Silicon Valley Bancshares

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Alternative Funding Sources Debt
Financing Philip G. Korn - Senior Vice
President Emerging Technologies Silicon Valley
Bank March 3, 2001
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A Bit About SVB - Who We Are

• Only US commercial bank that focuses exclusively
  on entrepreneurs developing early stage tech and
  life sciences companies
• Established 1983, NASDAQ listed under SIVB
• 1,000 employees located in 25 offices serving
  9,000 clients nationwide
• Financing partner with VCs and more recently the
  much broader angel and incubator community
• Focus on relationships - never too early to open
  an account

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Silicon Valley Bank is the the source of
financial services for early-stage companies
throughout the United States
Minneapolis, MN
Seattle, WA
SVB
Chicago, IL
SVB
Portland, OR
SVB
SVB
Boston, MA
SVB
Sonoma, CA
SVB
Napa Valley, CA
SVB
SVB
SVB
SVB
Philadelphia, PA
Sand Hill, CA
SVB
SVB
SVB
Palo Alto, CA
Northern Virginia, VA
SVB
Santa Clara, CA
SVB
Santa Barbara, CA
SVB
Los Angeles, CA
SVB
SVB
SVB
SVB
SVB
Irvine, CA
San Diego, CA
Atlanta, GA
SVB
Phoenix, AZ
Austin, TX
Boulder, CO
25 offices nationwide with clients in all 50
states
Dallas, TX
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2000 IPO Clients
Opus360 Corporation OraPharma, Inc. Oratec
Interventions, Inc. Organic Inc. Pixelworks,
Inc. Quantum Effect Devices, Inc. Rosetta
Inpharmatics, Inc. Selectica, Inc. Sequoia
Software Corporation Sonic Innovations Inc. Sonus
Networks, Inc. Speechworks International,
Inc. Support.com, Inc. T/R Systems, Inc. Talarian
Corporation Triton Network Systems, Inc. Vicinity
Corporation ViryaNet Ltd. webMethods,
Inc. Websense Inc. Witness Systems
_at_Road, Inc. Aclara Biosciences Inc. Advanced
Power Technology, Inc. AeroGen, Inc. Alliance
Fiber Optic Products, Inc. Applied Molecular
Evolution, Inc. Apropos Technology, Inc. Argonaut
Technologies Array Biopharma, Inc. AvantGo,
Inc. Avenue A, Inc. Centra Software,
Inc. Ciphergen Biosystems, Inc. ClickSoftware,
Inc. Corillian Corp. CoSine Communications,
Inc. CrossWorlds Software, Inc. Cypress
Communications, Inc. Deltagen, Inc. DigitalThink
Inc. DURECT Corporation Dyax Corp. Eprise
Corporation Esperion Therapeutics, Inc.
Evergreen Solar, Inc. Evoke Communications,
Inc. Exelixis Inc. Genomica Corporation Handspring
, Inc. HealthGate Data Corp. iBEAM Broadcasting
Corp. I-many, Inc. inSilicon Corporation InterMune
Pharmaceuticals Inc. IntraBiotics
Pharmaceuticals, Inc. Lightspan Partnership,
Inc. Mainspring Communications, Inc. MatrixOne,
Inc. McData Corporation Moldflow
Corporation Neoforma.com, Inc. Network Engines,
Inc. Nogatech, Inc. Nuance Communications,
Inc. Numerical Technologies, Inc. OmniSky
Corporation
The companies highlighted above represent some,
but not all, of Silicon Valley Banks current
clients which completed initial public offerings
during 2000.
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Q3 2000 IPO Clients
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Silicon Valley Bank Northern California banking
niches include the following
TECHNOLOGY LIFE SCIENCES - ANGEL / INCUBATOR /
BOOTSTRAPPED Emerging Technologies TECHNOLOGY
LIFE SCIENCES - VENTURE BACKED Online
Services Communication Electronics
Software Life Sciences
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Other Bank Products Groups

• Commercial Finance
• eSource
• Executive Banking
• Cash Management
• Corporate Finance
• Venture Capital Group
• Supply Chain Services
• International

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Recent Bank Developments

• Closed on 120 million fund of funds
• Closed on a 60 million Venture Fund to invest in
  bank clients (passive investments)
• Emerging Tech Showcase series
• New offices in San Francisco, NY and FL
• Electronic Banking (SVBeConnect)
• Venture Connect

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SVB Emerging TechClient Focus

• 1,100 early stage technology companies
• Similar client hurdles - funding, management
  team, product development, strategic alliances
• Leverage existing cash with SVB credit
  facilities.
• Connect clients with other service providers
  (accountants, attorneys, HR and PR firms)
• Work closely with angel investors, professional
  angel organizations technology incubators.
• Provide access to networking opportunities and
  referral sources.

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SVB Emerging TechClient Focus (contd)

• Understand the needs of early stage non-venture
  capital backed technology life sciences
  clients.
• Act as a business consultant to our clients as
  opposed to solely being their banker
• Selectively take on clients with a high
  probability of success.

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Typical Needs Early On

• Standby Letter of Credit
• Corporate credit cards
• Equipment Financing
• Referrals for office space, controller, recruiters

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Debt Financing
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Bank Debt Is Defined As
From
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Debt financing has one key difference from
equity IT MUST BE PAID BACK!
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Debt Financing

• Who is ready to take on debt,
• What type of debt is appropriate,
• Why should you use debt,
• When to layer on debt, and
• How much to obtain

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Early Stage Debt FinancingTypical Hurdles

• Lack of track record (alpha, beta)
• No revenues or minimal revenues
• Lack of alliances
• Strong competition (certain industries)
• Incomplete management team
• Short window of opportunity
• 3-6 months cash on hand

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Early Stage Debt FinancingTypical Strengths

• Founders technical/marketing expertise
• One or more well connected angel investors
• Well focused and well defined business plan
• Board of Advisors that can validate company
• Quality service providers
• Enthusiasm and ability to execute

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Debt Financing Vehicles (Who, What When)
Stage of Development / Financial
Profile RD Product Launch Market
Penetration Maturity Cash Flow Negative
Cash Flow Positive Available Debt
Financing Venture Leasing Niche
Banking Factoring Asset
Based Traditional Banking
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Debt Financing (Why)

• Basic Concepts
• Debt is less expensive than equity. Utilize
  debt financing whenever available.
• Debt Financing is used to leverage existing
  equity, not replace it, in an effort to
  improve valuation.
• Debt finances growth in assets
• Accounts Receivable Growth
• Capital Expenditures
• Business Acquisitions

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Underwriting Criteria (How)

• Management Team ?
• Investors ?
• Advisors ?
• Market size and market growth ?
• Defensible Business Plan / Technology -- What
  is your IP ?
• Cash Generation/Burn Rate ?
• Future Milestones for Funding ?
• Sources of repayment ?

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Sources of Repayment (We need 2)

• Cash on Hand
• Future Equity Rounds
• Cash Flow
• Existing
• Projected/Future (how certain)
• Guarantors

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Financial Covenants

• Simply Designed To Protect Sources of Repayment
• Should be Established as per Company
  Projections
• Violations Viewed as Red Flags
• Must Match Structure of the Debt
• Working Capital Current, Quick and Leverage
• Term Debt Service, Profitability and Tangible
  Net Worth

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What we expect from our borrowers

• Frequent and open communication
• Access to management, advisors, investors,
  alliance partners, service providers and
  customers
• Timely and Accurate Financial Reporting Must
  have systems in place
• Hold the Company to self-generated projections
• Contingency planning

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Summary

• SVB is far more than just a source of credit but
  additionally a trusted advisor.
• Establish the banking relationship early and keep
  us informed as you accomplish your milestones and
  face new milestones.
• Bank debt can be a key component in a growth
  companys overall capitalization. It is
  inexpensive relative to equity and will allow you
  to build your valuations without spending
  precious equity cash.
• Look for a Bank that understands your business,
  is committed to technology lending, and welcomes
  start-ups !

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Q A