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 1      GRAY CARY VENTURE CAPITAL SERIES:
 2   MOVING FROM THE FIRST INVESTOR MEETING 
 3            TO A SUCCESSFUL CLOSE
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 5                 MAY 11, 2004
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0002
 1            Mr. Jeff Lehrer, Gray Cary, Washington, D.C.,
 2   Emerging Growth & VC Practice:  Good morning.  It's an
 3   absolute pleasure to welcome you here to the Venture Capital
 4   Series, part two of three.  I have the emotional, mushy
 5   welcome speech here.  Thank you all for coming in very
 6   early, mid-week here.  And to tell you a little bit of why
 7   we're doing the series and what we hope you get out of it.  
 8             By way of a little bit of history, the sponsors,
 9   Gray Cary, Netpreneur, Chessiecap, E&Y, had a conversation
10   about a year ago, saying, God, it would be great if we could
11   get some really candid insight from the VCs themselves and
12   learn secrets that the VCs would tell their best friend if
13   they went about raising venture capital.  From an
14   entrepreneurial perspective you hear from your advisors,
15   other people in the community about how to go about raising
16   venture capital but you never really hear the juicy insight
17   from the VCs themselves that they would tell a friend.  So
18   what we went about is asking good friends of our respective
19   firms to get up on state and tell stuff that they would tell
20   their friend, and to have it truly be a very casual dinner-
21   type conversation about some secrets to raising venture
22   capital.  And what's very unique about this panel, and I've
23   never seen anything like it before, is it's truly from the
24   VC's perspective.  You're going to sit here today and you'll
25   say, wow, I never thought about it from the VC's
0003
 1   perspective.  These are great folks who have got a job to do
 2   -- make money for their pension funds, their teachers, their
 3   janitors, etcetera, etcetera.  And I'm going to understand
 4   exactly what they're looking for and how to make them
 5   comfortable about making an investment in my company.  So
 6   it's going to be a very unique panel, as Larry Robertson
 7   from Netpreneur's going to talk about and give you a very
 8   short recap of what we learned at the first panel.  And
 9   you're truly going to get some amazing insight out of it. 
10             So, my name is Jeff Lehrer.  Welcome.  I'm the
11   head of the Venture Capital Emerging Growth Practice for
12   Gray Cary, which is a technology law firm specializing in
13   high-growth technology companies; that's why we're here
14   today. 
15             Netpreneur is the most renowned, non-profit
16   organization in the D.C. community.  For almost ten years,
17   purely, purely for the advancement of the community and the
18   technology community they've been helping companies from a
19   non-profit, and the folks here from Netpreneur have day
20   jobs, night jobs, and they still find plenty of time to help
21   the community.  
22             E&Y, which is a Big Four accounting firm
23   specializing in high-growth technology firms.  Chris
24   Cantarella, who's going to be moderating our panel today did
25   an absolutely fabulous job last time and we asked him to
0004
 1   come back.  
 2             And we have Chessiecapital, which is an investment
 3   bank specializing in technology companies.  They do M&A and
 4   private placements, and they're very unique in that they
 5   have actually true technology folks and true people with
 6   operational experience helping companies grow.
 7             So, that's my little spiel and I have the
 8   privilege of welcoming the panel, which are made up of good
 9   friends of mine, stars from the venture community.  We have
10   Matt Newton from Columbia; Rich Harris from SpaceVest; Jim
11   Broder from ECentury; Mick Helmicki from Edison.  And these
12   guys are studs, they're stars and they're truly folks who
13   are giving up their sleep time, their deal flow time to come
14   here as favors to the community and help you and the
15   community.  
16             So we're now going to have about a 15 minute or so
17   very, very interesting discussion from Larry Robertson to
18   summarize what we learned last time and to help put it all
19   together in the process of going from a business plan to
20   funding.  So Larry, thank you.
21             Mr. Larry Robertson, Netpreneur, Co-Director
22   Lighthouse Consulting, Principal and Founder:  Good morning. 
23   I'm definitely going to make sure that Jeff does all our
24   marketing for Netpreneur in the future.
25             So here we are at Session Two of our three-part
0005
 1   series, which Jeff briefly alluded to.  And this morning,
 2   the focus is on getting from that first meeting, or first
 3   couple of meetings, with investors to a successful close. 
 4   And like we did in the Fall, we're really going to take a
 5   unique perspective on this, and it's really unique for a
 6   couple of reasons.  First of all, this isn't just an event,
 7   a discussion on venture capital.  It's a series.  And the
 8   pieces are meant to hang together, they really do have some
 9   meaning.  And I'll talk about that in a few minutes. 
10   Secondly, we're looking at the venture capital process from
11   some vantage points that are often either overlooked or
12   ignored but we think are the most important ones and really
13   valuable ones to helping you as entrepreneurs get to a
14   successful close.  The last reason, and the most important
15   one that I think for why this is a unique series are the
16   perspectives you're getting.  The four partners who've put
17   together this series all advise either venture firms and/or
18   entrepreneurs on a daily basis.  So you have all of their
19   perspectives in picking what the session topics are and
20   shaping the content.  But more importantly you're going to
21   have a panel of four venture capitalists.  That's four
22   venture capitalists from four different firms, and you have
23   four individuals who also have their own take, their own
24   style to the process.  So even though they're all generally
25   in the same business they do things very differently and we
0006
 1   think that makes for a better and a broader perspective on
 2   raising venture capital.
 3             So clearly, what we're focused on this morning,
 4   and what I think is going to be most valuable to you, are
 5   the insights that our panel can provide.  However, before we
 6   go launching down that path, we want to make sure that you
 7   don't sit and listen to all their valuable insights only to
 8   miss the point, like our ever optimistic friend here; kind
 9   of like an entrepreneur, there never is an end, right?  The
10   point for you this morning is to get to a successful close. 
11   That's the point of this session and really that's the point
12   of the series.  Not to go through a process where you make
13   all that effort and get within striking distance and then
14   end up with a dead deal.  Sorry to keep the pun going here. 
15   The panel is going to give you what I think is probably the
16   best insight and the best source for how you get to a
17   successful close.  However, I think it's important to have
18   at least a little bit of context on the venture capital
19   process in general to know why the information they're
20   providing you is valuable and how to apply it and where to
21   apply it.  That's my job, is to briefly set the context.
22             So, the way I'm going to do that is to cover three
23   things.  The first is, I want to tell you where this session
24   fits into the series and what we're trying to accomplish
25   with each part of the series.  Secondly, I want to go back
0007
 1   and touch on just a few of the lessons from Session One that
 2   we had last Fall.  There were a lot of things that were
 3   taught to all of us, even those of us who put this together
 4   in the Fall.  I want to just touch on a few that I think are
 5   most relevant to today's topic.  And then finally, in
 6   advance of the panel discussion today, I want to give you
 7   what I think are a few important guideposts for how you get
 8   from here to a close, here being the assumption that you've
 9   decided to go down the venture capital path and you've
10   either had or are about to have that first meeting.  
11             So let's begin by talking about the Venture
12   Capital Series.  Typically, when you go to a session on
13   venture capital, this is what's discussed as the venture
14   capital process.  It usually -- the discussion usually
15   begins with you running out and starting to talk to venture
16   capitalists about your business and about an investment. 
17   And, more often than not, it ends with a discussion about
18   receipt of a term sheet.  Well, first of all, this is not
19   the entire venture capital process.  And second of all, we
20   think it misses some of the critical points.  So in Session
21   One, what we did is we really started with the process
22   before the process.  We focused on a discussion of what are
23   you getting into when you decide to raise venture capital? 
24   Why does your business need capital in the first place?  Why
25   would you pick venture capital as your source when you have
0008
 1   many options available to you?  And if you make that
 2   decision knowing the pluses and minuses of taking venture
 3   capital, then what happens?  What is the process like and
 4   what's happening on the other side of the table?  How can
 5   you understand who you're trying to get to invest in your
 6   business and why they're even talking to you in the first
 7   place?
 8             Today we're building on that.  We didn't go
 9   through the first part just to ignore it and move on. 
10   Everything in this series, everything in the process of
11   raising venture capital is a building process.  So this
12   morning we're assuming that you've already made that
13   decision to pursue venture capital and you've either secured
14   or you had that first meeting.  So how do you get from a
15   first meeting to a close, a successful close?  This morning
16   what we're going to talk about is the process in between in
17   that middle phase; what some of the typical pitfalls are
18   that keep you from getting to a close and how you can
19   increase your probability of making it a successful run.  By
20   the way, we're also extending the discussion to what's the
21   more appropriate end point and that is including a deal
22   closing.  And then finally, this coming Fall, we'll have the
23   third part of our session where again, we're going to go out
24   of the boundaries of the typical and we're going to talk to
25   you about what happens after a deal.  What's it like to live
0009
 1   with a VC in your business?  So I point that third one out
 2   not only to give you context and to invite you to
 3   participate in the Fall but because this is an important
 4   thing to think about now as you're starting to raise money. 
 5   When you invite investors to look at your company and to
 6   make an investment, you're seeking out partners in your
 7   business.  They're going to become intimate partners in your
 8   business and you have to think about the implications of
 9   that and what you're getting beyond the capital that they
10   can provide.  So that's our series.
11             Now I want to go back and highlight a few things
12   from Session One.  In Session One, as I just said, we
13   focused on knowing what you're getting into.  So the
14   emphasis was really on that process before the process,
15   thinking about what the needs of your business are and where
16   does capital fit into that and of the various options you
17   have, why choose venture capital?  So the first part of our
18   discussion was on fit.  The rest of the discussion was more
19   about what are the implications of taking venture capital
20   and what's the process you're really through when you decide
21   to pursue that source of capital.  And we spent most of our
22   panel discussion time trying to give you insight as to what
23   VCs are looking for, what's their business, what are they
24   doing and why do they care when you show up their doorstep
25   to present your company.  The final thing which we beat on
0010
 1   the audience throughout the process was understanding and
 2   valuing the importance of preparing for this process, not
 3   just winging it.  
 4             So that's what we set out to do in Session One.  I
 5   think there was a lot that we learned but there were really
 6   three key things that I think are relevant to this morning
 7   and I want to recap those briefly.  The first was
 8   understanding that in a venture capital transaction there
 9   are really two businesses that come to the table.  Yours, of
10   course, as an entrepreneur but also the venture capitalist. 
11   So what is their business?  Well, it's pretty simple in some
12   ways.  Their job is to provide a return on somebody else's
13   money.  That's their job.  Their job is not to run your
14   business; their job is not to monitor your business to make
15   sure it's running properly down in the weeds, it's to
16   provide a good return on somebody else's money.  So when
17   they come together as a partnership, each partnership has
18   their goals as a partnership; what states they want to
19   invest in, what type of companies, what level of investment
20   they want to make in any particular company.  And as
21   individuals in a partnership all the partners have their own
22   perspectives.  Those are all relevant, and as you go through
23   the process of identifying the firms that you want to raise
24   money with, as you go through the process of getting to know
25   them, you should understand what their partnership goals are
0011
 1   and what their individual goals are but at the end of the
 2   day they're all there to provide a return on somebody else's
 3   money.  The way that they do that is they have to find
 4   investment opportunities that satisfy their needs and the
 5   way they're looking to find those opportunities is they're
 6   looking at various tools that you provide as an
 7   entrepreneur, whether it's what you say to them in a quick
 8   exchange in elevator pitch when you meet them or it's what
 9   you present in a business plan or a presentation to their
10   partnership, or it's what you provide them through the due
11   diligence process in terms of answers to the questions they
12   ask or support to those answers.  Those are the tools
13   they're looking at to see whether or not your investment
14   opportunity fits their needs.  And their needs are providing
15   a return on somebody else's money.  Have I repeated that
16   three times now, I think?  They're trying to satisfy their
17   own business plan.  So that's the first important lesson
18   from Session One to remember today.
19             The second one is that the venture capital process
20   and the transaction of closing a deal is all about the sale
21   of a product.  It's the sale from you as an entrepreneur to
22   the investor and the product you're selling is the
23   opportunity to invest in your business.  It's not unlike the
24   sale of any other product.  You have to understand what's
25   different and distinct about your product versus the
0012
 1   alternatives that your customer, the investor, has to invest
 2   in.  By the same token, you have to understand that
 3   customer.  What do they want, how do they go about getting
 4   what they want, what's valuable to them?  You also have to
 5   be effective in communicating that value.  You don't want to
 6   just generate their interest in your business and in your
 7   product; you want to compel them to buy.  So you have to
 8   have a clear and concise story that you package effectively
 9   that answers the kinds of questions they want answered and
10   speaks their language.  Don't make the customer work for it. 
11   So that's the second important lesson from Session One.
12             And the final one is that in that sales process,
13   ultimately the way that you're going to compel them to buy
14   is by communicating certain information.  This is not an
15   unfamiliar list or it shouldn't be an unfamiliar list. 
16   These are the basic things that every investor is looking to
17   learn about the companies that they have the potential to
18   invest in.  And in fact, this list was compiled by our last
19   VC panel and ran ordered by them.  So, venture capitalists
20   may not always ask you these questions or in these ways but
21   they're always looking for this information.  They're
22   looking to get that information to assess your deal and
23   secondly, they're looking to see what your level is of
24   understanding of the answers to these questions to see how
25   capable you are of running the business that they may invest
0013
 1   in.  
 2             Those are the lessons from Session One.  And so
 3   finally, before we turn it over to the panel, I want to hit
 4   a few guideposts, some points that I think may or may not
 5   come out in the panel discussion but they're certainly
 6   relevant to getting from those first meetings to a
 7   successful close.
 8             So.  Repetition, repetition, repetition.  The
 9   first one is, you need to build on the lessons of Session
10   One.  Don't just leave them in the past; be thinking about
11   them as you try to get to that successful close.  And if we
12   went through those too fast, venture capitalists have a job
13   to do, too.  Understand what it is, help them to do it as
14   easily and effectively as possible.  Don't forget that you
15   have a product to sell.  That's what your job is here and in
16   selling that product, you have to convey to them the kind of
17   information they're looking for that makes it easier to
18   assess your deal and you ought to do it through their own
19   filter, what they're looking for, how they're used to
20   looking at it.  Those are the lessons are Session One to
21   build on.
22             The second guidepost to recognize is that racing
23   venture capital money is a process.  I never cease to be
24   amazed at how many entrepreneurs just try to wing this. 
25   They thing that if they meet people with money and they tell
0014
 1   them their story the checks will just start scratching off. 
 2   And it just does not happen that way.  There is a real
 3   process here.  And the process usually breaks down into four
 4   steps: getting ready; generating interest; validating the
 5   business and then that period after or about the time you
 6   receive a term sheet to actually closing a deal.  The first
 7   two are the ones that we just recapped from Session One. 
 8   Getting ready is really that process before the process,
 9   where you decide to pursue venture capital and you come up
10   with the justifications not only for doing it, the internal
11   justifications, but the justifications you're going to make
12   externally for why somebody should invest in your business. 
13   Whereas generating interest is, once you've decided to go
14   you have to figure out where to do.  You don't just go to
15   people with money, you go to the right investors, the ones
16   who understand your business, who invest in your stage of
17   deal, your type of company.  That's that screening process
18   and the process of building the network for being able to
19   access those points of contact.  
20             So today we're really in the back half, validating
21   the business and the term sheet to close.  Validating the
22   business is that whole discussion, that whole dance between
23   that first meeting and a closing, where the venture
24   capitalist is trying to decide whether or not to invest in
25   your company.  Your job is really to anticipate the kind of
0015
 1   questions that they're going to ask, to have the support --
 2   not just the answers ready but to have the support ready as
 3   to why you think the way you do about your business, why
 4   your business is going to be more successful than
 5   competitors', to know what their process is so you can help
 6   them do their job and then to sell, sell, sell.
 7             The term sheet to close is about the negotiation
 8   and it builds on all the previous ones.  If you've done the
 9   first three steps right you've earned the opportunity,
10   you've earned the privilege of getting that term sheet, and
11   then you need to be prepared for that closing process too. 
12   So there really is a process here.
13             In addition to that, there's a process on both
14   sides.  While you're doing what you're doing, investors have
15   an equal and parallel stage for everything that you do.  So
16   for instance, while you're out trying to get those first
17   meetings or having those first meetings where you're
18   presenting your concept for the first time to investors in
19   the generating interest phase, investors are looking at you
20   before they meet with you and in that first meeting with you
21   to assess whether or not your opportunity fits with their
22   portfolio goals and needs.  And the same is true all the way
23   through.  So in addition to understanding what their job is
24   as venture capitalists and what their goals are as a
25   partnership and as individual partners, it's important to
0016
 1   understand the process that they're going through so you can
 2   be trying to read the signals as to where they are and how
 3   you can help them to more effectively get through that
 4   stage.
 5             All right.  So, process, process, process.  Yes,
 6   that's all important but no one should miss the obvious
 7   here.  Ultimately the process is what helps make you
 8   effective in delivering your message and getting to that
 9   successful close.  However, you don't want to miss the
10   obvious, which is the kind of information that you're trying
11   to deliver to them.  We've kind of forgotten about Hans Blix
12   but I wanted to revive him.  It's pretty clear, and it's
13   pretty consistent, what it is that entrepreneurs need to
14   convey to perspective investors.  No matter who the firm is,
15   no matter who the entrepreneur is, the basic information and
16   the basic process of selling your investment opportunity are
17   the same.  In addition to that, the distinctions between
18   each firm and the investment professionals in each firm,
19   they're not a mystery.  These are things that you can find
20   out, either from your contact with the venture capital firm
21   you're talking to or from other portfolio companies that
22   they've invested in, from trusted advisors; there are ways
23   to find these things out.  So the first lesson of don't miss
24   the obvious is don't you as entrepreneurs miss the obvious. 
25   Find out what's expected of you and provide it.  
0017
 1             And that leads to the second lesson, like our
 2   comic here.  Don't make the venture capitalist's job
 3   difficult to learn about what it is that you do and why
 4   you're unique.  The easier that you make their job to find
 5   out who you are and what your business is all about, the
 6   faster you're going to get to a close and the fewer
 7   questions you're going to raise so that you can get to the
 8   kind of close that you want to.  So, don't miss the obvious.
 9             There are lots of ways that you could trip up on
10   the way from that first meeting to a close.  But all of them
11   are knowns and they can all be avoided.  Even so, you don't
12   want to go through that whole process and make it a
13   pointless journey.  You don't want to get to the end, have
14   brought the audience to the table, have made it to the stage
15   yourself and then you leave you and the investor with
16   nothing, like going to see a mime ventriloquist.  Just let
17   that set in.  Your job is to get to a successful close. 
18   Understanding the process between the first meeting and that
19   term sheet on your way to close is important but you also
20   have to understand that once you receive that term sheet the
21   negotiation ensues.  And that also is more often than not a
22   pretty standard process.  It doesn't mean that there aren't
23   distinctions for each deal and distinctions for each firm. 
24   However, deal structures and terms have common formats. 
25   Know what they are.  Don't be surprised when you get that
0018
 1   term sheet for the first time; know those things in advance. 
 2   Secondly, some terms are more negotiable than others. 
 3   Understand which ones typically are or aren't and how that
 4   varies from firm to firm by leveraging your advisors or
 5   talking with their previous portfolio companies.  And some
 6   entrepreneurs are in a better position to negotiate than
 7   others, based on how mature they are as a team, as a
 8   company, their product, their market; based on how mature
 9   their market is or how much competition there is for their
10   deal.  Know what your strengths and weaknesses are as an
11   entrepreneur before you get to that negotiation process so
12   you know where you stand.  But most importantly, understand
13   that whenever you seek venture capital as an entrepreneur,
14   whenever you invite investors into your business, it's about
15   compromise.  When you invite somebody to the table as a
16   partner and they bring the money and high return
17   expectations, it's about compromise.  So if you understand
18   that going in and know what's negotiable and not, you're
19   more likely to get to a successful close.
20             So.  Build on the lessons of Session One, don't
21   ignore them.  Understand that there's a very real process
22   here, that it happens on both sides, that even though the
23   process can make you more effective if you're aware of it
24   and you plan around it, you still have to deliver the
25   obvious.  And, you don't want to go through the whole
0019
 1   process just to have your deal blow up in the end because
 2   you don't understand what the terms of the deal are and how
 3   to negotiate those.  Those are some guideposts you should
 4   take into that period between the first meeting and a close.
 5             These are the kinds of things that we're going to
 6   talk about on our path today with our panelists.  And so now
 7   I want to turn the podium over to Chris Cantarella from
 8   Ernst & Young, who's going to moderate our panel, and to our
 9   panelists themselves.
10             Mr. Chris Cantarella, Ernst & Young, Leader,
11   Private Equity Team:  Thanks, Larry.  Can you all hear me? 
12   Testing.  Well good morning.  How's that?  I think it works. 
13   And I'm Chris Cantarella.  I'm in our private equity
14   practice at Ernst & Young.  We are a Big Four accounting
15   firm and very happy to be here today and I think very
16   fortunate to have such a distinguished panel of Jeff's
17   friends up here this morning.  So, I do think we're very
18   fortunate.  To my far left again, we have Jim Broder from
19   ECENTURY Capital.  Next we have Michael Helmicki from Edison
20   Ventures.  Then we have Matt Newton here from Columbia
21   Capital.  And Rich Harris from SpaceVest.  So some of the
22   premiere firms, certainly, in the entire region.  And I want
23   to kind of set up our panel here a little bit.  
24             First I want to set up the audience and try to
25   find out a little bit about the audience.  How many in the
0020
 1   audience -- if you'll just raise your hand -- are now or
 2   within the next year raising capital?  Good.  Okay.  And how
 3   many of you work closely with those who are raising capital? 
 4   Okay, good, good.  Thanks.  Because I think, you know, as
 5   Larry put it so well, in our first series we talked about
 6   that first meeting.  What that first meeting was about,
 7   getting to that first meeting, make a decision to walk in
 8   and present to these guys, having a good plan to do that and
 9   then pulling it off successfully.  So now we've had that
10   good meeting.  And I always find that this is one of the
11   most interesting times, when I'm talking to an entrepreneur
12   who has just gone in to see one of these guys.  Because
13   usually what will happen is I'll get a call from the
14   entrepreneur who I work with and they'll say, "Hey Chris. 
15   I've got to tell you about the meeting I've just had." 
16   "Okay, tell me about it."  "Well, it really went well.  You
17   know, things went really well and we went through the whole
18   thing and he told me I had a half hour to speak and we ended
19   up for an hour and a half talking.  So I think we're moving
20   forward.  I think this is good.  I think he really loves the
21   deal."  I get a call about a half hour later or whatnot from
22   the VC.  "How'd the meeting go?"  "Well, I'm not quite sure
23   what they do yet.  I think I know.  I have a good feeling
24   about Bob, I like Bob, he's a nice guy.  I think he had a
25   good story overall but I still have to figure this out." 
0021
 1   So, I often find it -- and Bob here is the fictitious
 2   entrepreneur in my head right now -- is oftentimes a very
 3   experienced entrepreneur who has raised capital before.  So
 4   I often wonder, and this goes to our discussion when we
 5   started the series, why is that?  Why does this happen?  Why
 6   do the entrepreneurs kind of have different expectations and
 7   different conclusions after that first meeting and during
 8   this process?  I think the key is we ask these questions of
 9   the panel and really get into this is first, you know, we
10   talked about the process, Larry talked about the process. 
11   The process is great but let's face it, what we're dealing
12   with here is human behavior.  The humans are running the
13   process.  So the nuances of what these gentlemen have to say
14   is very key.  Please listen to the way they speak about
15   these processes, listen to what I'll try to get to towards
16   the end.  We'll start out with some of the process, we'll
17   start out with some of the voting that goes on internally
18   and how this works.  But I really want to get to what the
19   nuances and the perceptions and the expectations of you are
20   and what your expectations -- you might want to shape those
21   now before you start the process.  So this is real life and
22   this has to do with human behavior.
23             So let's start with some of these processes.  And
24   actually, it's very akin to -- some of these processes
25   towards the end, when they're voting internally or building
0022
 1   up the buy-in to get to a term sheet for you, it is much
 2   like a jury trying to get to a verdict in some ways. 
 3   Ultimately, I want to start with that end game and ask a
 4   question here first about that end game.  Because yeah, we
 5   all know there's due diligence, we all know there's term
 6   sheets, but what do you have to really believe, as a venture
 7   capitalist, to actually get to that point where you say,
 8   okay, I really want to fight for this, I really want this
 9   deal to get done, I want my fellow partners to come in with
10   me and let's go do this thing?  Because that is the end game
11   that we need to get to if we're the entrepreneur.
12             So Matt.  I've picked you first.  Let's start with
13   you and the process at Columbia Capital and how that vote,
14   quote unquote, is structured and how that actually happens. 
15   You know, assuming you've done some due diligence -- and
16   we'll get into that a little bit later, about due diligence
17   -- but this end game, when you're at that point, how does
18   that work at Columbia Capital?
19             Mr. Matt Newton, Columbia Capital, Partner:  So,
20   it's really a jump to how you get there first, at least
21   within Columbia, because I think one of the topics you
22   addressed was the sponsor, the individual that's the
23   advocate of a company that makes it far enough along in the
24   process to get to a vote.  We like to have a very high, very
25   successful hit rate on companies that we offer terms to to
0023
 1   invest in their business.  We don't indiscriminately throw
 2   term sheets around into the market; it's generally bad for
 3   all of us if that happens.  And, you know, when we make a
 4   move we like it to be decisive and definitive.  So, the
 5   vote, you know, obviously comes -- actually sort of towards
 6   the end of the process.  We don't get too many companies to
 7   present in front of our full partnership that we aren't
 8   ready to likely offer terms to, and sometimes that happens
 9   before a partner vote, most often it happens immediately
10   after that.  To understand how Columbia specifically works,
11   we have a fairly large partnership.  We have ten partners
12   each individually deal making, looking for things that are
13   interesting to them individually that fit with the
14   parameters of the firm.  Entrepreneurs often miss the fact
15   that they need to strongly appeal to the individual that
16   they're working with as opposed to Columbia Capital in
17   general.  It will be obvious if we're interested that it
18   fits within Columbia's interests but at the individual
19   level, every partner in Columbia is typically working on,
20   you know, five to eight investments.  And those are long-
21   term investments over a number of years, so it's a very
22   limited number of opportunities that you get to see.  The
23   real focus ought to be on the individual partner.  So, you
24   know, for me personally, when I decide that I like something
25   enough that it fits within my own interests and it certainly
0024
 1   would fit within Columbia's and it comes into a partner
 2   situation, there's already been a several month period of
 3   diligence, I've probably thought through economically how
 4   this would fit within our investment goals and a firm will
 5   present to Columbia.  I am a very critical part of that
 6   decision making process.  When we sit around and talk about
 7   a transaction and a deal after the company has presented, a
 8   lot of the weight falls on the individual partner's
 9   shoulders to lead the decision, to outline the road map for
10   why it makes sense, which is -- The one thing I skipped
11   which I should have mentioned, in a firm like Columbia we
12   have two very distinct different investment practices that
13   are vastly different from each other.  We have a
14   telecommunications services investment group and we have a
15   very early stage technology investment group, and the
16   partners that focus on those areas don't overlap and
17   therefore they have limited knowledge of each other's deals. 
18   So that final approval process is very educational for those
19   not in the know and again, emphasizes the requirements of
20   the sponsor.  So that would be the one thing I would
21   emphasize is you really need to focus on appealing to a
22   single individual as well as a firm's interests when you go
23   through the process.
24             Mr. Cantarella:  So appealing to that individual
25   is key because there's a lot of weight, as you mentioned, I
0025
 1   think the quote was, "weight on the partner's shoulder," and
 2   I think that's key.  So you have to understand the
 3   expectations of that individual partner.
 4             Let me turn to you, Michael.  How is that similar
 5   or maybe a little bit different -- and one of the things I
 6   want to point out here is that there are nuances of
 7   difference between different firms that you really should
 8   understand those differences if you can going in.  I think
 9   Larry brought that up.  But how is that different, how is it
10   similar for Edison and the companies you typically invest
11   in, Michael?
12             Mr. Michael Helmicki, Edison Venture Fund,
13   Principal:  Sure.  I think we have essentially a two-step
14   process, which is what happens after the Monday meeting when
15   you present to the entire partnership.  You know, as a
16   sponsor I've probably worked with the company over an
17   extended period of time and probably in reality 30 to 40
18   percent complete with my diligence, I've outlined the things
19   that I think give it merit from an investment perspective. 
20   And what we're looking for at the conclusion of a Monday is
21   the general partners' observations on the investment
22   opportunity and things that need to get proven out over the
23   next 20 or 30 day period of time.  So the first vote is
24   essentially to invest firm resources above and beyond the
25   individual sponsor to pursue the opportunity.  And usually
0026
 1   the outside counsel that we would use is really built on the
 2   accounting side and the technology side and we tend to work
 3   with somewhat more mature companies.  And what we do after
 4   that 30 day period of time is come back to the partnership
 5   with all of the conclusions from that diligence process,
 6   which we hope supports everything we outlined in the
 7   beginning.  And in certain cases the story starts to fall
 8   apart for you as a sponsor and that's a hard thing to admit
 9   to along the way, and sometimes you have to cut the process
10   off halfway through.  But we have two votes.  The first vote
11   does not require all of the partners to be onboard but you
12   get plenty of air time to hear the areas that they're
13   skeptical of and therefore where you need to work over the
14   next 20 to 30 days to prove things out to their
15   satisfaction.  And then I think what happens behind the
16   scenes, you can usually understand who the skeptics are
17   within the partnership so as a sponsor my responsibility is
18   really appealing to their reservations and working with the
19   company's management team to make sure that we have very
20   focused responses to the concerns that have been raised. 
21   But we will render a term sheet kind of at the 40 percent
22   completion stage, and we hope that we understand enough
23   about the investment opportunity that we can drive it to
24   conclusion.  And like Matt, we don't generally like to float
25   term sheets out unless we think there's a very strong
0027
 1   possibility of making an investment at the end.
 2             Mr. Cantarella:  Good. You know, while we're on
 3   this subject, Rich and Jim, why don't we give you guys a
 4   chance, too, to describe the overall piece of this, because
 5   you guys have a more formalized, two-step process, the first
 6   being, as you heard, kind of a decision to go forward and
 7   potentially invest resources, resources of time and the
 8   firm's resources to go after more information.  Rich, maybe
 9   you can describe a little bit about SpaceVest's process
10   there.
11             Mr. Rich Harris, SpaceVest, Managing Director: 
12   Sure.  So, we have four partners, so it's a smaller
13   partnership than Matt's partnership, for example.  We
14   usually, when a deal has an initial meeting, for example,
15   with one of the partners, and it's of interest to that
16   partner, usually we'll assign a second partner to it.  And
17   that second partner's job essentially is to look at all the
18   negative aspects of this deal and try to almost talk the
19   other partner out of it, who's the advocate.  So we have
20   this kind of balanced process.  If the two partners get on
21   board after a series of meetings, maybe a few reference
22   calls, then those two partners will present it to the full
23   partnership for kind of discussion and feedback and a
24   decision similar to Mike's of whether or not we want to
25   deploy substantial resources, bring in a technical
0028
 1   consultant, something like that.  Then we'll go through the
 2   full due diligence process and then the entrepreneur and the
 3   team will come in and make a presentation to the full
 4   partnership and it requires a unanimous vote in order to
 5   move forward.  And at that time we would tender a term
 6   sheet, complete our due diligence, similar to the processes
 7   we have here, that's about a 30 day process, and hopefully
 8   get to a close.
 9             Mr. Cantarella:  Good, good.  Jim.
10             Mr. Jim Broder, ECENTURY Capital, Principal: 
11   We're a pretty small firm, too.  Our process looks a bit
12   like SpaceVest, I guess.  We also have four investing
13   partners.  We don't have the sort of the good cop, bad cop
14   dynamic that you mentioned; it sounds like an interesting
15   strategy.  But other than that I think the processes are
16   pretty similar and they're also, I'd say, consistent themes
17   in our process compared with Edison and Columbia.  We have
18   one, sort of official vote toward the end that has to be
19   pretty unanimous but it never gets to that point without
20   knowing what the answer is going to be.  And you kind of
21   grope to that point from, say, a first meeting all the way
22   through to that point.  And for example, we've never
23   actually an opportunity get to that last meeting and have
24   the vote come out no, because you know, we've only got four
25   partners and by the time we get there we know what all the
0029
 1   key issues are, what all the concerns are and if we haven't
 2   addressed them we don't go to that meeting.  And if we can't
 3   address them then it's not something we're going to be able
 4   to move forward on.
 5             Mr. Cantarella:  So there's -- to some extent as
 6   you listen to this, you know -- one of the things I picked
 7   up on was there is an informal, even in the formalization of
 8   this two-step process that Edison has, there's an informal
 9   process going on, wouldn't you say, of kind of a
10   socialization between, in your case, good cop, bad cop, you
11   guys, you know, talking it up amongst yourself --
12             Mr. Broder:  Around the water cooler.
13             Mr. Cantarella:  In a four-man, you know, yeah,
14   kind of discussion.  So this is interesting.  So from an
15   entrepreneur's perspective, Matt, I'll turn to you.  Here
16   we're kind of thinking, okay, this is what it takes to get
17   through these steps of effectively some kind of
18   socialization to a positive for the entrepreneur.  So let's
19   roll it back.  Now, the entrepreneur's perception, I've
20   always found, of this process is that it is much more -- I 
21   think entrepreneurs tend to focus much more on the process
22   itself, and they tend to forget the socializations that are
23   going on internally.  So, after you get that call, hey, they
24   meeting went well, it's like a week-and-a-half later, you
25   get the next call from the entrepreneur, or I do.  I think a
0030
 1   lot of us do.  Hey, I haven't heard from Columbia Capital. 
 2   I haven't heard from them.  I would expect that I would have
 3   heard from them by now.  I'm a bit surprised, I'm not sure
 4   what to do.  Should I call?  Should I shoot an e-mail to
 5   Matt?  Whatever.
 6             Mr. Harris:  You want to send flowers.
 7             Mr. Cantarella:  You want to send flowers.
 8             Mr. Harris:  It works every time.
 9             Mr. Cantarella:  So, we usually talk it over and
10   try to figure it out, and usually it is very, very much an
11   individualization of the firm and how the firm acts and
12   sometimes the advisor can give some perspective.  Sometimes
13   we really don't know.  Maybe they're very busy.  And just
14   overall, socialization of an idea that came in on Friday,
15   you know, might get a little bit dropped if, you know, at
16   the end of the day they're very busy, throughout the weekend
17   and just, they're crushed for time.  But Matt, you know, how
18   should the entrepreneur view this first phase -- because I
19   really think there are two phases -- this first phase of due
20   diligence where you kind of chew on this first meeting and
21   say, well, it went pretty well, I think I'm going to take
22   this second meeting.  In that time frame, how should the
23   entrepreneur view that first step of due diligence?  What
24   timing should they expect from you and how should they
25   communicate with you?
0031
 1             Mr. Newton:  I think a gestation period of several
 2   weeks, you know, upon first looking at a deal, is pretty
 3   natural.  What ends up happening is that sort of period of
 4   silence you hope means that the venture capitalists you're
 5   dealing is out actually doing some due diligence without
 6   telling you about it, because that's the best diligence that
 7   we're going to do is probably personal reference checking,
 8   understanding the technology, using our own network of -- if
 9   it's a technology situation, you know, using our own network
10   to sort of vet intellectual property and specific areas of
11   technology that we don't understand, which is most.  Taking
12   a couple of weeks to understand how competitive this
13   marketplace is, you know, just actually doing a lot of sort
14   of legwork that you're going to have to do later, or just
15   understanding the parameters for how a diligence process,
16   how intensive it would have to be.  I don't think there's
17   any magic for an entrepreneur to understand how to
18   accelerate that process.  I think the only, you know, sort
19   of advice you could offer would be, you shouldn't be talking
20   to one venture capitalist.  This is supposed to be a sort of
21   intimate view of how we work, right?  So we're all lemmings. 
22   So the best thing you can is be selling your idea to other
23   people, in the right way, to create sort of a sales
24   atmosphere for your business.  At the end of the day if it's
25   a competitive situation that tends to usually work best for
0032
 1   the entrepreneur.  And I think the likely sort of hit rate
 2   for the entrepreneur in talking to individual VCs is
 3   actually pretty low anyway, so you're going to need to talk
 4   to multiple people.  If it's been six weeks, that's probably
 5   too long.
 6             Mr. Harris:  Yeah, I think there's two pieces to
 7   this and they're both very important.  There's the formal
 8   process, which we've talked about here, and you need to
 9   understand the formal process, know how each firm works. 
10   But there's also the informal process which Matt is touching
11   on, and that is, you know, in order for Matt or myself to
12   stand up within our firm and become a real advocate for this
13   deal, we have to like the deal and be excited about it and
14   we also have to like the team and get along with the team. 
15   
16   
17   
18   And so there's almost -- you know, I would almost compare it
19   to a dating process, in a sense, you know how, "Has he
20   called me back yet?"  "No."  You know, this type of stuff.
21             (Laughter.) 
22             Mr. Harris:   But it is similar, in a sense.  So
23   there has to be some sort of emotional connection, a desire
24   to want to work with that person for a long period of time,
25   because you are going to work together for a while.  If you
0033
 1   don't get along, you're probably not going to invest, you're
 2   probably not going to want to be an advocate.
 3             Mr. Cantarella:   That's a really good point, the
 4   chemistry.
 5             Mr. Harris:   Absolutely.
 6             Mr. Cantarella:   So let me ask you a question. 
 7   So let's just try this on for size.  You have a good
 8   meeting.  Let's say it's Friday.  And they come in, and they
 9   present -- it's Friday afternoon, and you guys are -- you
10   know, you've had a busy week, and -- I'm actually going to
11   throw this one to you, Jim, so be ready.
12             (Laughter.) 
13             Mr. Cantarella:   So you had a busy week, and
14   you're just kind of tired, and you see this group come in,
15   and they do a pretty good presentation --
16             Mr. Broder:   What exact time on Friday?
17             (Laughter.) 
18             Mr. Cantarella:   Yeah, well, let's say it's 3:00
19   p.m., right?  And you're mind's kind of spinning, and the
20   next thing you know -- but you have a pretty good meeting,
21   right?  And you're kind of interested in this.  And you get
22   a call that Monday morning from the entrepreneur that says,
23   "So when are we meeting again?"  They're very forward about
24   their expectation that this process go rather quickly.
25             Now, you just heard that talked about.  You know,
0034
 1   there's a vetting process, there's -- you know, "Give me a
 2   couple of weeks," you know, "I've got other things going
 3   on," I mean, it's inherently what you would, I think,
 4   expect.  Most people that have raised capital before would
 5   probably expect a few weeks.  Especially that first-time
 6   entrepreneur, maybe he's even experienced (inaudible) drops
 7   you that voice-mail or that Monday morning, he says, "Okay,
 8   let's go.  Let's go."  How do you feel about that?  And I
 9   know this is a squirrely question, to a certain extent, but
10   how do you feel when you get that, it's a very forward,
11   "Hey, let's get to that next meeting"?
12             Mr. Broder:   I think it depends on -- you know,
13   usually at the end of a first meeting, you'll sort of go
14   over, after you've heard the initial pitch, what you think
15   your tasks are going to be.  I mean, if you don't really see
16   a way to move forward, you want to be open and tell them
17   about that, but usually you, sort of, communicate --
18             Mr. Cantarella:   Right.
19             Mr. Broder:   -- you know, "Here's what I want to
20   do and, you know, if my schedule stays the way I hope it
21   will, here's a rough guideline."  Six weeks is too long, I
22   agree.  But if it's shorter than that, you know, "Here's
23   what I -- what I hope to accomplish."  And, you know, if I
24   got a call the next business day that wasn't consistent with
25   that time line, I think it might convey a bit of
0035
 1   desperation.  But if it's consistent with the, sort of, game
 2   plan we map out with the entrepreneur, then, you know, I
 3   think it would be okay.  Really, it would all depend on the
 4   circumstances.  I think, to get to your point of, how do you
 5   -- you know, if the entrepreneur is trying to move the
 6   process forward aggressively, which they should, for obvious
 7   reasons, the best way to get VCs to move more quickly on
 8   something is if we know that it's a competitive environment
 9   and a lot of other people are looking at it.  And if we're
10   interested and we want to be a part of their funding plans,
11   we have to prioritize that work, because our schedules are
12   really all about trying to move stuff around and what, on
13   any given days, seems more pressing and immediate than the
14   other tasks that you planned to do.  And if, you know, if
15   you get the feeling -- because, you know, we all talk to
16   each other, you hear about a, you know, a hot prospect or
17   something, and you meet with the company and you like it, I
18   think you're going to want to prioritize that.  And setting
19   up that dynamic to the extent you can is the best way to
20   sort of convey a sense of urgency, I think, to a potential
21   investor.
22             Mr. Cantarella:   So -- that's a good answer.
23             (Laughter.) 
24             Mr. Cantarella:   And I -- but there was something
25   key that you said, which I thought was interesting, that I
0036
 1   think we need to highlight, which is, you said, that could
 2   signal some desperation.  You know, this whole thing is a
 3   bit of a negotiation, right?  Anytime you're selling your --
 4   before the panel that you're selling your -- you're selling
 5   your opportunity, you're negotiating your opportunity, and
 6   you're trying to make sure that you look somewhat valuable
 7   as an opportunity.  What if you give a hint of desperation? 
 8   You know, it's like the old saying, in the sell side of M&A,
 9   you never really achieve a good valuation until you have at
10   least two prospective buyers, not just one.
11             So, to the extent that I'm hearing two themes here
12   -- and I'd love to hear some other indicators of
13   desperation, because I think entrepreneurs worry about this
14   a lot, "I don't want to look too desperate.  I want to -- I
15   want to -- I don't want 'em to forget about us, so I don't
16   to go six weeks, but I don't want to look too desperate." 
17   It's like the dating process.  It's --
18             (Laughter.) 
19             Mr. Cantarella:   -- a good analogy.  You know,
20   "What might make me look desperate?"  Michael?  Maybe if you
21   just think on that for a minute here.  I'm going off a few -
22   - I'm going away from a few of these questions here that I
23   initially planned, but this is a really good point.  What
24   are some other, if you may -- if you could think about some
25   of the things you've seen, indicators of maybe some
0037
 1   desperation on the part of an entrepreneur.  And this is a
 2   tough thing for an entrepreneur to do, to not let up, but to
 3   also be appropriately aggressive, not too aggressive.
 4             Mr. Helmicki:   Sure.  We -- I think it's trying
 5   to accelerate the time line, in general, and it -- I think
 6   as everyone else has commented, it's all about return on
 7   time, where board meetings, existing portfolio companies,
 8   deals in process are all competing.  And our view is kind of
 9   treating it like the sales pipeline, in that you need to pay
10   attention to new opportunities in the marketplace.  And some
11   of them are going to die early on; others you might keep on
12   your desk for a while and move around, hoping that some part
13   of the optics on the deal change so that it fits more
14   directly with your investment strategy and approach.  So
15   sometimes we're a bottleneck in the process, just by virtue
16   of other things competing for our time and, in some
17   instances, not necessarily being realistic about your
18   ability to convince the rest of your partners that it's
19   something you can move forward with.  But, you know, the
20   desperation challenges tend to really be trying to
21   accelerate your path to a Monday meeting or, "I'm going to
22   be up in New Jersey, and I can meet with your managing
23   partner.  I can, you know, unsolicited phone calls to other
24   partners, and trying to triangulate the fund from many
25   different angles sometimes will crater the perspective of
0038
 1   the sponsor on it.  So if I'm building a relationship, and
 2   then I have one of my partners in the background asking me
 3   why an entrepreneur is coming around full circle to them,
 4   I'm going to be fairly suspicious as to whether or not they
 5   just don't want to work with me or if they're trying to be
 6   too aggressive.
 7             Mr. Cantarella:   That's an interesting one,
 8   triangulation.  You  see that a lot, "Hey, you know what?  I
 9   saw -- I saw Nick, and he kind of liked it, but I really
10   need -- I think I'm going to go to Gary.  I think I'm going
11   to give Gary a call."  I'm sure when you see Gary and Gary
12   says, "How come you saw these guys, and they're calling me,"
13   right?  That's kind of interesting, right, from your
14   perspective, so that's something to keep in mind.  You were
15   going to say something.
16             Mr. Harris:   Yeah, I think one thing -- you
17   talked about a competitive deal, and there's no question
18   that, you know, VCs are highly anal and competitive people
19   and, you know, we certainly get more interested in a deal if
20   we perceive it to be a competitive situation.  But one of
21   the mistakes I've seen is making it look competitive when
22   it's not.
23             (Laughter.) 
24             Mr. Harris:   We all know each other very well and
25   you know, if you say you have a term sheet, I'm going to
0039
 1   probe you and ask you who you have it with, and often the
 2   answer is, "Well, I don't want to say."  Fine.  I can
 3   usually figure it out pretty quickly just by calling a few
 4   people "in the neighborhood," so to speak.  And by making
 5   those calls, if the feedback I get is, "We're not really
 6   interested in this company," or, you know, "We really
 7   haven't put a term sheet out," I'm going to start to back
 8   off.  And it's all about building trust, and it starts to
 9   become a slight credibility question, "Well, is this person
10   really just selling to me?  Am I getting the full truth from
11   this person, or not?"  And that can really become a problem
12   with the deal.
13             I think the best way to not look desperate, you
14   know, if you're in a situation where you really need to
15   raise money, is just to work the process step by step, be
16   highly responsive, but don't be over-aggressive, calling
17   around the person you're working with, to other partners in
18   the firm, you know, telling the partner you're working with
19   that, you know, you'll be having lunch in their building on
20   Monday during their partners' meeting, can you stop upstairs
21   and make a presentation, that type of thing.  But just be
22   highly responsive and prepared.  And if you work the process
23   that way, then I think you can push it forward, you know,
24   efficiently.
25             Mr. Cantarella:   So what you hear is another
0040
 1   thing that I think we need to keep in mind -- that's a
 2   really good point -- which is, you shouldn't give signs that
 3   you don't understand the process because obviously, they're
 4   going to assume that you have some understanding of the
 5   process.  Even if you meant well, and you really are
 6   dropping by New Jersey for some reason, and you can drop in
 7   to see the managing partner at Edison, even if that is true
 8   -- although I'd say 90 percent of the time I hear that, it's
 9   a feint to try to get in to somebody else -- even if you
10   just meant well, it shows that you didn't understand the
11   process, anyway. 
12             And what do you guys think about -- I'll go to
13   Matt here -- let's say you have a really good, solid
14   technology company that has a really -- seems to be a very
15   solid team.  Let's say they're a couple of PhDs that have
16   developed a really smooth, nice technology.  What is your
17   sense, if you get -- if you get three inklings over the next
18   two weeks after that first meeting that they don't really
19   understand this process at all -- maybe they never took the
20   time to come to an event like this to really think about
21   your process -- everything else is really good; you've done
22   some due diligence, this technology is the real deal -- what
23   is your sense, at that point, that if you do the deal, what
24   you're going to have to do with these deal?  If these guys
25   never understood your process, how does that affect you?
0041
 1             Mr. Newton:   You -- at that point, assuming it's
 2   a business you want to invest in, you're prepared for
 3   serious brain damage helping them learn --
 4             (Laughter.) 
 5             Mr. Newton:   -- about the process.  You're
 6   fearing the term sheet stage, because they're not -- they
 7   may not understand it.  So the first thing you need to do is
 8   -- I was looking at Jeff's little tips here, which are great
 9   tips -- is you need to hire Jeff, number one.
10             (Laughter.) 
11             Mr. Newton:   It says, "Select the proper advisors
12   to guide you."
13             (Laughter.) 
14             Mr. Newton:   That's how I get my venture capital.
15             No, I think -- I think that is -- actually, that
16   is what we would do.  So you're dealing -- clearly that's a
17   very early stage company.  It's probably a startup, it's
18   probably -- you know, slide-ware and some -- what you're
19   describing, sort of, mathematical parameters around a
20   technology.
21             Mr. Cantarella:   Right.
22             Mr. Newton:   We would take it upon ourselves to
23   likely refer a company to a set of advisors to help them in
24   the process --
25             Mr. Cantarella:   Right.
0042
 1             Mr. Newton:   -- that wouldn't conflict us,
 2   necessarily.  You know, friends and family of the firm,
 3   attorneys that would represent them, you know, consultants,
 4   accountants, the whole scope of service providers.  That is
 5   going to be an extended process for a company like that,
 6   that doesn't have experience, you know, having gone through
 7   it before.
 8             The interesting thing is that -- that's the
 9   negative -- the positive is that, you know, if it's
10   something that's so interesting to me, it's clearly
11   resonating at a personal level.  And I think what I was
12   getting at -- my initial comment was, you know, at Columbia
13   the partners are going to focus on things that they want to
14   personally work on, they're expecting to work with those
15   businesses and the people in those businesses for a long
16   period of time, you know, four to eight years.  And so if
17   it's still intriguing at that point to want to move forward,
18   that's a really good sign for the entrepreneur, for one
19   reason or another.
20             Mr. Cantarella:   I could see where that could be
21   a good sign.  Obviously, they must have something that's
22   pretty good, technology-wise if, you know, you're still
23   going forward with them and they don't quite understand the
24   process, you refer them to some advisors.  
25             But Jim, let's say the same group came to you,
0043
 1   same situation, and you knew that they clearly didn't
 2   understand the venture capital process, they didn't really
 3   buy into the sales cycle, as Larry put it -- the sales
 4   process -- but they also told you that they had ten sales
 5   going on in their pipeline, and they were real close to a
 6   million-dollar sale.  If they didn't understand your sales
 7   process, how believable are they when they talk about
 8   selling to real corporations?
 9             Mr. Broder:   Well, I think, you know, if it were
10   that one issue where they had never raised venture capital
11   before, say, you know, that -- that's something I think you
12   can work with.  If it's an indicator of maybe a larger
13   problem where they don't listen, you know, that could become
14   an issue.  But I think, as long as the entrepreneurs are
15   willing to listen and have -- you know, are receptive to
16   what the process is, and will reset their expectations, I
17   think -- and can, sort of, adjust on the fly -- I think it's
18   probably fine.  Where it becomes a problem is where an
19   entrepreneur doesn't understand the process and doesn't seem
20   like they really want to understand it or comply with it,
21   because, you know, in a firm where you have multiple
22   partners and -- you know, it can be kind of like "herding
23   cats," as they say, to get everyone together in the same
24   room and to do the things you need to do, and it takes time. 
25   And I think, you know, if entrepreneurs just don't get that
0044
 1   message, then it could become a problem.  But I think the
 2   fact that maybe they haven't been through the process
 3   before, per se, is not necessarily a, sort of a black mark
 4   against them in getting a deal done.
 5             Mr. Cantarella:   Right.  That in and of itself
 6   might not.  But let me pose this question to you.  Would it
 7   be fair to say that if they didn't really understand the
 8   sales process -- the sales process of what they're doing --
 9   would it be fair to say that you -- as we go into more of
10   the due diligence questions -- that you might look more
11   carefully on that pipeline and really make some in-depth
12   calls to see if they're for real on that pipeline?  Because
13   if they don't -- would it be fair to say that if they didn't
14   understand how to sell to you, they might not be able to
15   understand how to sell to somebody else?
16             Mr. Broder:   I think it definitely raises an
17   issue for further investigation.  There's no question.  I
18   think, you know, the sales process for venture funding is
19   probably a lot more consultative than a lot of other sales. 
20   You might actually be doing it inside of a company to
21   actually sell your products.  So there could be differences,
22   but you know, I think you want to, sort of, examine the
23   common themes and try and get beneath it to what is that
24   really saying about the entrepreneur's ability to, sort of,
25   interact with third parties who are going to help them build
0045
 1   their business?  So it raises a question, I think you're
 2   right.
 3             Mr. Cantarella:   It could raise a flag?
 4             Mr. Newton:   The worst case scenario is when it's
 5   purposely embellished information.  Then you're talking
 6   about, you know -- you know, we were talking about, before
 7   this panel, you know, "What would you say to entrepreneurs
 8   in the due diligence process?"  And someone said, very
 9   simply, "Don't lie."  
10             (Laughter)
11             Mr. Newton:   It's true.  I mean, you know -- I
12   mean, you know, we're going to do personal background
13   checks, and we're probably going to talk to customers early
14   in the process, and if it's -- if it's premeditated
15   deception on the part of the entrepreneur, that's a very
16   simple walkaway decision.  It doesn't go very far before you
17   learn things like that.
18             Mr. Helmicki:   I would agree that the worst thing
19   that you can do for your sponsor is set up a forecast that
20   is way out of alignment, and post that first board meeting,
21   coming back to your partners and saying, you know, "The
22   company is off the rails from where we thought it would be,"
23   is just not a great experience.  So we spend an awful lot of
24   time on the pipeline.
25             Mr. Cantarella:   That's an interesting point
0046
 1   because when I think about it, when we go back to that first
 2   call that I get from the entrepreneur after that first
 3   meeting, he  says, "The meeting went really well," but he's
 4   basically thinking, "We're getting to a term sheet,
 5   probably."  And if he says that about that situation, when I
 6   know that's really not the case, if he talks to you and say,
 7   "Well, I know IBM -- we had a really good meeting" -- don't
 8   you guy hear this kind of thing? -- "We had a really good
 9   meeting with IBM not too long ago.  It was fantastic.  I
10   wouldn't be surprised if we had the deal by the end of the
11   month."  Isn't there a case of, yeah, they should tell the
12   truth, but they should also be very attuned to what the
13   truth really is.  Then you have a --
14             Mitch, you were going to say something.
15             Mr. Harris:   Yeah, I mean, I think -- I think
16   lying is more rare than exaggeration.  And so I think what
17   you're getting to is exaggeration.  And if you're going to
18   use some fact in selling to me, our job is simply to
19   validate those claims.  And if you say, "We met with IBM,
20   and we think that they're going to put a big purchase order
21   on the table," I want to talk to IBM at some point in the
22   process, so you'd better be prepared for that.  And I think
23   it's actually much more effective if you say, "We had a good
24   meeting with IBM.  Here are the specific steps that we have
25   to go through in order to get to that purchase order, but
0047
 1   we're confident we can navigate through that process for
 2   these reasons," that's a much better way to present it than
 3   to make some exaggerated claims that, hey, you're going to
 4   close the deal in three weeks, and then we call up IBM, and
 5   they say it's going to take nine months.  So I think -- I
 6   think you have to watch the way you portray things.
 7             Mr. Cantarella:   That's a good point.
 8             Mr. Broder:  Yeah, I think we see often where, you
 9   know, it's not lying, and it's not exaggeration, although we
10   see those, too.  Maybe it's just not understanding what's
11   actually happening, and, you know, we do exhaustive
12   reference checking with customers and on management and so
13   forth, and it's really not uncommon -- you'd be surprised,
14   but it's not uncommon at all to have an entrepreneur tee up
15   a reference that we've asked for without really knowing what
16   they're going to say.  And what we find out is, you know, is
17   not what they thought we'd find out.
18             (Laughter.) 
19             Mr. Broder:   And, you know, that has a very
20   chilling effect on the process, I think.  And, you know, I'm
21   sure you guys have seen that, too.  But, you know, I think
22   it's important to really know what your references --
23   whether they're customers or personal references -- you know
24   what they're going to say in advance of actually giving them
25   out.
0048
 1             Mr. Cantarella:   That's really fascinating, if
 2   you think about it.  It's kind of like you -- you know,
 3   we've all gone through the process of a job interview and at
 4   some point, you give references.  I think most of those
 5   entrepreneurs probably prepped those references before they
 6   gave that resume and before they walked in for their job
 7   interview.  That's awfully interesting.
 8             So we have people giving out references to you
 9   guys, and not prepping those references.  Is that right? 
10   Any specific examples of that?  I mean, that's -- that's
11   pretty fascinating.  You can just protect the names or, you
12   know, don't give us names, but --
13             Mr. Harris:   Well, I mean, it happens all the
14   time.
15             Mr. Cantarella:   Does it?
16             Mr. Harris:   Yeah, I had a deal, just this week,
17   that we were working on, they were portraying the deal as
18   highly competitive, "You have to make a decision in two
19   weeks because we just had a major, major customer give us a
20   green light on a multimillion dollar contract and, you know,
21   after that, the valuation will be dramatically increased,"
22   etcetera.  So we made one call to that customer.  We had our
23   own contacts that time into that large customer.  And we
24   found out that -- essentially that they had just begun
25   discussions, versus actually having closed this deal.  So
0049
 1   that, of course, chilled the entire process, because then
 2   it's a credibility issue.  So I would imagine it happens to
 3   you guys all the time, as well.
 4             Mr. Helmicki:   Yeah, I think, generally speaking,
 5   we know we're not in the zero-risk game, so diligence is all
 6   about understanding what the risks are and how we can manage
 7   our way through them.  So our -- at some point in the
 8   process, it's working with the entrepreneur to come up with
 9   a plan for how you're going to address them collectively on
10   a go forward basis.  And, you know, sometimes it's switch
11   out in management team, sometimes it's sales execution.  And
12   our philosophy on that is basically we're accountable back
13   to Edison as a sponsor to come up with the 180-day plan that
14   we work out with the company, which are all the areas that
15   we're collectively accountable for acting on.  So it might
16   be us referring outside board members, it might be helping
17   with getting sales people onboard, etcetera.  But we don't
18   expect to come out of the diligence process finding no
19   issues.  We just want to be able to manage our way through
20   them.
21             Mr. Cantarella:   But it's interesting, too,
22   because I think the entrepreneurs are a little bit, maybe,
23   naive -- I don't know what the right word is -- on what --
24   on how they perceive what you communicate back to them after
25   you find this out, which is interesting.  Because I doubt
0050
 1   that you -- because, in the worst case, Rich probably
 2   thought on that call, "Well, these guys are either, in the
 3   worst case, lying outright or, in the best case, clearly
 4   misunderstood what was happening in this sales process,"
 5   right?
 6             Mr. Harris:   Uh-huh.
 7             Mr. Cantarella:   So you're going to default to
 8   the best case, and you're not going to get on the phone say,
 9   "Hey, Bob, you absolutely lied when you were in here last
10   Friday."
11             (Laughter.) 
12             Mr. Cantarella:   You're not going to say that,
13   right?
14             Mr. Harris:   No, that's what I say.
15             (Laughter.) 
16             Mr. Cantarella:   Is that what you say?
17             (Laughter.) 
18             Mr. Harris:   No, I mean -- exactly.  Usually I'll
19   talk to the entrepreneur and just say, "Look, I'm getting
20   conflicting information."  You know, "How do you explain
21   this?  And let's talk about it."  And sometimes you get a
22   satisfactory answer, sometimes you don't.  But I don't want
23   to be too negative on the entrepreneur.  We're talking about
24   all these mistakes, all these mistakes.
25             Mr. Cantarella:   Right.  Sure.
0051
 1             Mr. Harris:   A lot of entrepreneurs and
 2   management teams do a great job managing this process --
 3             Mr. Cantarella:   Right.
 4             Mr. Harris:   -- and are highly prepared, and do a
 5   lot of things right.  And one of the things they can do,
 6   with regard to referencing, is to talk to your references,
 7   make sure you understand exactly what they're going to say
 8   to the VC, and if you're not sure what they're doing to say,
 9   or if you're uncomfortable, just don't use them as
10   references, but also don't expect to increase the value of
11   your business, for example, or to use those references as a
12   selling point on the deal.  Just kind of leave them aside. 
13   You can talk about them, but make it clear to the VC that
14   these are not reference-able, they're not mature enough
15   stage or it's too delicate of a relationships.  That's okay. 
16   I hear that all the time.  And as long as it's disclosed
17   clearly up front, I'm fine with that.
18             Mr. Newton:   Then there's a -- there's another
19   subtle way that entrepreneurs -- the best situations that we
20   see -- really help themselves, and that is to understand our
21   portfolio the first couple of times they come to meet with
22   us, and use the opportunity to reference through the
23   companies that we already work with, that aren't necessarily
24   their personal or professional references, but they may be a
25   way to network into Columbia Capital to get us to take, you
0052
 1   know, a slightly more aggressive view of their business. 
 2   Those that manage that process well tend to be pretty
 3   successful, because they've gone out of their way to get
 4   educated on who we are.  I mean, every venture firm is
 5   different.  They invest in different portfolio companies,
 6   they just have different focus areas.  You know, coming into
 7   those initial meetings and understanding who we are and what
 8   previous companies we've invested in, and some of the people
 9   or uniqueness of those portfolio companies, that can be very
10   helpful.
11             Mr. Cantarella:   Because I imagine, too, that if
12   you -- if you get a call from the VC that initially liked
13   your deal, and started some previous -- or preliminary due
14   diligence, and they said, "Well, look, I called -- I called
15   IBM, and the bottom line is, there's some conflicting things
16   here."  At the very least, you need to be very concerned
17   about that, because I would imagine that not only are you
18   thinking, for this deal to go through, that's an issue, but
19   also, you're probably, Rich, imagining, in that case, six
20   months, a year down the road you're at a board meeting, and
21   the CEO says, "Well, we've got IBM lined up.  You know,
22   they're in the pipeline, and" -- you know, you're not going
23   to be sure about what the information is and how credible it
24   is in that board meeting, are you?
25             Mr. Harris:   Well, and that's always kind of a
0053
 1   data point for me when I'm thinking about whether or not I
 2   want to do a deal.  I always envision myself at that first
 3   board meeting and having -- you know, which has happened
 4   before -- the CEO stand up and say, "Well, you know, that
 5   pipeline that we discussed, it's actually about half and,
 6   you know, things aren't going quite as well and, you know,
 7   our VP of Sales just quit" and, you know, all these
 8   different things.
 9             So I think it's all about building trust and
10   credibility, and if things aren't quite as rosy as you're
11   portraying them, then just rachet it down a little bit.  And
12   it's better to have everyone on the same page, going into
13   that first board meeting, so that you don't set up a
14   situation where things turn negative very quickly.  You want
15   things to be positive, both parties -- investors and
16   management team -- to feel good about building this thing
17   over a period of years, as opposed to immediately starting
18   out kind of on the wrong foot.
19             Mr. Cantarella:   That's great.  Well, so the
20   first series we had -- getting to the first meeting, the
21   first meeting -- today, we've gotten up to -- up through the
22   initial due diligence.  And now we're at that magical stage
23   that entrepreneurs love to know about, the term sheet
24   process.
25             Now, I often hear about -- and I know that some of
0054
 1   the other advisors hear about -- the following, "We're
 2   really close to a term sheet."  "How's it going?"  "We're
 3   really close to a term sheet."
 4             So let's assume that you guys are thinking about
 5   drafting a term sheet on the deal.  Let's see if we can talk
 6   about the expectations of what this really means.  And Jim,
 7   maybe I'll throw this one to you.
 8             When you think about this term sheet that you're
 9   going to deliver to -- let's say Jeff Lehrer quit his --
10   quit his job as a lawyer and said, "Well, I've got a -- I've
11   got a good network.  I'm going to go start a company."  So
12   Jeff comes to you.  He goes through this whole process.  You
13   do the reference checks.  Everybody loves Jeff.  Jeff's got
14   a great pipeline.  Hey, I've socialized it with the other
15   four partners, seems good, let's go for it.  Okay?  What is
16   your expectation?  And, if you would, please tell us what
17   you would like his expectation to be about what this term
18   sheet means.
19             Mr. Broder:   I think the first thing I'd say is
20   that term sheets don't, sort of, just arrive out of the
21   blue.  There is a natural, sometimes implicit, sometimes
22   explicit progression where you actually get to that point. 
23   And we don't like, for example, to just put a term sheet on
24   the table without knowing what the entrepreneur's
25   expectations are.  We don't like to issue term sheets just
0055
 1   for the sake of it.  We want it to be accepted.  If we
 2   actually want to put one in it's because our intention,
 3   subject to dotting i's and crossing t's, as it were, is to
 4   actually close in the investment.  And we don't want to put
 5   that on the table unless, you know, we think we're on the
 6   same page.  So I think -- I'm not sure if this is directly
 7   answering your question, but one of the clues to an
 8   entrepreneur can be -- you know, before they call you and
 9   say, "We're really close to a term sheet" -- is, you know,
10   you should have had some kind of discussions about what deal
11   terms are and, you know, where you are in the process should
12   roughly equate to where you were told a term sheet might
13   arrive if you got comfortable.  And, you know, we've had
14   times where entrepreneurs think they are very close to a
15   term sheet, but we haven't done any customer references yet. 
16   And it would be a first for us to actually put a term sheet
17   on the table without having talked to some customers.  So if
18   some things that feel like they should be happening before
19   you get to a term sheet haven't yet happened, you're
20   probably not quite there yet.  And I think, you know, it's
21   helpful for us if entrepreneurs, sort of, think in that way. 
22   Does that --
23             Mr. Cantarella:   Yeah, it does, actually, because
24   -- and I'll just pose this to the other guys here in the
25   room -- you guys, I imagine that's the way you would process
0056
 1   into the term sheet, is to make sure that the expectations
 2   are being discussed to some extent at a high level before
 3   you put that term sheet down.  Is that not the case?  Or is
 4   there any kind of variation in the different firms here to
 5   that?
 6             Mr. Harris:   We're the same way.  You know, we
 7   want to know, before we put the term sheet down, what is the
 8   valuation, pretty specifically.  So we'll usually have that
 9   discussion prior to the term sheet, also discuss some of the
10   basic terms.
11             The other thing I wanted to comment on -- as you
12   said, you get calls from people saying, "Well, the term
13   sheet's two weeks away."  I mean, this is not a huge
14   mystery.  All you have to do is ask, you know, "Where are
15   you in the process?  What are the next steps that you need
16   to do in due diligence to get to a term sheet?  How close
17   are you?"  I mean, I know I will tell you, if I'm not close
18   to a term sheet, I will tell you that.  If I am close, I'll
19   also tell you that.
20             So I think there needs to be more back and forth,
21   in terms of just asking questions.  I ask entrepreneurs lots
22   of questions, "Who else are you talking to?  Do you have a
23   term sheet yet?  Where are you in the process with other
24   firms?"  I love asking those questions, but I often don't
25   get a lot of the same questions back.  And I think, as
0057
 1   entrepreneurs, you should feel free to do that.
 2             Mr. Newton:   I think, at the point of a term
 3   sheet, you know, a venture firm clearly wants to make an
 4   investment, and we've all said that, that's obvious.
 5             Mr. Cantarella:   Right.
 6             Mr. Newton:   One common mistake that we see
 7   frequently -- I just dealt with in the past several months,
 8   in bringing one deal to closure -- is that, sort of, at the
 9   point of getting into the term sheet, which means the
10   venture firm is actually spending money at that point,
11   because we're potentially hiring attorneys, we may be hiring
12   some consultants, if necessary -- the entrepreneurs will
13   often take a little bit of a breather, take their foot off
14   the gas and assume that you become the driving force in the
15   process, which is a huge mistake, because we really struggle
16   with driving the process.  And it hopefully comes back
17   around.  I mean, you sort of collectively figure that out. 
18   Entrepreneur CEOs play that role, because they're good at
19   it.  You know, that's one little pitfall to be mindful of,
20   you know, when you get into the process of negotiating
21   through a term sheet as, you know, the venture firm's in no
22   hurry to put the money in, most likely.
23             Mr. Cantarella:   That's a great point.  So is
24   there anything specific -- you know, other common mistakes,
25   or maybe common mistakes within that -- you know, letting
0058
 1   off the gas, as the entrepreneur, and letting you guys kind
 2   of drive the situation -- that they specifically need to
 3   keep up, they need to make sure they're vigilant in keeping
 4   you up to date or -- is there anything specific that you've
 5   seen people kind of not keep up with that has specifically
 6   caused the deal to crater for some reason?
 7             Mr. Helmicki:   I think sales execution is clearly
 8   top of our list.  We are extremely sensitive on run-rate
 9   revenue side and that the lower band of what we can get
10   accepted within the partnership, you know, we'll often test
11   our model based on the assumption that the company is going
12   to be in the run-rate revenue range we need them to be in in
13   a given 30-day period and if the pipeline starts the crater
14   and sales execution goes sideways there's just no way we're
15   going to get the votes at the end of the day to get it done. 
16   It's even rarer that we see an executive just get awful
17   references or something really strange like that come up;
18   it's more often than not just sales execution completely
19   falls apart and we start to get a little bit nervous about
20   the market, the company's ability to execute.  And sometimes
21   that just means that we're going to put off our process for
22   a couple of months or slow roll it and say, you know, "Here
23   are the two things that get us over the line.  You need to
24   close IBM, for instance, before we're ready to wire money
25   into the account.  If you want to be released from the no
0059
 1   shop we're happy to do that."  But you know, the four
 2   companies that presented to Edison yesterday, three of them
 3   had been tracked for over two years.  And it's not that
 4   we've been engaged in diligence the whole time but we've
 5   been touching base with each other on a quarterly basis. 
 6   And in two of those instances, they are companies that
 7   actually don't have to raise venture capital and it's us
 8   kind of changing our role into more of a sales model to
 9   convince them that we have that much value to accept money
10   at this point in time.  So.
11             Mr. Cantarella:  You bring up a good point,
12   frankly, a good term in there; you could slow roll it.  So
13   if you're an entrepreneur if there's no competing term sheet
14   or maybe you've got a few big things in the pipeline that
15   immediately would change the prospects of risk, the risk
16   profile, the reward profile, maybe the VC could just slow
17   roll this a bit.  Would that be something that you would
18   overtly say all the time?
19             Mr. Helmicki:  I think you owe it back to the
20   company to indicate, particularly if they're relying on
21   funds and playing it close to the margin on cash flow for
22   operations, I think you just owe it back to them to strongly
23   signal where you stand.
24             Mr. Cantarella:  Do you think it ever happens in
25   the VC community where things are slow rolled and things are
0060
 1   not overtly communicated to the entrepreneur that that is
 2   the case?
 3             Mr. Helmicki:  Absolutely.  And I think if you
 4   don't communicate well what happens is you get deal fatigue
 5   internally so things start to spin out of control of the
 6   sponsor, I think, when the company needs of the entire
 7   partnership there's momentum and there's this drive to push
 8   the deal to a close, everyone's excited about it and the
 9   more time you add on the more opportunities are in front of
10   the partnership that might, on balance, be better than the
11   one you're looking at from the viewpoint of others.  So.
12             Mr. Cantarella:  So the longer that you let this
13   go on as an entrepreneur, if there is anything you can do in
14   the process to keep things moving you should, because
15   ultimately there's deal fatigue, which is a great term that
16   I think a lot of entrepreneurs maybe aren't familiar with. 
17   On your part there's deal fatigue; there's opportunity cost
18   evaluation because there's new deals coming in while your
19   deal is being evaluated for a close.  You know, they're
20   saying, "New deals walk in the front door" as this is
21   happening.
22             Mr. Harris:  I would add one thing to that.  The
23   momentum issue is very, very important because you need to
24   really get a deal cranking to get it closed.  Be decisive. 
25   Once you get a term sheet, if you want to do business with
0061
 1   that firm, negotiate it quickly, sign it, move to legal docs
 2   and close the deal.  Try and manage your board if you have
 3   other investors or people on your board who are not sure;
 4   try and get them to make a decision quickly.  Often I've
 5   seen situations where the board will weigh in, say, "Well,
 6   we should get other offers," this, that and the other, and
 7   you don't have another term sheet sitting there on the
 8   table, you take another few weeks, try and get another term
 9   sheet, the firm that you have a term sheet from starts to
10   lose interest.  I mean, it can be a very, very dangerous
11   game to play in that regard.  So I think you keep the
12   momentum going and be decisive.
13             Mr. Newton:  We see that a lot.  That's a great,
14   common mistake as well, which for subsequent round deals,
15   when you take an initial meeting and the management team
16   appears very eager to go ahead and consummate a deal, you
17   get very intrigued.  Very quickly in the follow-up you learn
18   that they're not actually ready to make a decision because
19   they don't have consensus among their board and that's a
20   real, you know, instant turnoff and it's sort of wasteful
21   energy at that point because, you know, you can't really
22   insert yourself into intermural issues that they need to
23   come to terms with before going to see capital.  And we see
24   that a lot.
25             Mr. Cantarella:  That's got to be a huge turnoff. 
0062
 1   Because if you're ready and they're not, that's a tough one.
 2             I do have a very good question that just came in
 3   here on this but, real quick, as we finish up on term
 4   sheets, I think entrepreneurs have a sense -- I'm just going
 5   to throw a number up there -- but if they get a term sheet
 6   and maybe it's 90 percent probable that the deal's going to
 7   close.  Maybe that's not the right number and maybe that
 8   varies depending upon experience, but just roughly, if you
 9   guys were to throw out a number, the deals that you've seen
10   where there's been a term sheet, the probability, given all
11   these factors that you've just discussed, we've discussed,
12   what do you think the real likelihood that that deal is
13   going to close in a statistical level?  Is it a 50 percent
14   chance?
15             Mr. Broder:  Let me start with that.  I think --
16   just to clarify, you're talking about term sheets that have
17   been given and then negotiated and then signed, right?  
18             Mr. Cantarella:  Yeah.
19             Mr. Broder:  Not just ones that have sort of
20   arrived at a company.  For us, at least, once a term sheet
21   is signed there's a very high probability that the deal's
22   going to close.  I mean, there -- I can think of a few times
23   where they haven't; I'll give you one extreme example where
24   we were way past the term sheet with another local firm and
25   -- another local venture capital firm -- and -- a company up
0063
 1   in New Jersey -- and we were late stage, legal documents and
 2   we uncovered that they had granted a royalty-free product
 3   license for a big chunk of the world that they didn't
 4   disclose to us.  You know, obviously the process ended that
 5   day, not just because of the implications on the business
 6   but because the trust in management was immediately sucked
 7   out of the process.  You know, if that kind of thing
 8   happens, obviously a term sheet doesn't always foretell a
 9   close but you know, barring that kind of event, once a term
10   sheet's signed it's, you know, it's our intention to close. 
11   So things can happen but I'd say it's, you know, it's
12   certainly above 80 percent.
13             Mr. Cantarella:  So things can crater a deal,
14   especially if you haven't been completely truthful, you need
15   to know that's probably going to be less than optimal if you
16   haven't been completely forthright, maybe you didn't
17   exaggerate as much. If you can hardly look at yourself in
18   the mirror and you know that that's happened, then the term
19   sheet only means what it means, that it's an intention,
20   right?
21             Mr. Harris:  There's two pieces to it.  There's
22   getting a term sheet and the time between getting it and
23   signing it.  And I think quite a few of those fall away. 
24   And sometimes it's because the management team gets another
25   term sheet or, you know, the venture firm discovers
0064
 1   something.  It could be a whole host of reasons.  But once
 2   you sign a term sheet, I think we see the same thing, it's
 3   90-plus percent close unless something strange comes up in
 4   the legal due diligence that we do, mostly post-term sheet.
 5             Mr. Cantarella:  That a good point.  What if we're
 6   talking about previous to the signing?  The term sheet has
 7   been effectively talked about, there's discussion going on,
 8   let's say it's not even a term sheet but you're down to
 9   valuation, you're down to some pretty good discussion on
10   terms.  What percentage of the deals do not close once they
11   get to that stage?
12             Mr. Helmicki:  We pull that conversation earlier
13   in our process so by the time the company is presenting to
14   our partnership I've kind of modeled that already at a
15   banded range.  You know, we want to be realistic with the
16   pre-money and where the company sits on a post-money basis
17   and how much capital they're raising, frankly, at the end of
18   the day.  So we're very sensitive to that but we do convey a
19   kind of banded range and socialize that to management.  And
20   if we think there's a $10 or $15 million delta on pre-money
21   valuation then we'll step away.
22             Mr. Cantarella:  Okay.  Well, that's great.  I
23   have one more question, and this goes back to the due
24   diligence process.  What resources do you guys use to
25   validate technology, market size, competition, management
0065
 1   team?  I mean, effectively we talked about some of them; we
 2   talked about pipeline, people that they've been talking
 3   about, who they've been selling to.  You check into the
 4   background, use resources that are references to talk about,
 5   you know, gee, is this person credible, is this indeed their
 6   background.  Any other particular resources that you draw on
 7   that we haven't mentioned here today?
 8             Mr. Helmicki:  We have, on a case-by-case basis,
 9   had outsiders come in to do a top rating assessment of the
10   management team.  It's just an intensive discussion that
11   gets kind of another point of view into -- you know, it's a
12   contributing factor to whether or not we think management
13   can scale at the end of the day and whether or not we can
14   work with them.  But it's an outside, validated point of
15   view.
16             Mr. Cantarella:  And they might be experts and
17   have vertigal with particular management expertise?
18             Mr. Helmicki:  Correct.
19             Mr. Cantarella:  Okay.
20             Mr. Newton:  We principally start with and use
21   most heavily our existing portfolio.  I mean, you know,
22   we're looking at narrowly focused opportunities, you know,
23   wireless communication service providers; there's, you know,
24   four or five of those in our portfolio that we're going to
25   use for diligence purposes, both for personal references and
0066
 1   for business model references.  And use them throughout the
 2   process.  I mean, we sort of lean on that most heavily.
 3             Mr. Cantarella:  Sure.  That's a big one.
 4             Mr. Harris:  We do the same thing.  We also,
 5   especially if the technology is really the key
 6   differentiator, or key value in the company, we'll bring in
 7   a technical consultant that could be -- and we work with
 8   some university professors, some just, you know, industry
 9   experts.  And we'll also leverage what we call kind of off-
10   list referencing.  So this is just people we know in the
11   industry, sometimes outside of the portfolio, that we just
12   want to talk to.  You know, these may be people that are
13   speakers at various conferences, at trade shows, in that
14   space, and we'll talk to them and just get their view of,
15   you know, how they feel about this company and its position.
16             Mr. Cantarella:  That's great.  Well, we want to
17   give an opportunity here to Jeff Bede of Chessiecap.  I
18   mean, I think one of the things that I think is really
19   important that we recap the themes that we heard here today. 
20   You've heard a lot of different pieces and nuances of
21   discussion here of -- Jeff, if you could come up to the
22   podium, we're just going to turn off our mikes and go back,
23   sit down, and if we could hear your recap of what we heard
24   here today.  Thank you guys, really appreciate it.
25             (Applause)
0067
 1             Mr. Jeff Bede, Chessiecap, Principal:  My name's
 2   Jeff Bede.  I'm an investor banker at Chessiecap.  And my
 3   specialty is raising private equity for companies.  So, I
 4   live this process, I know it well, and my whole job is to
 5   get these guys to open up their wallets for you.  I'm a
 6   little bit hurt because I really thought that I was the only
 7   friend of Jeff Lehrer and so, you know, I'm a little bit
 8   disappointed as I've been here but I think I'll get over it.
 9             I'm just going to spend a second and just, you
10   know, share with you some take aways from today before we
11   leave.  As we mentioned at the beginning, the real point of
12   this series is to give you, the entrepreneur, really a
13   tangible and deep look at the venture process.  Raising
14   money is tough, it's a tough market out there, I know, and
15   the bar is high; these guys set the bar high.  And so, the
16   more you understand about the process, and not only what you
17   understand but if you could take it a level deeper and
18   really listen to what these guys are saying today and really
19   understand their funds, their personalities, the more
20   successful you're going to be.  I totally believe that; I
21   live that.  So, the purpose of today's session was to move
22   from -- or to talk about moving from a first meeting to a
23   successful close.  And we covered a lot of information and
24   I'm just going to try to summarize it a bit, you know, kind
25   of my top five list of take aways from today.
0068
 1             The first one is, work your sponsor.  And this is,
 2   work them in a good way, you know, with Rich, send him
 3   flowers.  I don't advise that to everyone else but, you
 4   know.  Make sure that they have -- they're fully armed, that
 5   they have all the information that they need, that they can
 6   overcome objections that the rest of their partnership's
 7   going to have.  I mean, it's crucial and you should know
 8   that, you should keep in communication with that sponsor and
 9   that's really going to help move that process along.
10             Second point is be prepared for rigorous due
11   diligence.  These guys -- this is what these guys do. 
12   They're going to call your customers; they may call your
13   competitors; they're going to talk to people in the
14   industry; they're going to look at your metrics; they're
15   going to examine your technology; they're going to bring in
16   outside advisors.  And so, I always advise companies to do
17   that up-front before you even get to that first meeting. 
18   But be prepared for due diligence because that's, at least
19   in my experience, something that can really prolong the
20   process and make it tough to get to that term sheet and
21   continue on.
22             My third point is make sure you create
23   competition.  These guys don't like hearing that because it
24   means that, you know, terms or valuation may be a little bit
25   higher than they may like but really, it's crucial.  It
0069
 1   keeps the process moving, it keeps -- prevents it from
 2   stagnating and really it's, in my experience, it's what --
 3   it's crucial to get to that successful close.  And then in
 4   terms of the term sheet, it's also -- you're going to get
 5   better terms if you've been able to create some competition
 6   and keep these guys honest.
 7             Fourth point is, you know, we've talked about it a
 8   lot, make sure you manage the process.  Be methodical, be
 9   responsive; you know where you're going and not be
10   reactionary.  I think is extremely helpful in terms of,
11   again, shortening the time line to funding.  You know, these
12   guys are busy, they've got a lot of demands on their time
13   and so to the extent that you can provide them clear
14   information, articulate your business and manage the process
15   along, the more successful you're going to be.
16             And then my last point is, you know, we talked
17   about the analogy of dating.  Well, keep in mind that, you
18   know, after you've dated you're going to get married.  And
19   so, make sure you manage expectations, you're honest and up-
20   front with your company and where you're going to be, and
21   you build trust.  We've mentioned it today.  We build trust
22   with your, you know, the venture investor.  Because I've
23   worked with a number of companies where that first board
24   meeting is painful because of expectations that have been
25   set up-front and, you know, you don't meet those numbers.  
0070
 1             So, those are my key take aways.  Now, it leads us
 2   to the subject of our next seminar, which is post-funding or
 3   living with your VC.  As I mentioned, you know, when you're
 4   in the process all you're thinking about is, you know, show
 5   me the money.  You know, I need that money, I need to fund
 6   my company and often we don't give a lot of thought about
 7   the relationship and what it's going to be going forward. 
 8   And so, next time we're going to dive deeply into how do you
 9   manage post-funding?  What are the expectations you should
10   have of yourself and what are the expectations you should
11   have of your venture capitalist?  And how do you maximize
12   that relationship?  Because it can be truly a great one in
13   terms of the success and growth of your company and so you
14   want to make sure you keep your eye on that as well.
15             So, we don't have -- the next seminar's going to
16   be in the Fall.  We'll be in touch with a time and a date. 
17   We'll look forward to seeing everyone there.  And I
18   appreciate you guys all showing up.  Thanks.
19             (Applause)
20             (Whereupon the meeting came to a close.)
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