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Funding Innovation: Non-Traditional Risk Capital April 17, 2014 Mark Lauinger Director – Tulsa Advisory Services

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Presentation on theme: "Funding Innovation: Non-Traditional Risk Capital April 17, 2014 Mark Lauinger Director – Tulsa Advisory Services"— Presentation transcript:

1 Funding Innovation: Non-Traditional Risk Capital April 17, 2014 Mark Lauinger Director – Tulsa Advisory Services mlauinger@i2e.org

2 Overview: Investment Landscape Sources & Trends – Angels & VC Funds Investment Pricing & Structuring Summary i2E Capital Funds Funding Innovation: Risk Capital Markets

3 Idea or Business? “We’re selling $100,000 shares in an idea we plan to have after raising enough capital to think about it.”

4 Funding Innovation: Commercialization Stage ConceptBench scale/prototype Pre-SeedPrototype/Beta customers SeedSales/Business Infrastructure EarlyExpanding Sales Channels GrowthProfitability/High growth MatureQuarter over Quarter Profitability

5 Innovation Capital: The “Valley of Death” A NGELS S EED F UNDS V ENTURE C APITAL GRANTS A CCEL - ERATORS S UPER A NGELS

6 Yrs-Exit Typical Stage IRR Target ROI 6 Concept/Pre-Seed 66% 21.0 5 Seed 60% 10.5 4 Early 53% 5.5 3 Growth 47% 3.2 Source: “Business Angels”, Robert Keeley Investor: Expected Rates of Return

7 Innovation Valuation/Total Investment Compatibility Analysis

8 US$ 17.60 billion ~57,000 deals 35% seed/startup 47% early stage 15% expansion capital Approx. 259,500 individuals Angel Investors 2009 US$ 17.69 billion ~2,800 deals 9% seed/startup 26% early stage 65% later/expansion capital Total 794 firms (not all active ) Venture Capital 2009 Investment Stage US$ Millions Early Stage Funding Profile

9 Mission: Support the growth, financial stability, and investment success of its member angel groups and their investors 325+ angel groups 10,000+ investors 20 affiliates 49 states/provinces Angel Capital Association

10 SeedStep Angels  History – Started in 2009 with 3 members  Process – Alternating monthly “Screening & Presentation” meetings  Best Practices – Seminars/Workshops  Investments – 29 investments totaling over $4.5M  Growth – Metro & Rural areas with 46 members  Contact – Michael Kindrat-Pratt 405-813-2418, mpratt@i2e.org mpratt@i2e.org

11 11 Over 100 (4) 51 to 100 (5) 25 to 50 (11) Under 25 (30) 2009 Deals VC Geographic Coverage

12 Venture Capital: A Follow-on Business

13 Strong capital efficiency a MUST Staged funding/capital path a MUST

14 There are two “predominant” financing strategies: issuing Preferred Equity or Convertible Debt with equity features The two strategies have distinct advantages and disadvantages Types of Innovation Financings

15 Advantages: Longer-term capital matches lengthy commercialization timeline Keeps the Balance Sheet “right-sized” Aligns ALL parties Disadvantages: Requires investment pricing Typically requires more terms & conditions Preferred Equity

16 The Numbers: ─Pre-Money Valuation ─Aggregate Capital Raise ─Cumulative Dividend Rate ─Stock Option Pool ─Liquidation Preference Qualitative Factors: —Investment Comps —Management/Market/Capital —Investment Comps —Terms & Conditions Preferred Equity Valuation Factors

17 “And this is where the revenue comes out.”

18 Pre-Money Valuation Computation Year 1Year 2Year 3Year 4Year 5 Revenues$270,000$2,900,000$9,300,000$14,400,000$19,200,000 COGS$70,000$650,000$1,800,000$2,587,500$3,300,000 Gross Profit$200,000$2,250,000$7,500,000$11,812,500$15,900,000 Gross Profit %74%78%81%82%83% Development $266,000$130,000$98,000$120,000$122,000 Sales & Marketing$32,000$281,000$866,000$1,300,000$1,960,000 General & Administrative$233,820$1,016,394$2,165,728$2,929,353$3,876,564 EBITDA($331,820)$822,606$4,370,272$7,463,147$9,941,436 A Operating Profit % -123%28%47%52% Investor Adjustment to EBITDA 50%B Adjusted EBITDA $4,970,718C = A X B Exit EBITDA Multiple7D Expected Exit Value$34,795,027E = C X D Investment$400,000F Required Return Multiple21G Expected Value at Exit$8,400,000H = F X G Ownership %24%I = H / EBusiness Plan Valuation Post Money Valuation$1,656,906J = F / I$1,600,000 Pre Money Valuation$1,256,906K = J - F$1,200,000

19 Capital Raise / Stock Option Pool

20 Liquidation Preference Illustration

21 The Numbers: —Interest Rate —Note Maturity —Conversion Discount —“Qualified” Next Equity Round —Cancellation Repayment Multiples Convertible Note Valuation

22 Advantages: Delays investment (equity) pricing until more information is available Simpler investor “terms & conditions” Simplifies tax treatment Disadvantages: Usually shorter-term capital Typically contributes to “upside down” Balance Sheet Can deter follow-on investment Convertible Debt Financing

23 i2E Focus High growth potential with competitive barriers Clear product/market fit Market size & customer accessibility Capital efficiency & milestone driven model Companies based in Oklahoma

24 Time Profit OK Angel Sidecar Fund GrowOK Seed Fund StartOK Seed Start-Up Early Breakeven Growth i2E Managed Funds Five separate funds totaling over $45 million Funds designed to create a capital continuum All Funds require co-investment Immersion Program

25 15-20 week Program in Tulsa/OKC office 4-5 post idea stage companies targeting Software/IT Specialized services, training & networking Access up to $25K early capital investment Emphasis on identifying “product/market fit”

26 Oklahoma Seed Capital Fund $25M Fund targeting 4 - 8 investments/year Investment Company Characteristics: ⁻Breadth of Company commercialization stage: Concept thru Early ($0M - $.5M revenues) ⁻Advance technology component with strong competitive barriers to entry ⁻Product development, market validation, full market launch ⁻Targeted minimum twelve month funding runway ⁻Total Capital rounds of $0.2M - $1.5M with minimum 1/3 rd co-investment match

27 StartOK Accelerator Fund: This fund invests in companies that are in the earliest stages or startup stage that have not yet generated any revenue or completed a market launch. This capital will enable them to take their concept or product prototype into beta test phase with potential customers or first sales. AccelerateOK Fund Profiles GrowOK Fund: This fund seeks established companies with existing products or services. that are generating revenue in the market place. The fund will enable these companies to expand new products or services and allow even more growth in both revenue and employees. OK Angel Sidecar Fund: This fund overlays all four of the i2E companion funds, providing leverage and capital to angel investment in Oklahoma companies at any stage of the continuum of business development. This fund essentially doubles the size and scope of angel investment in Oklahoma because it requires a one-to-one co-investment from angel investors and/or angel groups. Fund Size ~ $3.1M Investment Range ~ $100k - $250k Fund Size ~ $5.0M Investment Range ~ $750k - $1.0M Fund Size ~ $5.0M Investment Range ~ $100k - $500k

28 GrowOK Fund $5M Fund targeting 5-7 company investments Investment Company Characteristics: ⁻Existing business infrastructure ($5M - $20M revenues) ⁻Diverse existing customers ⁻Strong business growth opportunity ⁻Market expansion OR innovative new product roll-out ⁻Slightly negative to preferred positive EBITDA ⁻Total Capital rounds of $1.5M - $3M ⁻Execution enables future additional bank debt

29 GrowOK Fund Investment Structures: ⁻Convertible Subordinated Note (Interest & repayment multiple) ⁻Convertible Preferred Stock (Dividend & conversion into equity) ⁻Redeemable Preferred Stock (Dividend & repayment multiple) Investment Parameters: ⁻$750k to $1M targeted investment size ⁻ 1:1 capital match (Equity and/or Debt) at the deal level ⁻Strong management team & business infrastructure ⁻Large addressable aggregate market ⁻Company does NOT need to be technology based ⁻Ability to pay ongoing interest/dividend

30 Benefits: Complements ability to secure incremental bank financing Non-Equity participation Less Governance impact Redeemable Preferred Equity

31 Public/Private Blended Capital Sources Advanced Technology / High Growth Co’s Leveraging Local Oklahoma Angel Investment Continuum Approach Towards Funding Share and Educate All on Availability and Nature of Capital Sources Spur Wealth Creation in Oklahoma i2E Startup/Early Stage Funding

32 Thank You Mark Lauinger Director – Tulsa Advisory Services mlauinger@i2E.org 918-877-0453


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