Where Economic Development Meets Venture Capital: Impact Investing Noa Simons, Executive Director Upstate Capital Association of New York

Agenda What is Venture Capital and Why Does it Matter? How does Venture Fit in the Capital Stack? Where does Venture Intersect with Econ Dev? Next Steps for Implementation It is our mission to make understanding funding options more straightforward, so entrepreneurs and executives can focus on the important work of building businesses across New York.

What is Venture Capital? Startup or growth equity capital, sometimes in form of debt, also called risk capital For new or growing businesses Investor gives funding to company and gets equity or rights to buy equity Most common in high growth technology industries like biotech and software Source: http://www.businessdictionary.com/definition/venture-capital.html It is our mission to make understanding funding options more straightforward, so entrepreneurs and executives can focus on the important work of building businesses across New York.

Capital Stack: How Businesses Are Funded Founder Equity Long-Term Debt (Secured, unsecured, senior, subordinate) Investor Equity (Private and public) Convertibles (Options, Warrants, etc.) Short-Term Debt (Trade credits, etc) Equity Debt The textbook definition is “the types and sources of capital funds invested in a business.” It is the sum total of the value of every share of actual stock, potential stock, and the different types of debt that can exist within a company. Source: http://chadjardine.net/blog/finan-6300/

Convertible debt / Preferred stock Risk, Cost & Ownership Risk Cost Founder Equity Investor Equity Short-Term Debt Long-Term Debt Asset-Based Lending Bank Venture Debt Angel / VC Entrepreneur Finance Company Senior Debt Mezzanine Debt Convertible debt / Preferred stock Common Stock Senior Secured Debt Higher Lower This chart describes who owns which piece of the Capital Stack, with highest risk and highest cost at the top. Entrepreneurs of new ventures take on the most risk at the highest cost Traditional banks are at the opposite end of the spectrum. They are in the business of not losing money, so they make loans that meet criteria designed to ensure they get their money back. They typically own senior debt. Economic development capital historically comes in somewhere in between - revolving loan funds are common, angel and seed capital are becoming more common through organizations like Launch NY and the Hudson Valley Startup Fund. Sources:Internal, https://www.slideshare.net/LighterCapital/how-to-get-funded-in-2017

Why Risk Capital Matters Venture capital broadly - and more specifically for our conversation, seed/angel capital - can generally be called risk capital - and it’s important because there are always more companies that seek it than there is money available to cultivate new companies. Source: http://accesstocapital.com/resources/startup-funding/

Impacting Investing for Economic Development Apply venture investing principles to local opportunities Example: Ben Franklin Technology Partners (31 years in PA) Example: Launch NY (6 years in Western NY)

Example: ECIDA & Athenex ECIDA loaned the biotech startup $200k, part of larger round - with warrants (option to buy stock) in contract Company paid back loan over time with interest ECIDA had a put option in the loan agreement to be able to sell warrants back to company ECIDA exercised put option when company had IPO and received $300k in addition to the $200k loan repayment Source: Steve Weathers, President and CEO, ECIDA

Principles of ECIDA Risk Capital Make investments for economic development purposes, primarily focused on new job creation, less focus on return on investment (ROI) Never be the first or only money in a deal Typically last to the table and fill the last gap of capital needed, under the same terms as the first investor Source: Steve Weathers, President and CEO, ECIDA

Next Steps Get law changed so local IDAs can invest in startups Develop a plan that aligns with your mission Consult with experts on best practices Contact me at noa@upstatecapital.org for more information

Appendix Good Venture Investment Good Venture Portfolio

Good Venture Investment Early-stage business with high growth potential (useful solution in a growing market segment) Great management team with execution ability Competitive advantage with long-term defensibility (intellectual property, traction with customers)

Good Venture Portfolio Well-considered investment thesis Strong pipeline of opportunities Multiple investments within portfolio Solid investment management practices