborhood and Business Services

City of Philadelphia

Question & Answer

Please complete the survey being distributed by the volunteers.

Surveys may be returned to the volunteers or at the Registration

Desk in Ballroom A.

Thank you to our sponsors