This document outlines the multi-level due diligence process used by Triangle Venture Capital Group for early stage investing. It describes 7 levels of due diligence from an initial screening (Level A) to a formal due diligence and contract negotiation (Level G). Key aspects addressed at each level include the investment criteria, technology/market fit, developing financial models, conducting in-depth business and patent reviews, and negotiating investment terms. The goal is to thoroughly understand the opportunity, address risks, and structure deals while maintaining a cost-effective process.

1. Due Diligence for Early Stage Investingg y g g
EVCA Foundation Course
B d t O t b 2008Budapest, October 2008
Uli W. Fricke
Managing General Partner
Copyright Triangle Venture Capital Group Management GmbH, October 2008
Managing General Partner
Triangle Venture Capital Group

2. Agenda
Due Diligence for Early Stage Investing
Agenda
Objectives
Due Diligence ProcessDue Diligence Process
Overall Investment Criteria
Technology, Market, Team, Patent and Phase Fit
Investment Case Modeling
Business / Technology and Patent Due Diligence
Termsheet Negotiationg
Investment Case Definition
Formal Due Diligence / Final Contract Negotiation
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3. Objectives (1/2)
Due Diligence for Early Stage Investing
Objectives (1/2)
Before making any investment, our goal as venture capitalist is to understand virtually every aspect
of the target company.
Address areas of concern.
Avoid significant and otherwise unexpected liability following the investment.
Generate Due Valuation & Add Value &
E it Deals
Due Diligence process integrated in value chain.
Generate
Deal Flow
e
Diligence Deal Structure
dd a e &
Monitoring
Exit Deals
Cost & time effective Due Diligence and early determination of break-up factors.
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4. Objectives (2/2)
Case Study #1: Handout ADB AG
Objectives (2/2)
Discuss case study in your group
Define suitable due diligence process
Address areas of concern
Discuss lessons learned / impact on Due Diligence
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5. Due Diligence Process
Multilayered Selection and Due Diligence Process
Due Diligence Process
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6. Level A (1/2)
Overall Investment Criteria
Level A (1/2)
Objective
Very quick pre-screening (few minutes) to define whether the company fits the
“Overall Investment Criteria” or not.
Criteria
Investment phase / stage fit
Company origin fit
Technology fit
Industry focus fit
G hi l fitGeographical fit
Investment volume fit
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7. Level A (2/2)Level A (2/2)
Use of Deal Database
ID Name
Date of
initial
contact Source
Industry
focus Short company description
Deal
champion
Technolog
y
Date BP
request
Date BP
received
Date NDA
sent
Date
decline
sent Status
080310 A 02.09.2008 Ernst&Young ICT
Services & products for secure
SAP programs Fr Software 02.09.2008 04.09.2008 LevelB-ongoing
080312 B 05.09.2008 Cat Cap GmbH ICT
Mobile banking and money
transfer, remote micro payments Pa Software 11.09.2008 LevelA-decline
080313 C 02.09.2008 Bridge Link AG Other
Research and development
company for nutraceuticals Pa Physical 09.09.2008 LevelA-decline
080314 D 05.09.2008
INI-
GraphicsNet
a technology for infrared
camouflage Pa Physical 11.09.2008 LevelA-decline
online platform to match
080316 E 11.09.2008 ICT
p
sucessful investors with
insuccessful investors Fr Physical 11.09.2008 11.09.2008 LevelA-decline
080317 F 11.09.2008 Hr. Broermann MD
diagnoses and therapy of verious
cancer diseases inside the body Ge Other 23.09.2008 LevelB-ongoing
Institut für
Wirtschaftsber software for contact center
080318 G 11.09.2008
Wirtschaftsber
atung Other
software for contact center
solutions Fr Software 15.09.2008 LevelA-decline
080319 H 03.09.2008 Other
system for public and crowd
gaming Fr Software LevelA-ongoing
080320 I 09.09.2008 F. Müller ICT software solutions for vehicels Pa Software LevelA-ongoing
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8. Level B (1/2)
Technology, Market, Team, Patent and Phase Fit
Level B (1/2)
Objective
Develop investment hypothesis
Quick but well reasoned “no” if company does not fit investment criteriaQuick but well-reasoned no if company does not fit investment criteria
Quality of presentationQ a ty o p ese tat o
Technology / Product (e.g. target segment, key innovation, key competence, level of
innovation, level of complexity handled, position in value chain, mission critical
application, broad application potential, disruptive character of technology,
scalability of product, product development status, technology risk)
Market Potential (e g time to market customer needs market size market growth
Criteria
Market Potential (e.g. time to market, customer needs, market size, market growth,
growth driver / potential, industry cycle situation, target clients, ability to acquire
initial customers, business model, earning mechanics, ability for early revenue
generation, competitive situation advantage, competitive entry barriers, competitors
strengths, competitors weaknesses)
Team (e g track record qualification cooperativeness completeness sizeTeam (e.g. track record, qualification, cooperativeness, completeness, size,
compensation structure)
Patents (e.g. patent portfolio, first impression of patent situation)
Phase (e.g. how early, status of business plan, quality of business plan, extend of
input required, investment required, public grants/ co-investment available, exit
timing, exit potential)
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9. Level B (2/2)
Evaluation Tool
Level B (2/2)
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10. Level C (1/4)
Investment Case Modeling
Level C (1/4)
Objective
Learn in depth about investment opportunity
Develop financial model
D t i t f D DiliDetermine areas to focus Due Diligence on
Amount (e.g. amount this round total, amount until exit, public loan
programs, syndication, entry valuation)
Criteria
p g , y , y )
Timeframe (e.g. liquidity secured until, liquidity buffer, Cash flow)
Milestones (e.g. technology, patents, market / sales, team, revenue, EBIT,
liquidity)
Exit (e.g. when, main target, multiple goal)
Opportunities (e.g. technology, patents, market, people, exit, other)
Challenges (e.g. technology, patents, market, people, exit, other)
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11. Level C (2/4)
Managing Risks and Roads to Exit
Level C (2/4)
Capital
Use of sophisticated
financial monitoring
systems to control risk
and measure progress
InvestedC
and measure progress
Focus on early revenue
generation
Ti h lTightly manage costs
against milestones
LeverageTriangle’s
expertise and connectionsexpertise and connections
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12. Level C (3/4)
Scenario Analysis
Level C (3/4)
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13. Level C (4/4)
Scenario Analysis
Level C (4/4)
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14. Level D (1/2)
Business / Technology and Patent Due Diligence
Level D (1/2)
Objective
Confirm investment hypothesis
Understand risks
Ad ocate the dealAdvocate the deal
Technological Due Diligence (e.g. advisors involved, IP status, IP potential, IP
i f i i h l i f li iinfringement, competing technologies, amount of current applications,
development stage of applications, quality of applications, potential for
future applications, competing applications)
Commercial Due Diligence (e.g. geographical region with largest technology threat,
geographical region with largest market potential, timing of revenue generation,
Criteria
scalability of sales, sustainability of revenue growth, risk factor in business model,
target clients)
Financial Planning (e.g. reliable pattern of expectations and considerations,
planning scarce resources driven, all necessary information and data included,
realistic basis for execution)
Shareholder (e.g. current structure, risks in shareholder structure, social event with /
meet founders wives / family)
Sales and Marketing Plan (e.g. selected target markets - appropriate / attractive,
status business development activities, existing sales pipeline, sales plan and
budget in line with revenue target, marketing support - appropriate)
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budget e t e e ue ta get, a et g suppo t app op ate)

15. Level D (2/2)Level D (2/2)
Patent Due Diligence
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16. Level E (1/2)
Termsheet Negotiation
Level E (1/2)
Objective
Definition of key terms, financials and milestones
Agreement of all parties on key terms before continuation
max
liquidation preferences
plus ratchet
Gain
well structured
liquidation preferences
in
unstructured
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min max
m

17. Level E (2/2)
Termsheet Negotiation
Level E (2/2)
Rights to exert
Non compete clauses (management team)
Reps and warranties
control and
influence
(Board)
Board representation
Board approval guidelines
Reporting
Veto rights
Rights to
secure /
Liquidation preferences
Anti dilution clauses
Ratchets
Milestones
maximize
value
Protective provisions / RoFR
Vesting
IP representation
Right to exit,
exit trigger
and process
Tag – along
Drag – along
Trade sale & IPO provisions
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18. Level F (1/5)
Investment Case Definition
Level F (1/5)
Finetuning of Level C outcomeObjective
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19. Level F (2/5)
Risk Management – Measurements and Tools
Level F (2/5)
Objective
Performance analysis for strategy analysis and review
Early recognition of challenges and hurdles
Ea l sta e si al fo e fo ma ce deficitsEarly –stage signal for performance deficits
Balance Scorecard based on company’s business plan and milestones
A l i f d i i l lAnalysis of derivations plan – actual
Pipeline Analysis
Analysis of delays of order projection
Analysis of changes in order number of volume
Criteria &
Tools
Analysis of changes in order number of volume
Lost order statistics and analysis
Project Tracking of R&D Projects
Ongoing todo list monitoring
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20. Level F (3/5)Level F (3/5)
Risk Management – Derivation Analysis with BSC
6 000 000
7,000,000
8,000,000
9,000,000
80%
100%
3,000,000
4,000,000
5,000,000
6,000,000
40%
60%
0
1,000,000
2,000,000
Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05
0%
20%
Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05
plan actual fulfilled
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21. Level F (4/5)Level F (4/5)
Risk Management – Analysis of delays and changes of orders projected
Dec-08
Feb-09
Sep-08
Oct-08
Jul-08
Sep 08
ojectedSigningDate
Apr-08
Jun-08
Pro
Feb-08
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Jan-08
Jan-08 Feb-08 Apr-08 Jun-08 Jul-08 Sep-08
Pipeline Date

22. Level F (5/5)Level F (5/5)
Risk Management – Project Tracking of R&D Projects
Forecast at closing
R&D 1092nm - 1W
532nm - 1W
532nm - 100mW/ 300 mW
442 nm - 0.02W
266 nm - 0.1W
2006 2007 2008
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Operational manufacturing documentation certification of manufacturing
production processes due to industry standards maturial phase
Revenue 600k 2.83k
Orders test apps 3 1 4 0Orders test apps 3 1 4 0
Orders regular 10 12 32 24 78 17 38 48 60 163
Forecast 01/2008
R&D 1092nm - 1W
532 nm - 1W
532 100 W/ 300 W532 nm - 100mW/ 300 mW
532nm - 30 mW
532 nm - 10mW
488 nm
442 nm - 0.02W
266 nm - 0.1W
2006 2007 2008 2009
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Operational clean room set up and start of manufacturing
tech certifications
Operational manufacturing documentation
production processes due to industry standards
certification of manufacturing
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maturial phase
Revenue 60k 1.490k
Orders test apps 0 0 1 4 5 7 3 3 13
Orders 2 0 5 41 48 21 44 45 57 167

23. Level G (1/2)
Formal Due Diligence / Final Contract Negotiation*
Level G (1/2)
*Please refer to backup
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24. Level G (2/2)
Formal Due Diligence / Final Contract Negotiation*
Level G (2/2)
1. Legal basis
2. Other legal affairs of the company
3. Important agreements
4. Accounting and financial conditions
5. Technology & products
6. Market & competition
7 M k ti & di t ib ti7. Marketing & distribution
8. Risks
9. Management & organization
10. Planning
11 Publications11. Publications
12. References
13. List of all peer companies
14. Exit role models and scenarios
15. VC’s active in this field
*Please refer to backup
16. Risk management
17. Post closing todo’s
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25. Contact DetailsContact Details
Triangle Venture Capital Group Management GmbH
Marktstrasse 65
D-68789 St. Leon-Rot
Germany
Tel: +49 (0) 700 874 26 453
Fax: +49 (0) 700 874 26 329
i lwww.triangle-venture.com
Uli Fricke
u.fricke@triangle-venture.com
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