Venture Capital 101

“Rise of the Rockies”

New West Festival
May 6, 2011

Trevor Loy
Founder & General Partner
trevor@flywheelventures.com
+1.800.750.7870 x702
www.flywheelventures.com
Twitter / Facebook / LinkedIn: trevorloy
1
INFORMATION
Information CONTAINED
contained IN THIS PRESENTATION
in this presentation is confidential IS CONFIDENTIAL
and AND PROVIDED
provided for convenience only FOR CONVENIENCE
and may not be reliedONLY
upon.AND MAY NOT BE RELIED UPON. PROSPECTIVE INVESTORS MAY RELY ONLY
Prospective investors may rely only upon a FlywheelUPON A FLYWHEEL
private placementPRIVATE PLACEMENT
memorandum MEMORANDUM
or an official supplement OR AN OFFICIAL SUPPLEMENT THERETO.
thereto.
 Structure of the VC Industry

Limited Family
Fund of
Partners Pension Fund Office
Funds
(Investors)

VC Firms
(“General
Partners” or
“Fund
Managers”)

Go eBa
Portfolio Cis
Inte ogl y
Companies co
l e Am
SU Yah azo
N oo n
2
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 Sources of Investors in VC Funds

Source: 2003 data from 2004 NVCA Yearbook,

prepared by Thomson Financial, page 22

3
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 Portfolio Investment Allocation

Traditional Assets
Publicly- Publicl
Cash & Traded y-
Money Stocks & Traded
Market Mutual Funds Bonds
Funds

Hedg Commoditi
Options &
e es
Derivative
“Alternative” Investments

Fund &
s
s Currencies

Ventur “Special
e Private Equity &Leveraged Situation
Capital Buyout ”
Funds Funds Private
Funds
4
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 US Venture Capital Investment in
Perspective
Assets Under Management
$18,000 $16,700
$16,000
$14,000
$12,000
$10,000 US GDP is $12.5 Trillion
Venture capital = 0.2% of US GDP
$8,000
$6,000 $4,777
Billions

$4,000 $2,000
$2,000 $800
$179
$0
NYSE M kt Equity Hedge Funds Buyout Venture
Value M utual Funds (Est) Capital
Funds

Source: AIMA, Investment Company Institute, NYSE.com, Thomson Reuters, NVCA

5
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 How Does a VC Investment Make $?
Note: not to scale
5%
5%
6 2/3 6%2/3 %
6 2/3 % 5%
33 1/3 %
20 % 10 %
10 %
10 % 6 2/3 % 25 % 5%
33 1/3 % 20 %
10 % 10 %
33 1/3 % 20 % 6 2/3 % 5%
20 %
33 1/3 %
20 %

50 %
Founding 33 1/3 % 25 % 25 %
Angels
ares for founders @ $0.01 ea $500K +
Employee Pool
 =3M shares Series A: $5M Series B: $25M
1M shares for
Company Value=$30K angels @ $0.505Mea.shares @ $1.00 for VC
5M#1shares @ $5.00 IPO: $75M
Founders = $30K + 1M shrs for =10M shares for VC #2 5M shares @ $15.00 each
employees
Company =$10M =15M shares @ Σ = 20M shares
= 5M shares $5 each
Founders = $3M Co. Value=$300M
Company =$2.5M Value=$75M
Founders = $45M
Founders=$1.5M Founders = $15M

6
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
Ref: Trevor Loy, Stanford Technology Ventures Program
 How Do We Make $ Across All Deals?
35%

30

25

20

15

10

0
Total Loss Partial Loss 1-1.9x 2-4.9x 5-9.9x >10x
0-1x

Source: Journal of Venture Economics, Sahlman 1990

7
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 Ex: How We Make Money for LPs

Number of Total Invested Return Category Total Return

Deals (total 15) ($4m / deal)

2 $8m 0x $0
3 $12 m 0.5x $6 m
4 $16 m 1x $16 m
3 $12 m 3x $36 m
2 $8m 7x $56 m
1 $4m 10x $40 m
15 $60 m 2.6x $156 m

8
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 Overview of VC Fundraising Process

9
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 The Good Old Days

10
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 How People are Organized in a VC Firm

Reference: Will Price, Hummer Winblad

11
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 VC Firm – Typical Investment Process

Reference: Will Price, Hummer Winblad

12
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 Preparing Investor Pitch Materials

13
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 Investor Pitch Tips and Hints

14
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 Making Introductions to VCs

15
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 Hard Questions Investors Will Ask

16
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 Hard Questions Investors Will Ask

17
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 What You Should Expect From a VC

mber: You Are Assessing A VC While They Are Assessing You -- Check Refer

18
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 Thank you!

Trevor Loy
Founder & General Partner
trevor@flywheelventures.com
+1.800.750.7870 x702
www.flywheelventures.com
Twitter / Facebook / LinkedIn: trevorloy
19
INFORMATION
Information CONTAINED
contained IN THIS PRESENTATION
in this presentation is confidential IS CONFIDENTIAL
and AND PROVIDED
provided for convenience only FOR CONVENIENCE
and may not be reliedONLY
upon.AND MAY NOT BE RELIED UPON. PROSPECTIVE INVESTORS MAY RELY ONLY
Prospective investors may rely only upon a FlywheelUPON A FLYWHEEL
private placementPRIVATE PLACEMENT
memorandum MEMORANDUM
or an official supplement OR AN OFFICIAL SUPPLEMENT THERETO.
thereto.
 PE Fundraising Count on Pace with 2009
Number of Funds Closed and Total Capital Raised by Year

* Through 1H 2010
20
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 VC Fundraising Down Considerably –
A New Size Band for the Industry?
120.0

100.0

80.0

60.0

40.0

20.0

-
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1H10

$B Gross 10.1 11.6 18.1 30.6 58.2 106. 38.0 3.8 10.6 19.2 29.0 32.1 36.2 28.5 15.8 5.6

Does not include Corporate Venture groups.

Source: Thomson Reuters/NVCA
21
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 Venture Capital Returns

Period Ending 1 Qtr 1 Year 10 Year 20 Year

3/31/2010 (most recent) 0.7% 6.5% -3.7% 24.0%
12/31/2009 (3 mos ago) 3.3% 3.0% -0.9% 23.5%
09/30/2009 (6 mos ago) 2.3% -12.4% 8.4% 23.1%
03/31/2009 (1 yr ago) -2.8% -17.3% 25.8% 22.5%
DJIA 4.8% 46.9% 2.3% 9.8%
NASDAQ Composite 5.7% 56.9% -6.3% 8.9%
S&P 500 5.4% 48.9% -0.7% 8.7%

Through 3/31/2010
Source: Cambridge Associates U.S Venture Capital Index®, the
22 performance benchmark of the National Venture Capital Association
Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 A Capital Crisis?
Few IPOS Post-Bubble; Many
300 Good Companies in the Wings
250
200
150
100
50
0 1999 2000 2001 2002 2003 2004 2005 2006 2007 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09
YTD1
0

# IP Os 270 264 41 22 29 93 56 57 86 5 0 1 0 0 5 3 4 37

23 Source: Thomson Reuters/National Venture Capital Association; As of 8/11/2010

Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 PE/VC Has Much Higher Fund Risk

Manager Universe 10 Year Performance

90%

95th Percentile
75%

60%

45%

75th Percentile
30%

15%
50th Percentile
25th Percentile
5th Percentile
0%
US Large Cap US Small Cap
-15%
Mutual Funds2 Mutual Funds2 US Private Equity 3
1. This exhibit compares time-weighted and dollar-weighted 10-year returns to illustrate the dispersion of active returns in the public and private equity markets. For a more
detailed explanation of the data used in this exhibit, see Ilkiw, John H. and Karl Scheer, (2002) “What is the Relative importance of manager selection in the US public and
private equity markets?”, Consulting Practice Note, Frank Russell Company, November.
2. Source: Russell/Mellon; time-weighted returns, gross of manager fees.
3. Source: Venture Economics; dollar-weighted vintage year returns, net of manager/partnership fees and fund manager’s carried interest. Data extracted on
November 5, 2002 Private equity includes venture capital, buyouts, mezzanine debt and mezzanine equity.

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Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 VC Investment Peaked in 2000;
2009 declined to $18B: $11.4 YTD
$120,000

$100,000
$100B
$ Million Invested

$80,000

$60,000

$40,000

$20,000 $28B $18B

$0
1995

2002

2007
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994

1996
1997
1998
1999
2000
2001

2003
2004
2005
2006

2008
2009
1H10
Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report,
Data: Thomson Reuters
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Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.
 History has shown VC Deploys Capital To
Most Promising Sectors: Four Examples
(“Sector Churn”)
% of total VC investment $

60%

50%

40%

30%

20%

10%

0%

1H10
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
% Disk Drive % Cln Tch % Bio incl. Pharma % Software

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Reuters
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Information contained in this presentation is confidential and provided for convenience only and may not be relied upon.
Prospective investors may rely only upon a Flywheel private placement memorandum or an official supplement thereto.