The Emergence of Private Equity and Alternative Financing

1
The Emergence of Private Equity and Alternative
Financing

• Moti Weiss, Managing Partner, Plenus Venture
  Lending

2
What is debt financing?
Venture debt extends the cash runway without
chewing up equity (Harvard B.R.)
Impact of Venture Debt on Entrepreneur's Cash Burn
Source Gold Hill Venture Lending HBR Feb.
2004, Plenus analysis 2005
3
Why companies choose debt financing?

• Entrepreneurs use debt financing as
• Enhancement to existing funding round
• With minimize equity dilution
• Bridging
• Extend the time to the next financing round, and
  improve the terms
• Financial Buffer
• Financial credibility

4
Alternative Financing Landscape
Stage of Company
Traditional Israeli Banks
Plenus Venture Lending
Public
Investment Banks Mezzanine Funds
Late Stage
VC Funds (Bridge Rounds)
US Venture Debt Funds
Mid Stage
Israeli Venture Leasing
Eu. Venture Lending Fund
Early Stage
Established Presence in Israel
Source Plenus 2005
5
What is Venture Leasing ?
Venture Leasing provides financing in return for
equipment lease payments
Definition
Business Model

• Amount According to the fixed assets requirement
  of the company
• Repayment
• Spitzer Model up to 5m
• Interest - 10-15 (USD)
• Repayment 3-4 years
• Equity Kicker
• 15-20 of loan
• Exercise Price tied to recent or approaching
  equity round
• Exercise Period Up to 10 years
• Collateral
• Fixed charge of the companies equipment

6
Venture Leasing
Required Expertise for Successful Venture Leasing
Target Companies

• Deep understanding of technology
• Strong expertise in leasing of equipment
• Access to equipment second hand market

• Start-up companies or first round funding
• A company that needs to make a high investment in
  fixed assets
• VC backed
• High potential for exit

7
What is Mezzanine Financing ?
Last stage financing of pre-IPO and pre-Exit
companies, or used for management buy-outs
Definition
Business Model

• Financing
• More than 10 Million
• interest rate - similar or slightly higher than
  bank
• For a period of 1-2 years
• Equity Kicker
• Loan can be converted into equity with a discount
  of the exit valuation
• Collateral
• 2nd rank security

8
Mezzanine Financing
Target Companies
Required Expertise for Successful Mezzanine
Financing

• Profitable track record
• Cash generative business
• Visible exit
• Experienced management team

• Understanding of large operations
• Knowledge of buy-outs
• Exit management experience

9
What is Venture Lending ?
10
Venture Lending
Target Companies
Required Expertise for Successful Venture Lending

• Relatively late stage companies (product in hand)
• Clear visibility of future capital raising or
  Break-Even
• Established and supportive investors
• Low burn rate
• Strong management
• High potential for exit

• Management experience of technology companies
• Banking expertise
• Strong acquaintance with the VC market
• Experience in MA
• Deep understanding of high technology market

11
Transaction Example PowerDsine (NASDAQ PDSN)

• PowerDsine is a designer developer of solutions
  for power supply over communication networks.
• Background
• Founded in 1994, 6th year of revenues ( 25m)
• Raised 37m from leading Israeli VCs (JVP, PVC,
  Challenge, Vertex)
• Credit Facility as a bridge to the next round
• The Venture Lending Transaction (July 2001)
• Credit Facility 7m, Interest - 9, 2 Years
• First ranking floating charge
• Warrant Price Based on company valuation in
  next round of financing (full ratchet downside
  protection) for 4 years
• Exit Initial Public Offering onto the NASDAQ 9th
  June 2004
• Company issued 5.1million shares at a price of
  11.5m
• Company raised a total of 58.7million at a value
  of 250million

12
Plenus Israels Leading Venture Lending Fund

• Founded in September 2000
• Managing 80 million fund
• Investors Foreign and Israeli financial
  institutions
• Completed 24 transactions, total Credit
  Facilities of over 80 million
• Invested in all areas of technology
• Exit PowerDsine IPO, (June 9th 2004, NASDAQ
  PDSN), Business Layers (Acquired), Xacct
  (Acquired)
• Significant low write offs compared to the VC
  Industry average

13
Plenus Investment Portfolio by Sector
14
Advice to entrepreneurs

• Do not leave it too late
• Too much is always better than too little
• Customers wants to see healthy cash flow
• Check all financing options
• Learn how to handle debt
• Protect your portion of equity