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

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

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

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 • 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

5. Innovation Capital: The “Valley of Death” Venture Capital Super Angels Seed Funds Angels GRANTS Accel-erators

6. Investor: Expected Rates of Return 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

7. Innovation Valuation/Total Investment Compatibility Analysis

8. Early Stage Funding Profile US$ Millions Investment Stage • 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

9. 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

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

11. WA89 ME MT ND MN VT OR NH ID NY195 MA- 250 SD WI WY MI RI CT PA152 IA NJ- 62 NE NV OH IL DE IN UT CO56 WV VA MD- 57 CA958 MO KS KY NC TN AZ OK AK SC NM GA MS AL TX94 LA FL ALASKA HAWAII VC Geographic Coverage 2009 Deals Over 100 (4) 51 to 100 (5) 25 to 50 (11) Under 25 (30) 11

12. Venture Capital:A Follow-on Business

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

14. 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

15. 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

16. 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

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

18. Pre-Money Valuation Computation

19. Capital Raise / Stock Option Pool

20. Liquidation Preference Illustration

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

22. 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

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. 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 Seed Fund StartOK Immersion Program Profit Growth Time Breakeven Early Start-Up Seed

25. 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”

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 1/3rd co-investment match

27. AccelerateOK Fund Profiles 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. 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 ~ $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

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

31. 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

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