LBO Finance Overview

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Technology Funding in 2003

• Overview of EdgeStone
• Fundraising Environment
• Company Strategies for Success
• The Impact on Legal Work

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Overview of EdgeStone
Technology Funding in 2003

• Founded in 1999, today EdgeStone is Canadas
  leading independent private capital manager
  focused on the mid-market
• Manage more than 1.3 billion

• Early Stage
• Venture Equity

• Later Stage
• Buyout and Growth Equity
• Mezzanine Debt

• Fund of Funds
• General
• Venture

• Independent, employee owned with strategic
  partners, National Bank Group of Companies and
  the Canada Pension Plan Investment Board
• Successful track records across all funds

National Bank and National Bank Financial
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EdgeStone Capital Venture Fund, L.P.
Technology Funding in 2003

• Managed by Bryan Kerdman
• 104 million in capital
• Committed 45 million for 14 companies
• Preferred investment size between 1 and 7
  million
• Focus on investments in software companies in the
  transaction processing, enterprise solution,
  human capital management, and networking markets
  stage independent
• Seek lead or co-lead position sole investor
  under 2 million
• Investments include Workbrain, SlipStream,
  Datawire, Time Industrial

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Technology Funding in 2003

• Overview of EdgeStone
• Fundraising Environment
• Company Strategies for Success
• The Impact on Legal Work

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Todays Reality
Technology Funding in 2003

• Angel investors are harder to find and harder to
  please
• Number of investors have dropped by 50 or more
• Reduced valuations have put many investments
  under water
• VCs have shifted their focus to salvaging their
  existing investments at the expense of seeking
  new investments
• The balance of power has shifted back to
  investors
• This applies to ALL venture technology sectors

Situation
Impact

• Reduced competition for investments coupled with
  lower valuations have created a buyers market

• The investing environment is challenged
• Great ideas and teams are still getting funded

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Outlook For 2003
Technology Funding in 2003

• It aint getting better anytime soon
• Perhaps the pendulum has swung too far the other
  way
• No new venture funds are being created, just
  next funds
• Fewer people are taking chances to chase a dream
• Innovation is being stifled by the new reality
  they cant get money

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Sector Analysis
Technology Funding in 2003

• The malaise extends across all technology
  sectors
• Software
• Hardware
• Telecom
• Wireless
• Chip Manufacturing
• Hardware, including components, is the toughest
• Capital requirements are higher time-to-market
  longer
• Telecom could take years to fully recover
• Wireless in many cases is considered two
  four-letter words
• Software is attractive for many early stage
  investors

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Technology Funding in 2003

• Overview of EdgeStone
• Fundraising Environment
• Company Strategies for Success
• The Impact on Legal Work

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Entrepreneurs Have (Mostly) Adjusted to Reality
Technology Funding in 2003

• They are focusing on their business, not the
  public markets
• They now have reasonable and rational valuations
• Are realistic with respect to cash needs and
  growth projections
• Willing to accept that investors will be very
  involved
• They dont expect competing term sheets
• Fewer investors are involved in each deal

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Management is Getting the Message
Technology Funding in 2003

• Investors want
• A unique and proprietary product offering with
  competitive advantages
• One that addresses a real market opportunity, not
  one that requires people to change their habits
• Investors dont want
• Money being used for large marketing campaigns
  (yet)
• High salaries
• Big egos
• Founders disease

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Technology Funding in 2003

• Overview of EdgeStone
• Fundraising Environment
• Company Strategies for Success
• The Impact on Legal Work

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Legal Impact
Technology Funding in 2003

• Most deals now have just one or two investors
• Less legal work fewer people to argue with?
• Or more - does the structure of deals increase
  the length/cost?
• Venture Capital is like any other capital market
  remember the real estate market in the early
  1990s? Sometimes its just timing
• EdgeStone and other VCs are doing much more work
  in-house
• Real due diligence work is required
• Later stage style discipline
• Its not 1999 anymore
• Few law firms willing to swap billable time for
  equity

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What You Can Be Doing For Your Clients
Technology Funding in 2003

• Educate them about the state of the Venture
  Capital markets
• Control their expectations about valuation and
  structure
• Focus on their commercial needs rather than
  transactional work
• Prove you can be a good resource for advice and
  direction
• Make the right introductions to the right
  investors
• Have your clients prepared for a transaction
• Example employment issues - IP assignment,
  non-competition
• The company must be considered IPOable
• Be pragmatic in your negotiations
• Its a buyers market for now

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Summary
Technology Funding in 2003

• Funding environment experienced during the late
  1990s and 2000 doesnt exist today
• its gone and its not coming back
• Pretenders, both Investors and Investees, are
  also gone
• and the carnage isnt over
• Great companies and great ideas still exist
• and they will get funded
• Impact on professional services firms is
  significant
• less work, more competitive
• those who can adjust will thrive

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Contacts
Technology Funding in 2003
EdgeStone Capital Partners, Inc. The Exchange
Tower 130 King Street West Suite 600, PO Box
187 Toronto, Ontario M5X 1A6 Canada
Bryan Kerdman Partner T [phone] F (416)
860-9838 E bkerdman_at_edgestone.com
Michael Hollend Associate T [phone] F
[phone] E mhollend_at_edgestone.com