1

Prepared for

Technology Awareness Forum

January 19, 2005

Nanotechnology: A Look Into the Invisible Future

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Agenda

Venture Capital Industry Funding Environment for Nanotech

Is the VC Industry Interested in Nanotech Venture Firms Investing in the Category

What Venture Capitalists Look for Capturing the Attention of Venture Investors Summary

3

Venture Capital Industry

4

Venture Capital Investments($ in 000s)

Source: Thomson Venture Economics

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Est. $20.0 B

~ ~

$54.5 B

$105.9 B

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Uninvested Venture Capital“Overhang” still Significant

Source: SVB Estimates & Venture Economics

0

10

20

30

40

50

60

70

80

Billio

ns

$53.4 Billion

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Overhang AnalysisAvailable Cash/Investment Rate

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

High = 4.4x

Low = 0.6x

Median = 2.2x

Mean = 2.4x

Cur

rent

Ove

rhan

g / E

xpec

ted

Inve

stm

ent

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Capital Raised by Venture Funds

$-

$5,000

$10,000

$15,000

$20,000

Fund Raising(millions)

$3,700 $10,500 $17,000

2002 2003 2004(e)

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Early-Stage as a % of All Venture Capital

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Minnesota U.S.

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Venture Capital and Nanotechnology

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Deals / Companies / VC Firms2001 - 2004

0

20

40

60

80

100

2001 2002 2003 2004

No. Of Deals No.Of Company No.Of Firm

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Avg. per Deal / Company / VC Firm2001 -2004

0

2

4

6

8

10

2001 2002 2003 2004Average Per Deal Average Per Company Average Per Firm

($'s in Millions)

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Nanotech Investments by VCs2001 - 2004

247.3 31%

166.32 21%

179.3 22%

205.04 26%

2001 2002 2003 2004

Total Investments = 798.4 millions

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Good News

$200 Million Annually

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Not So Good News

Only 1% of Venture Investments

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Federal Funding Nano R&D

$116M in 1997to

$961M in 2004

An 8x Increase….

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Leading Nanotech Investors

Draper Fisher (10 deals) Harris & Harris group (9) Ardesta/MEMS Tech (4) NGEN Partners

(NextGen Partners) (4) Sevin Rosen (4) Zero Stage (4)

Alloy Ventures (3) Arch Venture Partners (3) CB Health Ventures (3) Eastman Ventures (3) Morgenthaler (3) New Enterprise

Associates (3) SBV Venture Partners

(Sigefi, Burnette & Vallee) (3)

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Top Ten > 25% of Market

0

50

100

150

200

250

300

350

400

450

No.Of Deal No.Of Company No.Of Firm

Total Top Ten Investment Total Investment

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Top Ten Venture Investor vs.Industry Average

0

5

10

15

20

25

Average Per Deal Average PerCompany

Average Per Firm

Average Top Ten Investment Average Investment

($'s in Millions)

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Which Way is the Wind Blowing?

Bulk of the Investments Tools

Distant Second Optics

Close Third Bio/Pharma; Materials; and, Solar/Power

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What Venture Capitalists Look For

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1954 Vision for Home Computer

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Old User Experience

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New User ExperienceTop 10 Wired 40

Google Amazon.com Apple Computer Genentech eBay

Samsung Electronics Yahoo! Electronic Arts Pixar Cisco Systems

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Mini Due Diligence ProcessIs it “Venture Capable”

Management Relevant domain expertise Fundable

Product/Service Explicit customer need Clear and compelling value

proposition (ROI)

 Market Size (> $100M) and

sustainable business drivers Target segment well defined

 Validation Customers, customers,

customers Maturity of the

distribution plan

 Deal Reasonable valuation and

terms Raising enough money to

hit meaningful milestones

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Management

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Investing In TalentFactors considered most important by investment professionals

(Weighted importance out of 100*)

Management Team

Market Sector

Business Model

Proprietary Product/Service

37

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20

19

Source: Spencer Stuart/NVCA VC-backed Leadership survey

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“As a founder, think hardest about the team. Are these the people I want to

be in trouble with for the next 5, 10, 15 years of my life? Because as you

build a new business, one thing’s for sure: you will get into trouble.”

John Doerr, Kleiner Perkins Caufield & Byers

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Product/Service

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Sustaining vs. Disruptive Technologies

Sustaining Technology Foster improved product performance

Disruptive Technology Bring to the market a very different value

proposition

The Innovator’s Dilemma – Clayton Christensen

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Sustaining vs. Disruptive Technologies

Sustaining Technology Improves

performance along an existing utility curve

A

BSustaining Technology

Cost

Performance

31

Sustaining vs. Disruptive Technologies

Disruptive Technology Moves the market to

new utility curve

A

Disruptive Technology

B

Cost

Performance

32

Market

33

Market Characteristics

Worth Winning $250 million

Sustainable Drivers Y2k

Well Defined Subsegment

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Validation

35

Seeing the FutureBeta Users, Customers and Distribution

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Deal

37

Return Expectations

5-10x your investment

or

30%+ IRR

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Sherpa Pocket Guide to Success

Quick Go vs. No Go Decision(4x in 5 Years = 32% IRR)

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Summary

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“It is not the strongest of the species that survives, nor the

most intelligent; it is the one that is most adaptable to change.”

Charles Darwin, British Naturalist

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Sherpa Partners, LLCSherpa Partners, LLC5050 Lincoln Drive - Suite 490

Minneapolis, MN 55436

Rick Brimacombwww.sherpapartners.com

Direct: 952-942-1074Main: 952.942.1070