w hite & l ee llp soup to nuts 2001 “the end game in a down market” may 19, 2001

1Bruce Lichorowic

WWHITEHITE && L LEEEE LLPLLP

Soup to Nuts 2001 Soup to Nuts 2001

“The End Game in a Down Market” “The End Game in a Down Market”

May 19, 2001May 19, 2001

Bruce W. LichorowicBruce W. Lichorowic

2Bruce Lichorowic

Soup to Nuts 2001 Soup to Nuts 2001

Shopping the Company without a Shopping the Company without a

BankerBanker

What can you expect?What can you expect?

Bruce W. LichorowicBruce W. Lichorowic

Background…BWLBackground…BWL Focus Focus

Solutions for troubled companiesSolutions for troubled companies

IssuesIssues Funding, operational, marketingFunding, operational, marketing

PartnerPartner VC’s, Angels, LP’s, Board, EntrepreneurVC’s, Angels, LP’s, Board, Entrepreneur

20+ years 20+ years TurnaroundsTurnarounds

4Bruce Lichorowic

The EnvironmentThe Environment ““So what’s going on?”So what’s going on?”

Last Year:Last Year: Q1, 114 AcquisitionsQ1, 114 Acquisitions

Venture-back deals…$44.9BVenture-back deals…$44.9B

This yearThis year ??

Dot com…Shutting downDot com…Shutting down Investors are Investors are nervousnervous IPO’s…5, ‘01IPO’s…5, ‘01 Merge or be Acquired?Merge or be Acquired?

Source: Reuters, 4/9/01Source: Reuters, 4/9/01

5Bruce Lichorowic

Deciding…Deciding…

Who decides to sell….?Who decides to sell….? BoardBoard

InvestorsInvestors

ShareholdersShareholders

FoundersFounders

BankersBankers

6Bruce Lichorowic

Getting Ready Getting Ready

Once the decision is madeOnce the decision is made ProspectingProspecting

Pre-DealPre-Deal

DealDeal

Post-DealPost-Deal

7Bruce Lichorowic

ProspectingProspecting Business DevelopmentBusiness Development

11stst calls to…existing Partners calls to…existing Partners Tell them your intentions…Tell them your intentions… Set up a meetingSet up a meeting

Investors…VC’sInvestors…VC’s Look into their existing Portfolio companiesLook into their existing Portfolio companies Checking other VC’s with similar technologyChecking other VC’s with similar technology

BoardBoard Active board members Active board members

8Bruce Lichorowic

ProspectingProspecting Sales TeamSales Team

Call key customers interestedCall key customers interested Delicate call…Delicate call…

Key ShareholderKey Shareholder Inform shareholder of intent to sellInform shareholder of intent to sell

9Bruce Lichorowic

ProspectingProspecting

Message…KeyMessage…Key

Deliver a “common sense” story Deliver a “common sense” story Intend to sell the companyIntend to sell the company

Give period of timeGive period of time

Why…funding, Investors Why…funding, Investors

Tell how you help their futureTell how you help their future

Be confidentBe confident

Show leadershipShow leadership

10Bruce Lichorowic

Prospecting Prospecting ProcessProcess Smooth and ContinuousSmooth and Continuous

Stay in contactStay in contact Don’t drop any prospect until they say:Don’t drop any prospect until they say:

No ThanksNo Thanks

Who leads the dealWho leads the deal CEO with Business Development….small company CEO with Business Development….small company Operating/Unit Manager….larger companyOperating/Unit Manager….larger company

TimingTiming Key..Don’t rush…Key..Don’t rush…

11Bruce Lichorowic

Profile your Company Profile your Company 0-6 months0-6 months

Market/MarketingMarket/Marketing Markets Identified, Web Site Markets Identified, Web Site

TechnologyTechnology WhitepaperWhitepaper

Team Team FoundersFounders

Business Model/PlanBusiness Model/Plan One pager Executive SummaryOne pager Executive Summary

FundraisingFundraising Founder/AngelsFounder/Angels

12Bruce Lichorowic

Profile your Company Profile your Company 6-18 months6-18 months

Market/MarketingMarket/Marketing Analyst ApprovalAnalyst Approval

VP Marketing, Core Message, PR LaunchVP Marketing, Core Message, PR Launch TechnologyTechnology

VP Engineering, Proof of Concept, AlphaVP Engineering, Proof of Concept, Alpha Team Team

Development, MarketingDevelopment, Marketing Business Model/PlanBusiness Model/Plan

Basic Executive Plan Basic Executive Plan VP Business Development VP Business Development

FundraisingFundraising Lead VC with Existing AngelsLead VC with Existing Angels

13Bruce Lichorowic

Profile your Company Profile your Company 12-24 months12-24 months

Market/MarketingMarket/Marketing Customer Approval Customer Approval

TechnologyTechnology Beta or FCSBeta or FCS

Team Team CEO, VP Sales, Marketing ProfessionalsCEO, VP Sales, Marketing Professionals

Business Model/PlanBusiness Model/Plan Detail Plan Detail Plan

Strategic PartnershipsStrategic Partnerships FundraisingFundraising

Syndicate of Investors, Lead VCSyndicate of Investors, Lead VC

14Bruce Lichorowic

Profile your Company Profile your Company 18-24 months18-24 months

Market/MarketingMarket/Marketing Key Message… ”why customer buy?”Key Message… ”why customer buy?”

TechnologyTechnology FCS with milestone releasesFCS with milestone releases

Team Team CFO, Audit FirmCFO, Audit Firm

Business Model/PlanBusiness Model/Plan Polished Presentation, Focus Plan, Reference Polished Presentation, Focus Plan, Reference

Sites Sites FundraisingFundraising

Syndicate Investors with VC Lead or Syndicate Investors with VC Lead or Mezzanine if IPO is imminentMezzanine if IPO is imminent

15Bruce Lichorowic

Pre-Deal…LOI StagePre-Deal…LOI Stage

More deals lost at this stageMore deals lost at this stage Management…Thinks it’s over Management…Thinks it’s over

General “relax” attitudeGeneral “relax” attitude

Forget take care…Current CustomersForget take care…Current Customers

PersonnelPersonnel Feeling of uncertaintyFeeling of uncertainty

Critical that you keep key employeesCritical that you keep key employees

16Bruce Lichorowic

Pre-Deal…LOI StagePre-Deal…LOI Stage””

Diligence StageDiligence Stage Business model…that makes senseBusiness model…that makes sense

Strong business propositonStrong business propositon

Revenue model, pipelineRevenue model, pipeline

TechnicalTechnical IP reviewed, architectureIP reviewed, architecture

Show the ”secret sauce” Show the ”secret sauce”

Key personnel intro’sKey personnel intro’s

17Bruce Lichorowic

Pre-Deal…LOI StagePre-Deal…LOI Stage

““Secret Sauce”… Core TechnologySecret Sauce”… Core Technology Underlying technology behind the productsUnderlying technology behind the products Meet customers needs and applicationsMeet customers needs and applications

00 1100 1100 11

00 1100

11

00 1100 1111

1111

Internet Personalization

Technique

Dynamic segmentation

of on-line users

Adaptive response to on-line users

Cooperative Multi-Agent

Search

18Bruce Lichorowic

Pre-Deal…LOI StagePre-Deal…LOI Stage””

Diligence StageDiligence Stage

Identified MarketIdentified Market Customer Customer

Market sizeMarket size

What problems are your fixing?What problems are your fixing?

Review backgroundsReview backgrounds FoundersFounders

Sales, Marketing, EngineeringSales, Marketing, Engineering

19Bruce Lichorowic

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY

TOTAL TOTAL CASH CASH

REQUIREDREQUIRED

BREAKEVENBREAKEVEN

Pre-Deal…LOI StagePre-Deal…LOI Stage

20Bruce Lichorowic

Pre-Deal…LOI StagePre-Deal…LOI StageProduct Road MapProduct Road Map

PRO

1.0

Product #1Product #1

Product #2Product #2

Product #3Product #3

Q2 2001Q2 2001 Q3 2001 Q4 2001Q3 2001 Q4 2001 1H2002 1H2002 2H 2002 2H 2002

1.0 2.0

1.0

1.0 2.0

PRO

2.0

PRO

1.0

PRO

2.0

21Bruce Lichorowic

Pre-Deal…LOI StagePre-Deal…LOI Stage

Financial ReviewFinancial Review Cash…Burn rateCash…Burn rate

Sales…PipelineSales…Pipeline

Budgets…by DepartmentBudgets…by Department

Balance Sheet, P&LBalance Sheet, P&L

22Bruce Lichorowic

DESCRIPTION JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV

BEGINNING CASH BALANCE: * $468.6 $520.1 270.8$ 545.9$ $111.9 $932.6 $4,932.8 $7,260.5 $6,118.4 $4,970.7 $3,767.3

CASH FROM INVESTMENTS OR LOANS:• Series B Preferred Financing $250.0 — $503.9 — — — — — — — —• Series B2 Preferred Financing — — — — 1,500.0 5,000.0 3,500.0 — — — —• Credit and/or Lease Line for Capital — — — — — — — 130.0 125.0 112.5 101.5 • Interest Income & Other 1.1 0.8 8.6 3.6 0.7 0.1 1.2 6.2 9.1 7.6 6.2

CASH FROM INVESTMENTS OR LOANS: $251.1 $0.8 $512.5 $3.6 $1,500.7 $5,000.1 $3,501.2 $136.2 $134.1 $120.1 $107.7

CASH FROM REVENUE: 30 days from date of shipment — — — — — — $14.2 $1.6 $15.7 $1.7 $60.2 60 days from date of shipment — — — — — — 32.4 4.0 0.4 4.5 0.5 90 days from date of shipment — — — — — — — 16.2 2.0 0.2 2.2

CASH FROM REVENUE: — — — — — — $46.6 $21.8 $18.2 $6.5 $63.0

TOTAL CASH GENERATED: $251.1 $0.8 $512.5 $3.6 $1,500.7 $5,000.1 $3,547.7 $158.0 $152.3 $126.6 $170.7

CASH REQUIRED FOR OPERATIONS:• Salaries for Employees $54.8 $52.5 $82.4 $185.5 $158.3 $220.0 $371.3 $427.5 $452.5 $495.8 $495.8 • Insurance, Payroll Taxes, Employee Benefits 10.0 6.2 7.3 20.2 15.5 41.6 70.2 80.8 85.5 93.7 93.7 • Commissions 4.2 2.5 2.5 3.7 5.5 5.1 0.6 5.6 0.6 21.5 24.9 • Recruiting & Other Personnel Expenses 7.2 5.9 — 30.0 65.0 55.0 60.0 60.0 52.5 52.5 52.5 • Contractors/Temporary Personnel/Legal/Audit 80.4 119.7 50.8 93.1 260.0 214.1 185.0 190.0 190.0 205.0 205.0 • Cost of Sales/Other Materials/Office Supplies 10.3 1.1 — 0.3 2.0 29.3 31.5 31.5 31.5 29.3 31.5 • Computer Hardware/Software Expenses — — 1.2 — 10.0 38.0 42.8 42.8 52.3 42.8 42.8 • Air Travel/Automobile/Entertainment/Hotel 14.9 5.8 7.8 2.1 25.0 34.0 29.8 34.0 34.0 39.1 39.1 • Advertising/Promotions 12.2 30.6 13.1 28.0 34.0 61.0 86.0 96.0 71.0 36.0 36.0 • Equipment Rental & Maintenance Agreements 2.5 — — — — 23.0 21.0 21.0 24.0 22.0 22.0 • Facilities/Utilities/Communications Costs 0.8 22.4 0.7 6.6 12.5 12.5 26.5 26.5 26.5 26.5 26.5 • Other Expenses — 1.5 0.8 5.9 17.2 16.5 20.5 18.8 18.7 25.2 37.2

CASH REQUIRED FOR OPERATIONS: $197.3 $248.2 $166.6 $375.4 $605.0 $750.0 $945.0 $1,034.5 $1,039.1 $1,089.4 $1,107.0

CASH REQUIRED FOR CAPITAL AND OTHER• Prepayment required for lease of a facility — — — — — — — — — — —• Capital Purchases $2.3 $1.9 $70.8 $62.2 $75.0 $250.0 $275.0 $260.0 $250.0 $225.0 $203.0 • Credit and/or Lease Line for Capital Payment — — — — — — — $3.6 $7.1 $10.2 $13.0 • Interest Expense — — — — — — — $2.0 $3.8 $5.5 $7.0 • Taxes payable — — — — — — — — — — —

CASH REQUIRED FOR CAPITAL AND OTHER $2.3 $1.9 $70.8 $62.2 $75.0 $250.0 $275.0 $265.6 $260.9 $240.7 $223.0

TOTAL CASH REQUIRED: $199.6 $250.1 $237.4 $437.6 $680.0 $1,000.0 $1,220.0 $1,300.0 $1,300.0 $1,330.0 $1,330.0

NET CASH FLOW: Positive / (Negative) $51.5 ($249.3) $275.1 ($434.0) $820.7 $4,000.2 $2,327.8 ($1,142.1) ($1,147.7) ($1,203.4) ($1,159.4)

ACTUAL

Pre-Deal…LOI StagePre-Deal…LOI Stage

23Bruce Lichorowic

Pre-Deal…LOI StagePre-Deal…LOI Stage

• Seed AccountsSeed Accounts• Early AdoptersEarly Adopters• Major AccountsMajor Accounts

Channels Market Segments

Technology Technology IntegratorsIntegrators

Marketing PartnersMarketing Partners

Direct SalesDirect Sales

Indirect SalesIndirect Sales IntegratorsIntegratorsIntegratorsIntegrators

Business DevelopmentBusiness Development

• Mid-MarketMid-Market• Vertical MarketsVertical Markets

24Bruce Lichorowic

Pre-Deal…LOI StagePre-Deal…LOI Stage

LicensesLicenses HostingHosting Professional Professional

ServicesServices

93%

7%

Licenses & Hosting Professional Services

25Bruce Lichorowic

The DealThe Deal Valuation in today’s MarketValuation in today’s Market

Thriving Business…ProfitableThriving Business…Profitable ½ to ¼ of the last round of funding½ to ¼ of the last round of funding

Multiplier of trailing revenuesMultiplier of trailing revenues

Business…Out of CashBusiness…Out of Cash Sell the asset or IPSell the asset or IP

Software Company…need the engineersSoftware Company…need the engineers

Hardware Company…need the engineersHardware Company…need the engineers

Cents on the $$$Cents on the $$$

26Bruce Lichorowic

The Deal The Deal The Deal The Deal Heat of the dealHeat of the deal

Simplicity is keySimplicity is key

ID what needs to accomplishedID what needs to accomplished

View what’s reasonableView what’s reasonable

Build a robust modelBuild a robust model

EmployeesEmployees Double TriggerDouble Trigger

Change of ControlChange of Control

Change of Job FunctionChange of Job Function

27Bruce Lichorowic

Post DealPost Deal

Integration ModeIntegration Mode Set short term “attainable” goalsSet short term “attainable” goals

Watch costsWatch costs

Settle disputes quicklySettle disputes quickly

Form one cultureForm one culture

MergerMerger Technology, people, cultures & systemsTechnology, people, cultures & systems

28Bruce Lichorowic

Top 10…Must HavesTop 10…Must Haves1.1. One Page Business BriefOne Page Business Brief

2.2. Value Proposition…10 wordsValue Proposition…10 words

3.3. True sustainable pipeline True sustainable pipeline

4.4. Find out what they’re looking for…Find out what they’re looking for…

5.5. Don’t announce products in the LOI stageDon’t announce products in the LOI stage

6.6. Get a reference customer ASAPGet a reference customer ASAP

7.7. Calculate to the month…breakevenCalculate to the month…breakeven

8.8. Accurately describe…use of fundsAccurately describe…use of funds

9.9. Understand their Business modelUnderstand their Business model

10.10. Business Integrity*Business Integrity*

29Bruce Lichorowic

Top 10…Personal ChecklistTop 10…Personal Checklist

1.1. Keep your cool…Keep your cool…

2.2. Selling the company is a full-time jobSelling the company is a full-time job

3.3. Don’t assume VC’s are going to HelpDon’t assume VC’s are going to Help

4.4. Constantly rethink your strategyConstantly rethink your strategy

5.5. Watch out…sinking shipsWatch out…sinking ships

6.6. Check your ego at the door Check your ego at the door

7.7. Plan on 2-3 rounds of negotiations Plan on 2-3 rounds of negotiations

8.8. Always tell yourself the truthAlways tell yourself the truth

9.9. Know where the “Exits” are Know where the “Exits” are

10.10. Trust your instinctsTrust your instincts

30Bruce Lichorowic

Bruce W. LichorowicBruce W. Lichorowic

Specialist for Distressed CompaniesSpecialist for Distressed Companies