Von Allmen Center for Entrepreneurship FUNDING OPPORTUNITIES

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1 Von Allmen Center for Entrepreneurship FUNDING OPPORTUNITIES

2 Von Allmen Center for Entrepreneurship Services Clients Faculty, clinicians & staff Students Community entrepreneurs Business Planning Assess IP/commercialization potential Conduct market research & competitive analysis Assist in business plan development and financial analysis Connections Provide ongoing management assistance Refer clients to vetted service providers Facilitate access to incubator space Funding Develop funding roadmap Facilitate access to state and private funding resources Guide investor presentation development gatton.uky.edu/vace

3 Client Stories (UK) Startup Company Simplified Example UK patent expenses royalties equity progress payments Funding Opportunities Startup equity after repayment of patent expenses 40% inventors 20% inventors department(s) 20% inventors college(s) 20% UKRF

4 Startup Company Funding Creation Pre-Revenue Breakeven Growth Valley of Death Idea IP Protection Prototype Business Plan Beta Customers Sales/Marketing Paying Customers Growth Plan years

5 Funding Roadmap Creation Pre-Revenue Breakeven Growth Friends/Family/Founders SBIRs/STTRs & State Match State Investment Funds Crowdfunding Angel Investors Banks Strategic Partners Venture Capital Valley of Death Customer Sales Tax Credits Idea IP Protection Prototype Business Plan Beta Customers Sales/Marketing Paying Customers Growth Plan

6 Types of Financing Sources Grants Loans/Debt Investment/Equity Revenue Federal & state agencies Foundations Banks Credit cards Friends & family Angel investors Venture capital State programs Friends & family Customer Sales Pros No payback Non-dilutive Keep control Non-dilutive Keep control Shared risk Smart money Nothing better Cons Lengthy process Highly competitive Usually technology based Payback with interest Security required Dilutive Give up some control None

7 Funding Opportunities FEDERAL & STATE GRANTS

8 Federal SBIR/STTR Grants Small Business innovation Research (SBIR) Set-aside program for small business concerns to engage in federal R&D with potential for commercialization 2.5% of the extramural research budget for all agencies with a budget greater than $100MM per year Small Business Technology Transfer (STTR) Set-aside program to facilitate cooperative R&D between small business concerns and U.S. research institutions with potential for commercialization 0.3% of the extramural research budget for all agencies with a budget greater than $1B per year Total 2013: SBIR $1.1B, 3196 awards - STTR $130M, 447 awards

9 SBIR/STTR Participating Agencies SBIR/STTR DOD HHS/NIH NASA DOE NSF SBIR only DHS USDA EPA DOC/NIST DOEd DOT

10 SBIR/STTR Three-Phase Program Phase I Feasibility Study, Proof of Concept Awards normally do not exceed $150,000 for 6 months Phase II Full Research and Development Effort Awards normally do not exceed $1,000,000 for 2 years Phase III Commercialization Stage External Funding [non-sbir]

11 SBIR/STTR Major Differences PI Employment SBIR PI primary employment (51+%) must be with the small business STTR PI employment not specified; e.g., could be faculty Research Partners STTR requires at least 30% work conducted by partnering research institution; e.g., university or federal lab SBIR university partnership permitted, but not required

12 Kentucky SBIR/STTR Matching Program Only state to provide matching funds for both Phase I and Phase II federal SBIR/STTR grants Phase I Match up to 100% but not to exceed $150,000 Phase II Years 1 & 2 match up to 100% but not to exceed $500,000 Year 2 requires matching private funds Since program inception in awards totaling $43 million

13 Kentucky SBIR/STTR Assistance Program Phase Zero Small grant to assist Kentucky-based new and existing small businesses, and Kentucky's college and university faculty with the preparation of high-quality, competitive Phase I proposals for submission to participating federal SBIR and STTR programs. Phase Double Zero Small grant to assist Kentucky-based new and existing small businesses with the preparation of high-quality, competitive Phase II proposals for submission to participating federal SBIR and STTR programs. The applicant must have previously received a Phase I Federal Grant to be eligible for a Phase Double Zero grant

14 Example UK Companies Receiving SBIRs/STTRs Adaptive Intelligent Systems, YuMing Zhang Alkymos, Robert Yokel Bluegrass Advanced Materials, Zach Hilt & Tom Dziubla Brockman-Hastings, Todd Hastings Direct i2i, Ruigang Yang Hummingbird Nano, Scott Stephens MosquitoMate, Stephen Dobson Naprogenix, John Littleton NuForm Materials, Tom Robl Oraceuticals, Brad Huang ParaTechs, Bruce Webb Scout Diagnostics, Bert Lynn & Mark Lovell Signal Solutions, Kevin Donohue & Bruce O Hara Topasol, Uschi Graham W-Z Biotech, Dongfang Wang & Jay Zwischenberger

15 Funding Opportunities INVESTMENT / EQUITY

16 State Co-Investment Programs Kentucky has two state investment funds that co-invest with private investors in early-stage companies based in the Commonwealth. These funds typically follow the terms negotiated with private investors. The Kentucky Enterprise Fund (KEF) is a state-sponsored, venture capital-like fund that invests in Kentucky-based seed and early stage technology companies. Commonwealth Seed Capital, LLC, (CSC) is an independent fund that makes debt or equity investments in early-stage Kentucky business entities to facilitate the commercialization of innovative ideas and technologies. startups.kstc.com

17 Private Investors Angel VC Stage Seed / Early-stage Early-revenue & growth Investment (per deal) $25K - $100K ** $2-5 million Source of funds Personal Institutional & wealthy individuals Investment decision Individual Professional managers Investment type Equity Equity Control Limited Active ** Angel groups are common Larger investments as a group ($100K - $500K) Shared due diligence Diverse backgrounds of members Sidecar funds mitigate risks

18 Accredited Investors SEC restricts investments in private firms to the following: a natural person who has individual net worth, or joint net worth with the person s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 a bank, insurance company, registered investment company, business development company, or small business investment company a business in which all the equity owners are accredited investors a trust with assets in excess of $5 million

19 Regional Angel Groups & VCs Angel Groups & Early-Stage Investors Bluegrass Angels, Lexington Bluegrass Angel Venture Fund, Lexington Enterprise Angels, Louisville Kentucky Angels, statewide (new) Lincoln Trail Venture Group, Elizabethtown Louisville Angels, Louisville Queen City Angels, Cincinnati Yearling Fund, Louisville Angel Capital Association, national Venture Capital Funds Allos Ventures, Cincinnati Blue Chip Ventures, Cincinnati Chrysalis Ventures, Louisville Kentucky Highlands Investment, London River Cities Capital Funds, Cincinnati Triathlon Medical Ventures, Cincinnati National Venture Capital Association

20 Angel Investor Expectations Assume: portfolio of 10 investments with equal investments Total loss Singles Doubles Triples Home Run # Return 0 1x 2x 3x 10x Result: 2.4x ROI = 19% annual return over 5 years, 13% over 7 years

21 Sample Term Sheet Highlights Company Investment Security Valuation Dividend Closing Use of Proceeds Liquidation Preference Preemptive Rights Board of Directors XYZ LLC $500K Series A Preferred Participating Equity $1 million pre-money 6% paid at liquidity event or redemption July 1, 2014 initial close Per the business plan 1X with participation rights 1 st rights to invest in next financing round 5 person board 2 common, 2 preferred, 1 independent

22 Valuation The process of determining the current worth of an asset or company For a public company market capitalization; i.e., # of outstanding shares X share price For a startup company what the entrepreneur negotiates with investors Pre-money: the value before investment Post-money: value after investment (pre-money + investment) Investor equity: investment post-money

23 Valuation Drivers drive valuation up Revenue Experienced Team Intellectual Property Global Market Opportunity drive valuation down Regulatory Process Crowded Market Time to Market Sales Cycle

24 Valuation Methods Discounted Cash Flow based on financial projections Earnings Multiples based on public companies in same industry Comparable Transactions in acquisitions or IPOs Venture Capital Method estimated harvest value required return Berkus Method qualitative based on team experience, intellectual property, regulatory requirements, market size Bottom Line: In the end, valuation is what the entrepreneur is able to negotiate with investors typical startup company pre-money valuations range from $500,000 to $3 million.

25 Dilution Example Valuation Pre-money Raise Post-money Formation $0 Sweat equity N/A Series A $1,000,000 $500,000 $1,500,000 Cap Table (equity) Founders (common) Series A Investors (preferred) 100% N/A 66.7% 33.3%

26 Example UK Companies Receiving Angel / VC Investment

27 Funding Opportunities CROWDFUNDING

28 Crowdfunding Donation Based Donation-based crowdfunding gives people and creative projects the opportunity to raise money via online donations or pre-purchasing of products or experiences Kickstarter Projects must fit within certain categories - personal interests & charities are not allowed Average campaign is $5,000-56% of campaigns fail All-or-nothing funding policy Kickstarter takes 5% fee for successfully funded projects Indiegogo Looser guidelines almost any type of project Average campaign is $3,700-80% of campaigns fail Flexible funding allows creators to keep the funds they have raised Indiegogo takes 4% fee for successfully funded projects Experiment.com (new, UK policy being discussed) Strict focus on research projects All-or-nothing funding policy Experiment takes 5% plus 3% credit card fee for successfully funded projects Researcher/institution keeps IP

29 Crowdfunding Equity Based JOBS Act of 2012, biggest change to security laws in 80 years Allows non-accredited investors to invest in privately owned companies Greater of $2,000 or 5% if income < $100,000 10% of income if >$100,000, max of $100,00 in one year Sales can occur online through registered funding portals Company limited to $1 million raise in any 12-month period Has the potential to be a huge game-changer for small businesses SEC established rules October 2013 Too early to know how effective this will be Audit requirements on company financials Expectations of unsophisticated investors

30 Funding Roadmap Creation Pre-Revenue Breakeven Growth Friends/Family/Founders SBIRs/STTRs & State Match State Investment Funds Crowdfunding Angel Investors Banks Strategic Partners Venture Capital Valley of Death Customer Sales Tax Credits Idea IP Protection Prototype Business Plan Beta Customers Sales/Marketing Paying Customers Growth Plan