Transcript Oklahoma Seed Capital Fund i2E Investment Review Process

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
• Summary i2E Capital Funds
Idea or Business?
“We’re selling $100,000 shares in an idea
we plan to have after raising enough capital
to think about it.”
Funding Innovation:
Commercialization Stage
•
•
•
•
•
•
Concept
Pre-Seed
Seed
Early
Growth
Mature
Bench scale/prototype
Prototype/Beta customers
Sales/Business Infrastructure
Expanding Sales Channels
Profitability/High growth
Quarter over Quarter
Profitability
Innovation Capital: The “Valley of Death”
V ENTURE C APITAL
S UPER A NGELS
S EED F UNDS
A NGELS
GRANTS
A CCELERATORS
Investor: Expected Rates of Return
Yrs-Exit
6
5
4
3
Typical Stage
Concept/Pre-Seed
Seed
Early
Growth
IRR
66%
60%
53%
47%
Target ROI
21.0
10.5
5.5
3.2
Source: “Business Angels”, Robert Keeley
Innovation Valuation/Total Investment
Compatibility Analysis
Early Stage Funding Profile
US$ Millions
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Investment Stage
•
•
•
•
•
•
Angels
4,672
Venture Capital
1,596
6,160
5,511
8,272
5,912
2,640
Seed
Angel Investors 2009
US$ 17.60 billion
~57,000 deals
35% seed/startup
47% early stage
15% expansion capital
Approx. 259,500 individuals
Early
Expansion
528
Later
Venture Capital 2009
•
•
•
•
•
US$ 17.69 billion
~2,800 deals
9% seed/startup
26% early stage
65% later/expansion capital
• Total 794 firms (not all active)
Angel Capital Association
• 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
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
[email protected]
405-813-2418,
VC Geographic Coverage
WA
89
MT
ME
ND
VT
MN
OR
ID
SD
NY
195
WI
WY
MI
PA
152
IA
NE
NV
IL
UT
CO
56
CA
958
NH
OH
IN
OK
NM
NJ- 62
VA
MD- 57
NC
AK
SC
MS
TX
94
RI
KY
TN
AZ
CT
DE
WV
MO
KS
MA- 250
AL
2009 Deals
GA
Over 100 (4)
LA
FL
51 to 100 (5)
25 to 50 (11)
Under 25 (30)
ALASKA
HAWAII
11
Venture Capital:
A Follow-on Business
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
Initial Investment
Follow-On Rounds
Linear (Initial Investment)
Linear (Follow-On Rounds)
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0%
• Strong capital efficiency a MUST
• Staged funding/capital path a MUST
Types of Innovation Financings
There are two “predominant” financing
strategies: issuing Preferred Equity or
Convertible Debt with equity features
The two strategies have distinct advantages
and disadvantages
Preferred Equity
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 Valuation Factors
• 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
“And this is where the
revenue comes out.”
Pre-Money Valuation Computation
Year 1
$270,000
$70,000
$200,000
74%
$266,000
$32,000
$233,820
($331,820)
-123%
Revenues
COGS
Gross Profit
Gross Profit %
Development
Sales & Marketing
General & Administrative
EBITDA
Operating Profit %
Year 2
$2,900,000
$650,000
$2,250,000
78%
$130,000
$281,000
$1,016,394
$822,606
28%
Investor Adjustment to EBITDA
Adjusted EBITDA
50%
$4,970,718
B
C=AXB
Exit EBITDA Multiple
Expected Exit Value
7
$34,795,027
D
E=CXD
Investment
Required Return Multiple
Expected Value at Exit
$400,000
21
$8,400,000
F
G
H=FXG
Ownership %
24%
I=H/E
Post Money Valuation
Pre Money Valuation
$1,656,906
$1,256,906
J=F/I
K=J-F
Year 3
$9,300,000
$1,800,000
$7,500,000
81%
$98,000
$866,000
$2,165,728
$4,370,272
47%
Year 4
$14,400,000
$2,587,500
$11,812,500
82%
$120,000
$1,300,000
$2,929,353
$7,463,147
52%
Business Plan
Valuation
$1,600,000
$1,200,000
Year 5
$19,200,000
$3,300,000
$15,900,000
83%
$122,000
$1,960,000
$3,876,564
$9,941,436
52%
A
Capital Raise / Stock Option Pool
Valuation:
Pre-Money
Capital
Post Money
% Ownership
Dividend Rate
$1,500
$500
$2,000
25%
8%
Stock Option:
Founder 1
Founder 2
Angel 1
Stock Option Pool
Angels-Current
Total
Altered Pre-Money Valuation
Percentage Impact
Existing
40.0%
40.0%
20.0%
0.0%
0.0%
100.0%
Pre-Funding
Post Funding
Stock Option Funding Funding Stock Option
34.0%
25.5%
30.0%
25.5%
34.0%
25.5%
30.0%
25.5%
17.0%
12.8%
15.0%
12.8%
15.0%
11.3%
0.0%
15.0%
0.0%
25.0%
25.0%
21.3%
100.0%
100.0%
100.0%
100.0%
$1,853
23.5%
Liquidation Preference Illustration
Liquidation Preference:
Exit Value
Liquidation Preference
Investment
Accrued Dividends/Interest (5 yrs.)
Liquidation Preference Payment
Distributable Equity
Investor Equity %
Investor Equity Value
Total Investor Cash Return
% Exit Value-Liquidation Preference
% Equity-Cap Table
Increased Effective Ownership Variance
$500
$2,000
$5,000
$10,000
$500
$200
$500
$0
25%
$0
$500
100.0%
25.0%
75.0%
$500
$200
$700
$1,300
25%
$325
$1,025
51.3%
25.0%
26.3%
$500
$200
$700
$4,300
25%
$1,075
$1,775
35.5%
25.0%
10.5%
$500
$200
$700
$9,300
25%
$2,325
$3,025
30.3%
25.0%
5.3%
Convertible Note Valuation
• The Numbers:
—
—
—
—
—
Interest Rate
Note Maturity
Conversion Discount
“Qualified” Next Equity Round
Cancellation Repayment Multiples
Convertible Debt Financing
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
i2E Focus
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•
•
•
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High growth potential with competitive barriers
Clear product/market fit
Market size & customer accessibility
Capital efficiency & milestone driven model
Companies based in Oklahoma
i2E Managed Funds
•
•
•
Five separate funds totaling over $45 million
Funds designed to create a capital continuum
All Funds require co-investment
OK Angel Sidecar Fund
GrowOK
Profit
Seed Fund
Immersion
Program
StartOK
Growth
Time
Breakeven
Early
Start-Up
Seed
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
AccelerateOK Fund Profiles
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.
Fund Size ~ $3.1M
Investment Range ~ $100k - $250k
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 ~ $5.0M
Investment Range ~ $100k - $500k
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.
Fund Size ~ $5.0M
Investment Range ~ $750k - $1.0M
GrowOK Fund
• $5M Fund targeting 5-7 company investments
• Investment Company Characteristics:
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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
Redeemable Preferred Equity
Benefits:
• Complements ability to secure incremental
bank financing
• Non-Equity participation
• Less Governance impact
i2E Startup/Early Stage Funding
• 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
Thank You
Mark Lauinger
Director – Tulsa Advisory Services
[email protected]
918-877-0453