What doinvestorslook for? ?Presented by:

Peter Tolnaiptolnai@marsdd.com

“I’m afraid I can’t remember how thismeeting was set up and I don’t have any

documents. Can you please remind me whoreferred you to me?”

The Question?

The QuestionSetting up the MeetingA Review

! Some homework on investors

! Resourceful

! Results-oriented

! Inappropriate use of Craig Lauder (who doesn’t know about this meeting)

! Over-aggressive

! Demonstrates that the team is not well-connected

! Defensive about the deal – won’t send advance materials

Positives

Negatives

The Bottom Line

! Get the best quality introduction you can get

! Send some materials in advance so VC can prepare and use time more efficiently

“Please give me your personalbackgrounds and tell me the story of how

you know each other.”

The Question?

The QuestionThe Management TeamA Review

! Two people have worked together before

! Each team member should speak and provide their own backgrounds

! All have large company experience; no entrepreneurial experience evident

! Bob and Mark are brothers: Nepotism often a problem

Positives

Negatives

The Bottom Line

! Experience in BOTH a large sophisticated company to acquire skills AND asmall, resource-constrained company to learn entrepreneurial skills providesbest background and complete skill set.

! Teams who have worked together before reduces risk of creating a newmanagement team.

“Mark do you think you have the rightexperience to be the CEO of this deal?.”

The Question?

The QuestionMark as the CEOA Review

! Some very limited entrepreneurial experience

! Knows the online gambling industry

! Knows the online gambling industry

! No entrepreneurial experience; questionable abilities to set priorities; identify HRrequirements; recruit a management team; manage a business “by the numbers”;etc.

! Overconfident “sales-guy” without recognition of challenges of starting a business

Positives

Negatives

The Bottom Line

! Entrepreneur may or may not be the CCEO at different stages of companydevelopment.

! Listen to the VC and assess if he/she has practical insights on this point.

“Please tell me about the technology andthe market you’re going after.”

The Question?

The QuestionThe Market OpportunityA Review

! None - Sorry

! “Gray” area legally; needs to be offshore and many investors in the fund would notbe supportive”.

! Completely unrealistic revenue and EBITDA forecasts. Defining revenues byassuming market share is an illusion; all start-ups start with zero market share.

! Greedy and arrogant

! Focused on making money personally – not building a business.

Positives

Negatives

The Bottom Line

! Build a business that solves a real business or consumer need, and the financialrewards will take care of themselves.

! Building a business is very hard; demonstrate confidence with an awareness ofthe risks.

“What segment of the market are youtargeting and what is the competition

doing in that market segment?”

The Question?

The QuestionMarket SegmentationA Review

! The online gambling market in Asia is large and potentially underserviced; these arenot games that most mos North American companies would typically “do first”.

! It isn’t clear that Mark has played Mah Jong or any of the other games he wants totarget, as his knowledge of the competition appears to be thin.

! Even if this were a relatively open market opportunity, Mark and the team appearto lack the cultural sensitivity which would almost certainly be required to succeed.

Positives

Negatives

The Bottom Line

! You have to know more than just what you’re doing! Try to know EBERYTHINGabout the market: segmentation & characteristics of each segment; competitorsand their strategies; key success factors; who has failed and why;movement ofkey managerial talent; etc.

“Can you describe the technologyarchitecture and whether any of your

technology could be considered proprietary?Have you looked at the intellectual property

estate around your technology?”

The Question?

The QuestionTechnology ReviewA Review

! None - Sorry

! No IP work at all

Positives

Negatives

The Bottom Line

! Understanding of IP estate is essential, both “positive” (“Do we haveanything patentable?”) and “negative” (“Does our invention infringe on anyexisting patents?”)

“How much capital do you needto get started?”

The Question?

The QuestionCapital RequirementsA Review

! At least they understand they need marketing money; many entrepreneurs assumetheir products will “sell themselves” based upon the sheer brilliance of the solution.

! Plan to complete software V1 and demonstrate viability before raising second roundof financing at (hopefully) a higher valuation.

! Frightening use of proceeds without project plan for software development

! Wasteful spending on the wrong expense items; this is 2007, not 1999.

! Unintended insult and arrogance (raising money in New York), implying that “thisdeal will get too big or you”.

Positives

Negatives

The Bottom Line

! Investors must see well-planned use of proceeds with spending “appropriate”to the deal.

! Amount of capital to be raised in Round 1 should finance achievement ofsignificant value creation step + at least 6 months at then-current burn rateto allow time for raising Round 2.

“What valuation are you putting on thedeal, and are you speaking with other VCs?”

The Question?

The QuestionOther VCsA Review

! Understands the process

! Consultation with others in management team undermines credibility, followedby blatant lying on getting another term sheet to attempt to obtain negotiatingleverage.

! Unrealistic timing

Positives

Negatives

The Bottom Line

! Never misrepresent ANYTHIING during the process; it undermines trust ineverything else.

“Isn’t online gambling illegal in Canadaand the US? How will you operate?

The Question?

The QuestionLegal Structure & DocumentsA Review

! Their plan MAY be legal, but clearly violates the spirit and intent of the gaming legislation andtax code.

! Their plan MAY be legal, but clearly violates the spirit and intent of the gaming legislation andtax code.

! Impossible to obtain legal opinions on legality and tax from credible sources.

! Deviation from “tried and true” convertible preferred share structure is a “red flag” toVCs; it always makes things more complicated, consumes time and is expensive to paperwith the lawyers.

! Structure makes it VERY difficult to sell to a third-party buyer (except another onlinegaming company) and very difficult to have an IPO.

Positives

Negatives

The Bottom Line

! Keep the structuring very simple.

! Use standard documents.