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To: Sarah Anderson

Re: ABC Venture III

From: Nick Faulkner

January 13th, 2015

ABC Venture is raising a third venture fund and is seeking LP commitments.
This memorandum will analyze the track record and summarize key performance
components of their prior two funds in an effort to determine if ABC Venture III
represents a suitable investment opportunity.

ABC Venture Overview:

ABC Venture has raised two venture funds, investing in 52 companies.
ABC Venture I, a 2005 vintage fund, made investments in 26 portfolio companies
totaling $166,541, with an average investment size of approximately $6,400. The first
fund focused its investments within the software, internet services, and mobile and
wireless industries. The fund predominantly invested in Series A rounds (occasionally
investing in Series B and C) and maintained an average portfolio company ownership
level of approximately 20%. To date, there have been seven exits within ABC Venture I
totaling $91,796.
ABC Venture II, a 2008 vintage fund, made investments in 26 portfolio companies
totaling $112,972, with an average investment size of approximately $4,300. The second
fund followed a similar sector allocation and weighting as the first, investing in the
software, internet services, and mobile and wireless industries. The fund again
predominantly invested in Series A round but increased exposure to Series B rounds by
10%. Average portfolio company ownership dropped from 20% to 17% in the second
fund. To date, there have been two exits within ABC Venture II totaling $14,823.

Fund Analysi

ABC Venture Fund Performance Statistics:

ABC Venture I
As stated above, ABC Venture I is a 2005 vintage year venture fund with 26 investments
totaling $166,541.
There have been seven successful exits in Fund I that generated a realized return of
$91,796, TVPI/DPI of 2.28x, and a gross IRR of 26.9%. The seven exits represented, in
aggregate, 24% of the total cost in Fund I and 37% of the total value.

Of the remaining 19 unrealized portfolio companies in Fund I, seven companies have

been written completely off and two have been written down. Ten unrealized portfolio
companies have a positive IRR and a TVPI of greater than 1.0x. The unrealized portfolio
represents 75.8% of the total cost of the fund and 62.8% of the total value.

On a fund level, ABC Venture I produced a TVPI of 1.48x, DPI of .55x, and a gross IRR
of 6.2%. While this seems like an underperforming fund given recent returns and trends
in the venture capital market, the IRR, DPI, and TVPI are fairly average for this vintage
year. According to a recent Cambridge Associates benchmark report published in June
2014, the pooled IRR for funds with a 2005 vintage is 7.29%, the TVPI is 1.40x, and DPI
is .50x. Top quartile performance for funds with a 2005 vintage show a 10.48% IRR and
lower quartile is -.79%. The S&P 500 and Russell 2000, both produced IRR returns of
around 9% for the same investment period.

However, taking a closer look at the June 2014 Cambridge report reveals that for the
information technology industry, IRR returns for that group of companies with a 2005
vintage is actually 24.96%. ABC Venture I invested heavily in information technology
and a significant number of the companies that were realized and remain unrealized are
IT investments.

ABC Venture II
ABC Venture II is a 2008 vintage fund that, having invested $112,972 across 26
companies, has had only two exits. The two exits, costing the fund $12,000, generated a
realized return of $25,752, a TVPI/DPI of 2.15x and an IRR of 38.6%. However, these
exits only represented 10% of the total cost and 17% of the total value in Fund II.

As of December 31, 2014, only seven of the 24 unrealized companies, representing 38%
of the unrealized fund value, have positive TVPI ratios and IRR returns. More than 62%
of the portfolio companies in ABC Venture II remain unrealized with TVPI ratios at or
below 1.0x. In aggregate, unrealized companies produced an IRR of 3.9% and a TVPI of
1.23x. With 24 of the companies still unrealized, it represents a substantial portion of the
funds value and cost, as seen below.

ABC Venture II, at the fund level, has produced a DPI of .23x, TVPI of 1.33x and a 5.9%
IRR. Comparatively speaking, ABC Ventures second fund has preformed very poorly to
other funds with the same vintage. According to the June 2014 Cambridge Associates
benchmark report, funds with vintages of 2008 generated pooled IRR of 17.05% and
averaged DPI and TVPI ratios of .32x and 1.59x, respectively.

Fund Analysis & Investment Recommendation:

There are several major risks and drawbacks of committing to ABC Venture III.
First, ABC Venture has produced returns from their prior two funds that, when compared
to peer funds with similar vintages, are average or below average. ABC Venture I
generated the highest returns of both funds, yet still only has average returns when
compared to all 2005 vintage funds. While Fund I had healthy returns on their realized
investments, most of the companies were realized shortly after their initial investment.
The majority of the companies in Fund I remain unrealized or have been written off and,
considering that the fund vintage is 10 years old, it is growing more improbable that the
unrealized companies will generate a timely exit and more probable that LPs will not
recover all of their initial investment. To date, Fund II has had very poor performance
with below average IRR, TVPI, DPI, and 24 of the 26 portfolio companies remaining
unrealized or written off. The majority of the unrealized companies in Fund II lack a
positive IRR and have a TVPI of less than or equal to 1.0x. This implies that the
companies have not increased their valuation since their initial investment and brings into
question the sustainability of the businesses since most of the investments in Fund II were
made five to seven years ago. Finally, given the high illiquidity and risk associated with
venture investing, the returns that ABC Venture I & II produced do not beat the market
on a risk-adjusted basis. The S&P 500 and Russell 2000 have returned IRR values of
16.93% and 17.43%, respectively, for a 2008 vintage. For fund returns that ABC
Ventures produced, an investor would be better off investing in the investment-grade debt
market which has much less risk.
Second, ABC Ventures has invested a majority of their capital into information
technology (internet services), software, and mobile and wireless companies. Returns for
these companies for fund vintages of 2005 and 2008 have been very strong. For example,
according to the June 2014 Cambridge Associates benchmark report, the tables below
show that when ABC Venture is compared by portfolio company industry, their fund
returns are very lackluster. With ABC Venture III raising a third fund, there is a very high
risk that the managers will continue to pick underperforming companies for investment.

Third, it is curious as to why ABC Venture II, with total investments of $112,972, is 30%
smaller than ABC Venture I, which has a total investment size of $166,541. Usually,
when a firm raises its second fund and has a strong LP backing, the GPs are able to raise
a similar sized fund (if not a larger one). It is concerning that ABC Venture has not been

able to do this for their second fund and brings into question their LP support,
performance, and cohesion as a team. Without any additional information, there could be
many reasons why their second fund is smaller, but given the performance to date, it
implies there might be a performance / management issue and that the current LPs lack
confidence in the team.
Finally, the GPs only sent fund performance data. Other information that would be
helpful to analyze this investment opportunity would include:

Percent of capital drawdown in Fund I and II from LP commitments

LP investor list to analyze quality of LPs that invested in Fund I and II
Fund manager(s) employment and exit history
Investment strategy
Employee turnover at fund
Business updates on unrealized portfolio companies
Financial data for portfolio companies
Cash flow for Fund I & II

Questions include:

What are the prospects regarding exits in Fund I & II for unrealized companies?
Why do so many unrealized companies in Fund II have a TVPI of 1x even though
their initial investment date was five to seven years ago? Are they really at a 1x or
should they be written down / off?
A 15% to 20% ownership in the portfolio companies is generally large enough
ownership level to request a seat on the board. Are you on the board on any of the
companies in Fund I or II?
What kind of support, other than monetary, do you provide your portfolio
How much have the fund managers, themselves, invested in the prior two funds?
Where are the majority of companies in Fund I& II located? Will this change in
Fund III?
What is the target size of Fund III? Have many LPs already committed?
Will Fund III invest in similar types of industries, rounds, etc.?
What mistakes have the managers learned from Fund I & II that will change the
performance in Fund III?
Would Cintrifuse be a strategic partner and LP? Or would we be a smaller LP and
have little influence?
Is ABC Venture a fund that we think would invest in Ohio River Valley
companies and provide meaningful value to them?

Without the information above, making a thoughtful investment recommendation is

difficult. However, based purely on the quantitative and performance metrics from ABC
Venture Funds I & II, ABC Venture III does not seem like a suitable investment
opportunity for Cintrifuse at this time.