funding innovation: non-traditional risk capital april 17, 2014 mark lauinger director – tulsa...
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Funding Innovation: Non-Traditional Risk Capital April 17, 2014 Mark Lauinger Director – Tulsa Advisory Services [email protected]. Funding Innovation: Risk Capital Markets. Overview: Investment Landscape Sources & Trends – Angels & VC Funds Investment Pricing & Structuring - PowerPoint PPT PresentationTRANSCRIPT
Funding Innovation: Non-Traditional Risk Capital
April 17, 2014
Mark LauingerDirector – Tulsa Advisory Services
Overview:• Investment Landscape • Sources & Trends – Angels & VC Funds• Investment Pricing & Structuring• Summary i2E Capital Funds
Funding Innovation: Risk Capital Markets
Idea or Business?
“We’re selling $100,000 shares in an idea we plan to have after raising enough capital to think about it.”
Funding Innovation: Commercialization Stage
• Concept Bench scale/prototype• Pre-Seed Prototype/Beta customers• Seed Sales/Business Infrastructure• Early Expanding Sales Channels• Growth Profitability/High growth• Mature Quarter over Quarter
Profitability
Innovation Capital: The “Valley of Death”
A N G E L S
S E E D F U N D S
V E N T U R E C A P I T A L
G R A N T S
A C C E L -E R A T O R S
S U P E R A N G E L S
Yrs-Exit Typical Stage IRR Target ROI 6 Concept/Pre-Seed 66% 21.0 5 Seed 60% 10.5 4 Early 53% 5.5 3 Growth 47% 3.2
Source: “Business Angels”, Robert Keeley
Investor: Expected Rates of Return
Innovation Valuation/Total Investment Compatibility Analysis
Seed Early Expansion Later0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
6,1608,272
2,640528
1,596
4,672
5,5115,912
Angels Venture Capital
• US$ 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$
Mil
lio
ns
Early Stage Funding Profile
• 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
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, [email protected]
11
Over 100 (4)
51 to 100 (5)
25 to 50 (11)
Under 25 (30)
MT
WY
ID
WA89
OR
NVUT
CA958
AZ
ND
SD
NE
CO56
NM
TX94
OK
KS
AK
LA
MO
IA
MN
WI
IL IN
KY
TN
MS AL GA
FL
SC
NC
VAWV
OH
MI
NY195
PA152
MD- 57
DE
NJ- 62CT
RI
MA- 250
ME
VT
NH
ALASKA
HAWAII
2009 Deals
VC Geographic Coverage
Venture Capital:A Follow-on Business
Initial Investment
Linear (Initial Investment)
Follow-On Rounds
Linear (Follow-On Rounds)
19801981
19821983
19841985
19861987
19881989
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20120%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Initial Investment Linear (Initial Investment) Follow-On Rounds Linear (Follow-On Rounds)
• Strong capital efficiency a MUST• Staged funding/capital path a MUST
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
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
• 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
“And this is where therevenue comes out.”
Pre-Money Valuation Computation
Year 1 Year 2 Year 3 Year 4 Year 5Revenues $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 AOperating Profit % -123% 28% 47% 52% 52%
Investor Adjustment to EBITDA 50% BAdjusted EBITDA $4,970,718 C = A X B
Exit EBITDA Multiple 7 DExpected Exit Value $34,795,027 E = C X D
Investment $400,000 FRequired Return Multiple 21 G
Expected Value at Exit $8,400,000 H = F X G
Ownership % 24% I = H / E Business PlanValuation
Post Money Valuation $1,656,906 J = F / I $1,600,000 Pre Money Valuation $1,256,906 K = J - F $1,200,000
Valuation:Pre-Money $1,500Capital $500Post Money $2,000
% Ownership 25%Dividend Rate 8%
Stock Option:Pre-Funding Post Funding
Existing Stock Option Funding Funding Stock OptionFounder 1 40.0% 34.0% 25.5% 30.0% 25.5%Founder 2 40.0% 34.0% 25.5% 30.0% 25.5%Angel 1 20.0% 17.0% 12.8% 15.0% 12.8%Stock Option Pool 0.0% 15.0% 11.3% 0.0% 15.0%Angels-Current 0.0% 0.0% 25.0% 25.0% 21.3% Total 100.0% 100.0% 100.0% 100.0% 100.0%
Altered Pre-Money Valuation $1,853Percentage Impact 23.5%
Capital Raise / Stock Option Pool
Liquidation Preference:Exit Value $500 $2,000 $5,000 $10,000Liquidation Preference Investment $500 $500 $500 $500 Accrued Dividends/Interest (5 yrs.) $200 $200 $200 $200Liquidation Preference Payment $500 $700 $700 $700Distributable Equity $0 $1,300 $4,300 $9,300Investor Equity % 25% 25% 25% 25%Investor Equity Value $0 $325 $1,075 $2,325Total Investor Cash Return $500 $1,025 $1,775 $3,025 % Exit Value-Liquidation Preference 100.0% 51.3% 35.5% 30.3% % Equity-Cap Table 25.0% 25.0% 25.0% 25.0%Increased Effective Ownership Variance 75.0% 26.3% 10.5% 5.3%
Liquidation Preference Illustration
• The Numbers:— Interest Rate— Note Maturity— Conversion Discount— “Qualified” Next Equity Round— Cancellation Repayment Multiples
Convertible Note Valuation
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
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
Time
Profi
t
OK Angel Sidecar FundGrowOK
Seed FundStartOK
SeedStart-UpEarly
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
Immersion Program
• 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”
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
1/3rd co-investment match
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
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
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
Benefits:• Complements ability to secure incremental
bank financing• Non-Equity participation• Less Governance impact
Redeemable Preferred Equity
• 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
Thank YouMark LauingerDirector – Tulsa Advisory [email protected]