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MORNING SESSION: Start Me Up – The Current State of the Private Equity Markets

Opening Speaker:

Technology Financings 2002 – The Road Ahead and How to Drive It
Mark Cameron White – Partner, White & Lee LLP

Mark provided a brief overview of the performance of the private equity markets in 2002 and his observations on key structural changes now taking place within the venture capital industry. His focus was on exploring the different financial strategies and the build-up profile that technology companies will have to adopt in order to raise venture capital. Mark also profiled successful early-stage, mid-stage and late-stage companies by looking at staffing levels, revenue generation, infrastructure, proprietary technology position and markets.

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Panel Discussion 1: Institutional Changes in the Venture Industry and How this Impacts Financial Strategy

Yikes! Now What?! Structural Changes in the Venture Industry – How LPs Now Affect VC Investments
C. Scott Gibson – Chairman, Gibson Enterprises

With depressed returns, lost companies and out-dated fund economics, LPs are both more vulnerable on capital calls and more vocal on fund direction and management. Scott addressed some of these issues from his perspective as an LP with the objective of pointing out how new fund dynamics are affecting portfolio companies. With respect to changes within funds, Scott addressed (i) how and if most funds are changing management fees, fund carry for the GPs, and fund expenditures, (ii) if and whether funds should continue to carry the costs of internal staff supporting companies, (iii) the interaction of fund size and ROI and a brief primer on fund economics and ideal fund size and expected return in the next 5 years, (iv) the impact of capital calls on LPs (institutions and individuals), and the push-back and leverage, if any, that LPs have to limit or redirect capital expenditures, (v) the new mix of LPs, if any, with individual LPs not being in a position to make capital calls and (vi) the effect of the new market in fund positions being sold to outside financial institutions. Scott considered how these changes will impact companies, with particular attention to (vii) the amount of funds now available to early, mid-stage and late-stage companies and (viii) the involvement and direction that LPs expect funds to have in portfolio companies.

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The Angel Reaction to the Market Meltdown – Northwest Edition
Rick Nagle – Principal, Pillar Management

As an advisor, manager and syndicator of angel investments in technology and non-technology investments, Rick has a unique perspective on the impact of the current market on early-stage investors. Rick offered his view on key issues now confronting individual investors, including (i) why would any investor participate in an early round, if in a mezzanine round, investors can now find low valuations almost comparable to 1st rounds, lower risk than 1st rounds…and less of a threat of being washed out in subsequent rounds?; (ii) how can angel investors now protect themselves from being washed out if they don’t have the resources to continue to invest?; and (iii) as a result of early stage risk, are angels now joining organized funds to pool their money and participate in down-stream rounds? Rick also commented on (iv) the mix of attractive deals he is now seeing in the market for technology and non-technology companies; (v) how angel investors are getting into attractive venture-backed deals, and whether they want to; and (vi) solutions Rick sees and alternative sources of capital for companies prior to the first venture round (usually 12-18 months after the Company is formed). Rick also provided his sense of the health and size of the angel community in the Northwest: who are the players, and how have they fared in the post-bubble market.

Panel Discussion 2: A Snapshot of the Current Market – The Numbers and the Company Perspective

The Venture Numbers and Trends for 2002
John Gabbert – Director of Research, VentureOne

John addressed: (i) general financing trends in 2001 and into 2002, (ii) the profile of companies that are being funded, the attractive investment sectors, and changes here over the past 12 months, (iii) what is the range of funds being raised in 1st, 2nd and 3rd round financings – and what are the valuation parameters, (iv) statics and trends in the venture industry itself…the new funds being formed and raised, the growth of the overhang, and at what rate funds are being invested and in what stage companies, (v) any statistics or information on funds returning capital, closing, or simply not raising new funds…and implications for companies, and (vi) any numbers or insight on the relative growth and activity of domestic funds in international markets….and international funds setting up shop in Silicon Valley and the Pacifc Northwest. John also discussed a sense of relative fund activity in the major technology regions in the Bay Area, Northwest, Northeast and Washington/Virgina. John closed with a brief discussion on how VentureOne works, what reports entrepreneurs can purchase and how these reports are structured.

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Getting Money for a Great Company with Great Numbers in a Battered Industry and Down Market
Charlie Schoenhoeft – CEO, UFO Communications

UFO is a telecommunications metropolitan network carrier that is currently attempting to raise $15m in a Series B expansion round. The Company has rapidly built out networks in the Bay Area, Chicago and Los Angeles and has set out an aggressive build-out plan for which the new capital will be used. With this background, Charlie addressed (i) where the Company has had the most success in getting VC meetings and why the Company has avoided Bay Area based funds, (ii) what story seems to sell best in this market, (iii) how the Company is responding to investor questions on the general weakness in telecom, sluggish customer enrollments and concerns about over-capacity, (iv) the Company’s financial strategy in seeking funds now, versus waiting to increase revenues with the existing 3 networks so that the market can be more clearly defined and Company valuation will be enhanced, (v) given the Company’s current focus on rapid deployment of its services in order to build brand recognition, in this current round, how does the Company weigh the importance of valuation against a fund’s ability to help with customer and service vendor introductions, and (vi) what’s the current game plan in approaching funds….i.e., how many, when, over what period of time? Charlie addressed why he has decided not to use an investment bank to do a private placement and how this direct involvement in the financing process is affecting his ability to run the Company.

A CEO’s View of the New Venture World – From a Guy Who Ought to Know
John Orcutt – Former CEO, Actional Software

John is the former CEO of Actional Software, a connectivity enterprise software company, and he is now a company advisor and interim CEO with a number of early and mid-stage companies. Given this background, John provided his prospective on (i) how the venture world has changed over the past 12 months, (ii) the profile of the different business models VC funds are now following and how to match VC funds of a certain model with companies having specific needs, (iii) how management can effectively conduct diligence on the venture funds and partners that companies are considering working with, (iv) how to address management change issues raised by investors…whether to make the change, when and how, (v) what type of protections management should put into place prior to an investment to protect them against aggressive investors, (vi) for companies currently seeking investment, whether to build the team and Board prior to the investment, or to wait for the input of the new investors, and (vii) John’s take on how investor expectations have changed…IRR expectations, liquidity exits, maturity periods, and the like. For all of these points John compared how strategy changes for early, mid-stage and mezzanine-stage companies. John also talked a bit about Actional’s most recent financing, which was an agent deal that took over 6 months to complete.

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Panel Discussion 3: Show me the Money – The Venture Guys Speak from the Valley, The Forest, and Mainland China

This was a panel of established, first-tier venture capital firms that actively fund early stage technology startups in the Silicon Valley, Portland, Seattle and mainland China. The four panelists had approximately 15 minutes each to talk about their firms, to identify recent investments their firm has made that exemplify what they look for in technology startups, current financing trends or developments they see in the regional markets in which they invest, and how their firm is reacting or positioned, relative to these trends. Each panelist distinguished his own firm, briefly addressing the number of seed, mid-stage and later-stage financings they expect to complete in 2002, the average size investment by stage, and how a young company can get an introduction to the firm and be noticed. This panel consisted of prominent funds from the Silicon Valley (Outlook Ventures), Portland (Smart Forest), Seattle (OVP Venture Partners) and a San Francisco based fund that has invested in diverse industries in China for over 40 years (ChinaVest Ltd.).

The View from the Silicon Valley and Investment Possibilities for Pacific Northwest Companies
Carl Nichols – Managing Partner, Outlook Ventures

Carl commented on (i) the willingness of Valley-based funds to invest in the Northwest, and rely on Northwest funds to monitor portfolio companies, (ii) what technologies he sees as most promising in the Northwest, (iii) how Carl views the relative health of the technology communities in the Valley and the Northwest, and (iv) what new financing trends that have developed in the Valley in the post-bubble period will, in Carl’s view, take hold in other regions in the country.

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The View from the Forest and Activity in Portland
Hugh Mackworth – Managing Partner, SmartForest Ventures

Hugh commented on (i) the diversity of the Oregon technology industry, and how this has helped Oregon weather the technology recession, (ii) given the small size of the Oregon venture community, how Oregon funds syndicate deals and with funds from the Northwest or the Valley; (iii) what are the most promising and emerging technologies coming out of Oregon; and (iv) from Hugh’s perspective, what are the relative strengths and weaknesses of Oregon companies and management teams when compared to companies from outside the region.

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What’s Happening in Seattle Post Bubble?
Gerry Langeler – Partner, OVP Venture Partners

Gerry is in a unique position to comment on the markets in both Oregon and Washington, inasmuch as OVP is prominent in both. Gerry addressed (i) how the Washington technology community has been affected by the tech recession; is the technology community there too narrowly focused on wireless, telecom and enterprise software and when does he expect the market will recover, (ii) how will the growth of the Vancouver venture industry impact Northwest companies and will Northwest funds now start to look to Canada for company investments more than in the past; and (iii) why is it that more Washington based funds are not active in the Oregon market.

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Private Equity Markets in the New China: How to Put Money In and Get Out - What’s in it for U.S. Based Companies
Robert Theleen – Group Chairman, General Partner and Founder, ChinaVest

Bob commented on mainland China primarily from the perspective of U.S. venture funds entering the Chinese markets and investing in Chinese companies, and U.S. companies investing in joint ventures or other partnering deals with Chinese companies or partners. Specifically, Bob addressed (i) how to identify and work with local partners in China, (ii) what are the principle risks of doing business in the country and how to mitigate these risks, (iii) is it premature for mid-sized private companies to do business in China, or is it better to wait, (iv) how can U.S. investors and companies assure a return on investment in Chinese companies – and (v) the nature of government involvement in private enterprise in China. Bob also identified what he thinks are the most attractive technologies and markets in China and why.

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AFTERNOON SESSION: Acquisitions – The Only Liquidity Path that Makes Sense

Keynote Speaker:

Intel’s Perspective on the 2002 Global Economy - Where are the Opportunities, When Will Corporate Buyers Return…and What Technologies and Industries to Avoid
Kirby A. Dyess – Vice President and Director of Operations, Intel Capital

Kirby provided a general picture of Intel Capital’s view of the health of technology and strategic technology investment. In addition, given her work integrating newly acquired businesses into Intel, Kirby also spoke about Intel’s M&A strategy, the types of companies and technologies it seeks to acquire and generally whether Intel believes this is the right time to acquire new technologies, and why or why not. Not necessarily from Intel’s corporate perspective, but rather from her own observations, Kirby also commented on (i) whether at this time technology should lead or follow market development…essentially the “innovators dilemma”, (ii) given the risks and capital required to penetrate new markets for young companies, whether it now makes sense for management to form companies that are hard-core technology providers to larger, more established OEM companies such as Intel that then become attractive acquisition targets, (iii) what are the most promising new technology areas for markets that will develop in the next 2-3 years that are currently under-served, and (iv) whether the burdens of raising capital in a tight market, working under new risk from enhanced officer and director liability, and the absence of enterprise customers will fundamentally change the pace and way in which new technologies are created and put to market. In addition, Kirby defined a general strategic direction for technology managers to follow in the current market and whether that direction is to build companies, build technologies, or build markets.

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Panel Discussion 4: The Acquisition Path – What’s Going On Out There?!

What's in the Numbers and What the Future Portends
Kevin Cable – Managing Director, Cascadia Capital

Kevin discussed how the technology recession has affected acquisition volume, pricing and the type of deals that are now getting done. Kevin (i) provided an overview of trends and statistics for 2002 and projections for the next 12 months, (ii) identified the technology sectors and industries seeing the most activity and why, (iii) what buyers are looking for in attractive targets, where the buyers are coming from and what is driving the completion of the few acquisitions now taking place, (iv) generally, what are the key issues management must consider in whether to sell or finance the company, when should the decision be made, and when is it too late, (v) what structural changes have taken place in the investment banking industry in the past 2 years…such as the consolidation of banks, the competition for new business and the lay-off of large numbers of bankers…and how have these changes helped or harmed technology companies, and (vi) what are the new standards of fees, services offered and on-going commitments that companies should expect from M&A bankers.

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Valuation – How to Know If the Deal is Fair
Greg Endicott – Associate Managing Director, Kroll, Inc.

Greg provided an overview of the M&A valuation process and sense of valuation ranges prevalent in different technology industries and stage of company maturity. Greg commented on (i) trends in valuation based on acquisition structure, and the purpose of the acquisition for the buyer, (ii) different valuation methodologies, and which are most accepted and why, (iii) the strategy and negotiation process in determining price with the buyer, (iv) what are examples of factors or issues that impact valuation…and what can target companies do to pre-manage and anticipate problems that affect price, (v) does valuation differ for financings and acquisitions, why, and what is the range of difference, and (vi) what are creative deal structures that target companies might adopt that maximize price…and what are the negatives of any of these approaches. Greg focused his remarks on the current market and current valuations, explained what he expects the trends in pricing to be over the next 12 months and why. Is now the best time to sell a company, or is it better to wait?

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Creative Deal Structuring Alternatives for Distressed Target Companies
Todd Bauman – Stoel Rives

Todd discussed structuring, tax and securities issues in the sale of private technology companies – and current and critical issues in the negotiation and closing of these deals. In particular, Todd focused on the issues and acceptable deal structures for distressed target companies, such as (i) with the new focus on corporate governance, what are the new risks facing target officers and directors, and how should they be addressed, (ii) how can target companies pre-plan for an acquisition to minimize tax and liability, (iii) what are the current parameters on escrow holdbacks, limitations of liability, breakup fees, lock-ups and the like, (iv) how can target companies minimize the restrictions of lock-ups to talk with other buyers, and is this advisable, and (v) what are the fiduciary duties of officers and directors in considering alternative acquisition offers or in comparing and contrasting selling or funding the company.

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Panel Discussion 5: Survival Until a Sale – Cutting Burn and Tapping the Bank

Tricks for Keeping the Enterprise Alive – Things You Never Thought Of
Les Fahey – Founder, Fahey Ventures

This might have been the most relevant and timely discussion of the day…how to survive with limited cash, a reluctant market, nervous and demoralized employees and anxious investors. Les identified the traditional ways of throttling back on company growth, but more importantly, the more creative but essential ways of stretching capital and prolonging survival. In addressing these points, Les contrasted effective strategies appropriate for mid-stage and later stage organizations. The issues and strategies Les mentioned included (i) whether and how to use the threat of bankruptcy to restructure trade debt, (ii) how to re-negotiate onerous terms in real estate leases and what not to do, (iii) creative compensation plans for employees and management that reduce cash burn, and what to watch out for, (iv) the structure and use of cash bonus plans to substitute for incentive option plans that are underwater, (v) recapitalizations – should they be done, why, and how to do them, (vi) Les’ thoughts on the issues to consider in determining whether to fund or sell the Company, and (vii) what staff to cut, and what to keep. With reduced organizational infrastructure, Les also commented on the use of outsource services to provide variable services at a reduced cost.

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Venture Debt - How to Get It, When to Get It…and How to Avoid Foreclosure
J.P. Michael – Senior Vice President, Comerica Bank

Technology banks are still making loans, but the qualifications and terms have changed in the past 2 years. J.P. began by discussing what has changed in technology lending post bubble, how the banks have performed in this market, and what has changed in the way that banks now work with early, mid-stage and late-stage companies. After providing this overview, J.P. provided specific advice on (i) at what stage in the Company’s development is venture debt appropriate, what are the eligibility requirements and must a Company be venture backed, (ii) with the tightening of financial performance covenants, even if a distressed company has a line of credit in place, will it be able to pull down on the line?, (iii) when do the banks become concerned about Company performance, when are they willing to restructure loans…and when will they pull the plug?, (iv) how have the renewed focus on corporate governance affected how banks work with management and the Board….are banks becoming more vigilant and proactive in protecting their loans in distressed companies?, (v) if a Company is fundamentally sound but its markets are weak, how should the Company work with the bank to avoid foreclosure and restructure loans?, (vi) typically, what type of restructuring works and when are personal guarantees required to back up loans, and from whom?, (vii) what industries and stage companies are most attractive to technology lenders now, and what industries do lenders avoid?, and (viii) J.P. closed by providing an overview of who are the major technology lenders, how is Comerica positioned in the industry, what programs does it now offer to support companies that are attractive and what trends and changes in technology lending does J.P. see over the next 12 months. Finally, J.P. identified and commented on non-traditional lending sources or government-sponsored programs for loans to companies – such as SBA loans and the like.

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