Louisiana Venture and Angel Capital Report

Louisiana Venture and Angel Capital Report Spring 2015 Graffagnini, A Law Corporation 127 Camp Street New Orleans, Louisiana 70130 504.265.9955 (p/f) http://graffagninilaw.com @GraffagniniLaw hello@graffagninilaw.com

Page 2 Executive Summary By Mark Graffagnini, President Graffagnini, L.C. ( GLC ) is pleased to release this year s Louisiana Venture and Angel Capital Report (the Report ), the third such report. This Report is our most exciting report to date. The 2015 Report examines a broad range of data collected about venture and angel capital financing deals in the State of Louisiana during the 2014 year. The Report continues to be the most comprehensive analysis of angel and venture capital activity in the state. Since the original release of the Report, investors, companies and policymakers have used the Report s findings as the benchmark with which to gauge whether companies starting and operating in Louisiana are able to find the private investment capital they need to start and grow their businesses. Angel Capital Market Since 2011, the Angel Investor Tax Credit ( AITC ) program has incentivized more than $33.8 million in angel capital financings for Louisiana businesses. These angel capital deals have been increasing in number since 2011, and the AITC program supports the financing of over 30 companies per year. In 2014, 32 companies raised over $8 million in reported AITC financings in 46 transactions. Companies located in parishes across the state have benefitted from the AITC program. Louisiana companies have faced a gap in angel capital availability over the last few years despite the AITC program s use. The AITC legislation sunsets, or expires, in July 2015. Data indicates that angel capital in Louisiana is increasingly organizing to deploy capital. Angel groups have formed in Baton Rouge, Lake Charles, New Orleans, and Shreveport, and are forming in Lafayette, Monroe, and Ruston, partly on the basis of the program s availability. If the AITC program is not renewed in July of 2015, Louisiana companies will likely lose a competitive advantage, as at least 22 other states have similar incentive programs favoring early stage capital. Some neighboring states also have policies encouraging the creation of early stage investment funds, so a loss or signal of lack of support to Louisiana companies would be especially negative at this time. Policy makers considering renewal of the AITC program may also wish to consider strengthening the program to do one or more of the following: (1) lengthen the time in which companies and investors may submit proof of investment to secure tax credits for angel capital deals; (2) reduce the amount of time in which an investor may claim tax credits against income tax liability; and (3) permit credits for investment through convertible debt financings of companies, which are not currently eligible for investment. Newly formed angel groups have invested millions of dollars in local companies from 2011-2014, some of which investments did not qualify for the AITC program (e.g., because the deals involved convertible debt). These market efforts should be incentivized by a renewal of the AITC program and a strengthening of its key provisions. A failure to renew the program would likely send a signal to the entrepreneurial and investment communities that the state does not support the efforts which have emerged recently to fill the angel capital financing gap that companies face. Venture Capital Market Louisiana companies raised more venture capital in 2014 than in any previous year examined. Louisiana companies raised over $123 million in venture/growth capital transactions. While a small number of large deals accounted for a significant portion of the growth in 2014 venture capital activity, the data suggests that the Louisiana venture capital market is growing. Other statistical sources dramatically underreport the level of venture capital activity in Louisiana. The data shows that both early stage and larger growth stage financing sources are increasingly becoming available to Louisiana

Page 3 businesses. However, there are only a small number of venture capital funds and firms in the state, and access to capital has largely been reserved to a relatively small number of highly performing companies or those with connections to large out of state investors. Controlling for a small number of large deals in 2013 and 2014 indicates that the venture capital deal market in Louisiana may be growing only slightly. Conclusions The early stage financing market in Louisiana is entering the beginning of a growth phase. We expect that capital may become better organized, and fast-growing companies seeking capital will have options for both large and smaller investments. However, this potential growth is fragile, and many companies still lack access to all of the capital they are seeking, especially early stage capital. Louisiana still lacks a large number of local venture capital firms. At the same time, although angel capital options appear to be organizing within the state, there appears to be a substantial gap in angel capital being sought by Louisiana businesses. Policy makers and advisors should reference key data points in crafting policy and financing strategy. As the early stage capital market in Louisiana enters what we hope is its own growth phase, policy and strategy must refer to an analysis of the market realities to succeed. Louisiana businesses require information on the capital market to succeed. This information provides policy-makers with a barometer of the success or failure of the state programs designed to help investors and businesses. Prior to the first Report s release, there was no statistical analysis of private financings in Louisiana. Without a framework to determine the state of capital availability, it is not possible to adequately measure whether companies are obtaining the capital they are seeking. Likewise, it is not possible to measure whether the financing strategies or terms used by companies seeking capital match up with investors expectations. Companies raising capital need a reference to what the market actually supports so that they are informed when they raise funds. Metrics are crucial to determine whether incentives such as the Angel Investor Tax Credit program are succeeding in spurring investment into Louisiana businesses. Armed with this information, investors and companies, alike, can align their expectations and close deals. Louisiana companies report conducting far more financings than other studies reveal. Investors are increasingly looking to Louisiana businesses for investment opportunities. Without reliable information about the number and size of financing deals in the state, venture capital funds and angel investors cannot gauge whether their investment dollars should be used in Louisiana versus opportunities in other states. Louisiana risks being overlooked in the competitive landscape for investments without information about the deal flow and volume in Louisiana. For these reasons, Graffagnini, L.C. hopes to provide the policy, entrepreneurial and investment community with a valuable resource in Louisiana s continuous quest to build a strong business environment. We hope that you find our Report useful and that it continues to serve as a basis by which Louisiana stakeholders can continue to measure their progress forward. Aided by knowledge, we can all stay one step ahead of the growth curve.

Page 4 Data Sources and Terminology The Louisiana Venture and Angel Capital Report analyzes several data sources: 1. Data obtained from the Securities Exchange Commission ( SEC ) on Form D; 2. Data from Louisiana s Department of Economic Development ( LED ) regarding the Angel Investor Tax Credit ( AITC ) program. Tax credits awarded under the AITC program are referred to in this report sometimes as AITCs ); 3. Proprietary deal research available to GLC, including internal deal databases; 4. Reporting from angel capital groups, venture capital funds and other hybrid funds investing in Louisiana companies; and 5. Documents used in deals, along with external information such as National Association of Industry Classification Codes ( NAICS Codes ) and other industry classification schemes. Angel Investor Tax Credit Program In 2011, Louisiana renewed the Angel Investor Tax Credit Program. The AITC program was only partially available for 2011, with applications beginning to be accepted for processing on September 1, 2011. To obtain angel investor tax credits, a Louisiana Entrepreneurial Business must apply for designation by LED. Once designated as a Louisiana Entrepreneurial Business, a company may reserve tax credits by filing a tax credit reservation application with LED. Companies generally make these reservations prior to their upcoming expected financings. In fact, in order to have any tax credits allocated to their angel investors, the reservation must take place prior to the investment. The angel investor tax credits go to the investor putting money into the company, not to the company itself. To actually receive an award of angel investor tax credits, the investor (or company) must submit proof of investment within 60 days of the reservation application. Then, LED issues a tax credit certification letter confirming the award of the credits for the investor. An angel investor is defined in the regulations as someone who is an accredited investor (e.g., high net worth or high income) under the SEC rules and who is not a venture capital investor. SEC and Form D Data Generally, the U.S. securities laws provide that a company raising money must register its securities so that they can be sold to outside investors or the public. Registration of securities is commonly associated with companies that are going public or conducting an IPO. Registration is expensive and complex. Section 4(a)(2) of the Securities Act of 1933, however, gives companies an exemption for selling their stock or membership interests in a private placement or in any deal not involving a public offering. For decades, the courts defined what a private placement was on a case-by-case basis. Eventually, the SEC created a safe harbor allowing companies to establish that they sold their stock and took investment in a private placement if they filed a Form D with the SEC. Companies filing a Form D are relying on Regulation D and certain Rules promulgated by the SEC to achieve this safe harbor. This safe harbor gives them a presumption that they have conducted a private placement as opposed to a public offering. For companies that plan to raise several rounds of financing, investor groups often ask the company to file a Form D to maintain this safe harbor presumption in the lead-up to going public or being acquired. Therefore, it is fairly standard practice for companies raising substantial sums of money (or multiple rounds of investment) to file a Form D when they raise money. For this reason, Form D filings indicate how many companies are raising money, how much money they are raising, the industry sectors and other valuable information. It is important to keep in mind, however, that many companies choose not to file a Form D, so the data analyzed from the SEC Form

Page 5 D filings necessarily underestimates the total financing outlook for Louisiana business. That said, the data does provide a very important picture of the actual fundraising efforts of companies, and there is very little, if any, substitute for this data set. Indeed, Form D filing data is one of the better publicly available sources of information for private equity financings, with the only alternative being privately reported survey data, which to date has not been widely available for the state. Offering and Closings When raising money by selling securities (like stock in a corporation or membership interests in a limited liability company), companies are requested to provide information about the equity or debt they are offering to investors in the financing transactions in exchange for money. In other words, companies offer their stock or LLC units for cash. Once they receive cash in the sale, the funds are considered closed. As used in this report, offerings refers to the amount of money companies were seeking from investors through the sale of their equity or debt. As used in this report, closings refers to the amount of money actually reported, received or irrevocably committed to companies in the offering. The relevant SEC rules require that companies make Form D filings within 15 days of the first offer or sale of their securities. Generally, the SEC data presented shows how much money companies raised within 15 days of the filing. It is likely that the actual amount closed in the financings examined is actually higher than what is reported. of that offering to report the total financing closed. In some cases, companies may make the Form D filing before they actually offer or sell their stock or units to investors. In these cases, the data might make some figures look as if a company has not been able to close on financing when, in fact, it may very well close on substantial sums of money from investors. These limitations are inherent in the data, but the data still provides valuable insight. With respect to the AITC angel investment data, companies are reporting how much money they closed within 60 days of the AITC reservation. So, if their fundraising efforts lasted beyond that 60 day window, then they may have raised more funds than what is reported. In reference to the AITC data presented, offerings and closings are defined the same way as explained above. Furthermore, in many cases, companies are seeking an indefinite amount of money. It is not possible to determine the size of an offering if the end fundraising amount is indefinite, so these types of deals are not represented in the overall offering and closing numbers. Few companies who make a filing at the start of an offering of indefinite size amend their filings at the end

Metrics Covered The report covers six major metrics of interest to those following private equity investments and entrepreneurial business in Louisiana. These metrics are as follows: 1. Number of Deals or Deal Flow the number of transactions or deals is derived by examining how many filings for Angel Investor Tax Credits were made by companies. In addition, the number of venture capital deals from a variety of sources were analyzed. In some cases, companies made more than one filing with these organizations, which indicates that they conducted more than one separate financing deal or transaction. 2. Deal Volume (also a measure of deal flow) total dollar value of financings that occur in any given year for all companies on which we have data. 3. Deal size a. Offerings refers to how much money companies were trying to raise. In other words, offerings refers to the total size of the deal that a company was targeting by offering its stock or other equity for sale to investors. b. Closings refers to how much money companies reported actually taking from investors. 4. Geographic Distribution the address of company locations was analyzed to determine whether there were geographical differences in the amounts and number of financing transactions within Louisiana. This was done on a parish basis. 5. Deal Terms a. State of organization the jurisdiction of a company s formation was determined to analyze any data on whether investors prefer companies to be formed in any particular state when making investments. State of organization does NOT indicate where a company principally operates its business. Delaware is the state of organization most commonly used in the United States for organizing a business, but many companies formed under the laws of Delaware often operate in their home states. b. Entity Type the Report analyzes data about the companies organizational entity types, for example, whether a company raising money was a limited liability company ( LLC ) or corporation to determine any trends regarding types of entities raising money. 6. Industry Segments classification of the various types of companies raising venture capital in a given year. By analyzing this diverse set of data, certain trends can be observed and potential lessons derived, which can in turn support the entire cycle and process of deal making and investment. In the sections below, we present the data in graphical form, along with some analysis and explanation. The result is a picture of the key components of a capital market s health: Deal Volume # of Deals Deal Size Deal Terms Industry Hubs Key Components of Capital Market Health

Page 7 Angel Capital Transaction Data Deal Flow Angel investment transactions under the AITC program rose for the 4 th straight year. Companies reported more total angel investment transactions to LED in 2014 than in the previous three years. Louisiana companies applied for the AITC program 46 times and received awards 25 times in 2014. The rise in both the number of AITC deals is a positive indicator that more angel investment transactions are taking place. Angel Capital Deal Flow: Angel Investor Tax Credit Reservations and Awards 50 45 40 40 44 46 35 30 25 20 26 20 22 25 15 13 10 5 0 2011 2012 2013 2014 Total Angel Credit Reservations Total Awarded Reservations Table 1. Deal Flow Number of Angel Investor Tax Credit Program Filings Notably, only about 50% (slightly more in 2014) of the transactions reserving or applying for angel investor tax credits receive an actual award of angel investor tax credits. In some cases, the investors submitting proof of investment simply did not qualify as an angel investor under the program. In other cases, the company did not qualify as a Louisiana Entrepreneurial Business, so the investment was not qualified for tax credits under the program.

Page 8 However, the data suggests an additional explanation for the difference in reservations versus awards of the credits. The data also indicates that some companies fail to submit proof of investment within the 60 day window provided to close the transaction earning the tax credit. We believe that some companies rush to file angel investor tax credit reservation applications at the beginning of each year and toward the end of each year, even if they have no actual investment committed (or likely to be committed) within the required time frame. This fear likely results from a misperception that the company may miss out on the yearly cap of angel investor tax credits ($5,000,000). So far, companies have not used all of the tax credits in any given year (other than in 2011 when pent up demand exceeded the partial year cap, which was lower). The strategy of rushing to file an application at the beginning of the year does not increase the likelihood of closing the investment during the 60-day proof of investment period. However, such a failure results in a penalty prohibiting the company from re-applying for AITCs under the program for an additional 90 days before it can reserve tax credits again. 25 Angel Tax Credit Reservations by Month 20 15 10 5 2011 2012 2013 2014 0 Table 2. Angel Investor Tax Credit Reservations by Month We believe this problem relates less to a failure of policy than to an information gap. Companies and their advisors should more closely consider optimal timing and financing strategy with respect to when AITC reservation applications are filed with LED. Companies may benefit from a longer period of time in which to submit proof of investment to LED, and there are current proposals to amend the AITC legislation and program rules to provide for a longer time frame. However, if providing companies with a longer time period in which to submit proof of investments results in companies reserving credits when they do not have investors lined up, then companies who do have deals ready to close will suffer. Any change to current rules must balance these considerations.

Page 9 We have noticed that the proportion of individual companies successfully applying for credits under the AITC program is increasing, with 32 unique companies successfully receiving 25 tax credit awards in 2014. This supports our view that the AITC program is working for wellinformed companies and advisors. We believe educational efforts have increased awareness of the 60-day window in which to submit proof of investment. Angel Investor Tax Credit: Companies that made Reservations and Received Credits 35 32 32 32 30 25 20 15 26 13 16 18 25 10 5 0 2011 2012 2013 2014 Total Companies the Applied for ATC Total Credits Awarded Table 3. Deal Flow Unique Companies under Angel Investor Tax Credit Program Deal Volume Table 4 shows a general increase in total angel capital deal activity from 2013. After a decline in 2013 from the high in 2012, companies sought to raise approximately $41,628,445 in angel capital transactions under the AITC program in 2014. However, companies reported closing only around $8,532,945 (i.e., in the bank) within 60 days of the tax credit application. This total dollar volume closed decreased slightly compared to 2013. Table 4 presents information on the total deal volume under the AITC program. The overall trend on closing volumes appears to be on a downward trend. Based on several years of data now at hand, it appears that there is a funding gap in the angel capital market. In other words, companies are seeking far more investment under the AITC program than appears to be available to them within 60 days of filing their tax credit reservations. Again, it is possible that companies are receiving investment dollars beyond the 60 day proof of investment period or that certain larger investors do not qualify for the program, but the angel capital gap in Louisiana appears substantial based on the figures examined. We believe it unlikely that companies are actually raising roughly $33 million in additional angel capital after the 60-day proof of investment period.

Page 10 $60,000,000 $50,000,000 $40,000,000 Angel Deal Volume: Offering $ versus Closing $ $50,530,300 $41,628,445 $30,000,000 $20,000,000 $10,000,000 $24,874,650 $10,611,000 $11,069,693 $23,935,499 $8,679,063 $8,532,945 $0 2011 2012 2013 2014 Total Offerings Reported to LED Total Closings Reported to LED Table 4. Deal Volume Angel Investor Tax Credit Deal Offerings and Closings Deal Size Table 5 below examines the average and median offering and closing size, which reveals additional information about the characteristics of the market in Louisiana. As opposed to the total size of deals and number of deals occurring, this information provides insight about the sizes of individual deals on an average and median basis. Companies and investors may find this information useful when considering how large a financing to seek under a program like the AITC program. For example, if a company is seeking such a large angel investment round that it would be an anomaly in the marketplace, it may want to reconsider its financing strategy. Likewise, if new or interested angel investors are considering investing in a deal or set of deals, then they may find information useful about the average and median deal size before they invest.

Page 11 Average & Median Deal Size Angel Investor Tax Credit Program $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $956,717 $816,231 $690,000 $500,000 $1,263,258 $1,000,000 $904,966 $553,485 $543,989 $400,000 $455,500 $394,503 $341,318 $204,834 $203,750 $237,045 $0 2011 2012 2013 2014 Average Size of Offering Reported to LED Average Size of Closing Reported to LED Median Size of Offering Reported to LED Median Size of Closings Reported to LED Table 5. Deal Size Average and Median AITC Closings, by Year Average closing size declined slightly in 2014 compared to 2013, but median closing size rose slightly in 2014 compared to 2013. The data shows a general downward trend in average and median closing size, even as average and median offering size has fluctuated slightly. When read in conjunction with the data in Tables 1 and 2, many companies appear to be conducting their financings in tranches, closing relatively smaller rounds when their investments are basically secure. The absolute dollar amount of investments and the number of companies applying for credits under the AITC program have been relatively constant over the past two years, so a higher number of smaller, individual closings under the AITC program appears to be a reasonable explanation of these trends. In late 2011 and early 2012, there were at least two financings of which we are aware that were larger than a typical angel investment round but that still qualified for an award of AITCs to the investors in those deals. We believe those very large early stage financings in late 2011/early 2012 partially explain the relatively higher average and median closing sizes for 2011 and 2012. Therefore, it may still be too early to classify the relatively smaller average and median numbers since 2012 and 2013 as a negative trend rather than a strategy aimed at maximizing the chances of securing tax credits under the AITC program. Geographic Distribution of AITC Data Table 6 provides a breakdown of the total dollar amount of offerings conducted under the AITC program by parish for the period 2011-2014.

Page 12 West Baton Rouge $150,000 Rapides 0% $1,727,500 5% Lafayette $100,000 0% St. Tammany $989,000 3% Caddo $4,600,045 12% East Baton Rouge $8,320,400 21% Orleans $23,005,756 59% Table 6. Geographic Distribution Size of AITC Investments by Parish, by Year We believe that it is important that the entire state continue to support entrepreneurial businesses and investors in entrepreneurial businesses for the long-term health of Louisiana businesses. Additionally, we think it is important that investors and companies pursue a financing strategy that includes opportunities both within and outside of their primary locations in the state to ensure a better chance of success at fundraising. Greater informational campaigns in underrepresented parishes may be needed to boost access to the program if it is renewed. AITC Transfers/Market Liquidity Tax credits under the AITC program are transferrable. The AITC secondary market remains very illiquid to date, however. Very few transfers of AITCs have been reported to LED or the Department of Revenue. Many of the angel investors holding AITCs express a desire to monetize their credits to recoup some of the value of their investments in many cases, so that they can use those funds to invest in other companies. However, angel investors have found it difficult to realize significant recoupment of their investment by transferring the angel investor tax credit. In addition, there are several individual investors who hold AITCs who may not be familiar with the transfer process. At the same time, large institutional tax credit buyers have so far shied away from purchasing AITCs from individuals because the market is fragmented, with hundreds of individual investors holding relatively small amounts of tax credits. In addition, the current AITC program does not allow a holder of the credit to claim the entire 35% credit in the year of the investment. Rather, investors must wait 24 months after the year of the investment; and even then, they may only take a credit equal to 7% of their total investment each year for a period of 5 years before the entire 35% tax credit becomes available. This makes it even more difficult for individual investors to monetize their AITCs because they may need to sell their credits in tranches divided out by year (7% each year they may count against income taxes), so they are unlikely to be able to transfer these credits without tax credit

Page 13 professionals. For these reasons, some angel investors (and companies) express that they would like the program to better allow them to realize the 35% credit sooner so that they can deploy that capital into new companies. Efforts have been made to pool the AITCs that have been issued to date to increase the interest of institutional buyers and lessen the transaction costs associated with individuals attempting to sell their credits. Policy-makers may want to consider changes to the AITC program to make credits refundable or more easily transferred or claimed to help alleviate the relatively illiquid AITC tax credit market. This would benefit investors and companies by allowing angel investors to invest in a greater number of companies seeking capital. This also allows investors to diversify their risks. Other Significant Angel Capital Developments In addition to data obtained from LED, we have observed and have been provided with other significant data on the angel capital market. In last year s Report, we noted that several grassroots or market changes were occurring. We can now confirm that angel investors across the state are in the process of organizing into networks, funds and other organizations in order to more efficiently deploy capital. Since last year s report, the NO/LA Angel Network, Inc. has been organized and become active, with over 90 members. Innovation Catalyst and its Catalyst Fund have formally been announced and are beginning to evaluate investment opportunities. New Louisiana Angel Fund 1, LLC has recently raised $1.5 million of a $2.5 million fund (which amount may be larger at the time of publication). Additional groups, such as South Coast Angel Fund, are raising additional funds. New Orleans Start Up Fund, Inc. and its affiliate, PowerMoves.Nola, continue to be active investors in angel deals. Additional groups may also be forming. We are aware of approximately 12 formal early stage investment networks or funds already active and in existence across the State of Louisiana. There is a significant amount of angel investment that is happening for which the AITC program is not available. For example, investments in convertible debt securities are not currently eligible for tax credits under the AITC program, despite the fact that such investment structures have become one of the preferred structures for angel capital investments. As a result, the activity currently occurring under the AITC program does not represent the entirety of the angel capital market, and the AITC program is not reaching many deals. For example, data from angel networks and small angel funds in the state indicate that well over 200 individual companies have applied to become part of the various deal pipelines or processes in place. To our knowledge, these angel networks or funds have invested over $2 million in approximately 11 companies from 2013-2014, some of which investments did not qualify for the AITC program (e.g., because the deals involved convertible debt) and are not represented in the data above. Further, there are a number of early stage angel capital organizations that are non-profits or that deploy state grant funds that are not included in the AITC program data above. When the amounts invested by these groups are added to the totals above, the actual amounts raised by early stage businesses is higher than reported to LED. The degree to which the various groups will collaborate on or syndicate deals is not yet known, but early indications make it reasonable to believe that in-state syndication of larger angel capital deals is becoming more possible. The challenge for companies raising capital from formal organized angel groups while only a small number of sources exists will be maintaining viable options if particular angel organizations pass on the investment opportunity, or if they determine that there may be better investment partners for their particular opportunity. Too few investment options for Louisiana businesses may have the result of lowering the amount of overall investment activity. However, consolidation of capital and greater investor education

Page 14 through more organization may provide a much needed boost to fill the investment gap companies currently face. Continued Viability of the AITC Program The AITC program is scheduled to sunset legislatively in July 2015. It is not clear whether the AITC program will be renewed. However, economic development organizations, angel groups and companies in the four corners of the state appear to support the program. A coordinated effort is currently underway to renew the program and strengthen it. Our research suggests strongly that the AITC program should be renewed and even strengthened. As angel funds and groups of various types begin to consolidate capital to evaluate investment opportunities, many have made the continued existence of the AITC program a key component of their investment strategy. The AITC program has helped Louisiana companies raise over $30 million in angel capital since 2011. This is a significant amount of much needed capital for these businesses. Venture Capital Deal Climate Deal Flow Venture capital activity jumped significantly in total deal volume in 2014 compared to previous years, but total number of transactions remained the same as in 2013. Other reports such as the PwC/National Venture Capital Association ( NVCA ) report continue to report far fewer venture capital deals than we have determined that Louisiana companies make each year. As we noted last year, we believe this is because the NVCA does not include certain deals that are included in our statistics either for policy reasons or because their members are not represented in those transactions. Table 7 demonstrates the wide disparity, with GLC recording 25 deals in 2014 and the NVCA reporting only 4 deals. 30 25 20 15 10 5 Total Number of Deals (GLC vs. NVCA/PwC) 0 2011 2012 2013 2014 GLC Database NVCA Table 7. Deal Flow Total Deals in GLC Database vs. National Venture Capital Association/PwC MoneyTree Report

Page 15 Deal Volume Louisiana companies raised over $123 million in 2014, the highest in several years, basically doubling the amount raised in 2013. The number of deals remained relatively stable compared to 2013, with 26 individual venture capital transactions. Table 8 below lists the total number of venture capital deals in the state, along with the total volume of investment deal activity in the state. Venture Capital Deal Flow 2011-2014 Deal Flow Thousands $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $123,009 0.001 $61,566 $31,101 $32,054 30 25 20 15 10 5 Number of Deals Total Deal Volume Number of Deals $- 2011 2012 2013 2014 0 Table 8. Deal Flow Total Number of Deals & Offering Amounts. The notable jump in 2014 in the total volume of venture capital offerings occurred because of a small number of very large deals. If the largest deals are excluded, then the total amount of deal activity declined from approximately $61.5 million in 2013 to approximately $33 million in 2014. However, the total deal volume would represent a slight increase over 2011 and 2012 if the two larger transactions are excluded from the analysis, and it would be higher than 2013 if the largest transactions in 2013 were excluded. We are aware of several deals in the rage of $50 million underway in 2015 and we are familiar with other large transactions in the market, so we anticipate that large financing transactions will continue into the future. Large growth financings appear to be increasing in number in Louisiana. The data indicates, therefore, that both smaller size, earlier stage venture capital transactions are taking place, and much larger growth financing transactions are taking place for more established companies. Healthy ecosystems tend to exhibit this type of behavior in varied deal sizes. Deal Size Table 9 provides the average and median offering and closing amounts of venture capital deals from 2011 to 2014. Both the average offering and closing size increased in 2014 substantially. The median offering size decreased slightly while the median closing increased substantially.

Page 16 Louisiana companies are doing venture capital deals of various sizes. Where it may have been thought that Louisiana companies do not have access to substantial amounts of capital, it appears that at least some large institutional investors are entering the Louisiana venture capital market with greater frequency. The largest investors, however, continue to come from outside of Louisiana, as only a small number of venture capital funds call Louisiana home at this point. Several large venture capital funds located out of state continue to express strong interest in the Louisiana market to GLC. $7,000,000 $6,000,000 $5,000,000 Venture Capital Deal Size Average and Median Offering and Closing Size $6,038,479 $4,974,419 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $- $2,798,463 $1,943,784 $2,136,943 $1,676,127 $1,783,695 $1,392,874 $887,500 $1,000,000 $1,256,266 $1,200,000 $901,400 $887,500 $500,000 $575,000 2011 2012 2013 2014 Average Offering Average Closing Median Offering Median Closing Table 9 Deal Size: Average and Median Deal Sizes Deal Terms The choice of which entity type a company should adopt is a complex decision beyond the scope of this paper. Venture financings have a number of terms that are beyond the scope of this Report. The data for 2013 and 2014 reversed what looked like a trend in 2011 and 2012. Companies raising venture capital in 2013 and 2014 were more often organized as limited liability companies than corporations in 2013 and 2014. We believe this indicates that the types of deals in the past two years included investment groups that could not be strictly categorized as venture capitalists in the Silicon Valley sense of the term and that likely at least some of these investment groups have private equity financing characteristics.

Page 17 20 Entity Choice (LLC or Corporation) Number of Deals 15 10 5 Limited Liability Company Corporation 0 2011 2012 2013 2014 Table 10. Deal Terms Entity Type (Corps vs. LLCs) From 2011 to 2014, more companies have been organized under Louisiana law (either LLC or corporations) than under Delaware law. This shift largely occurred in 2013 and 2014 due to a number of large transactions with involving limited liability companies. 35% 53% Louisiana Delaware Alabama Colorado California Florida Pennsylvania South Carolina Texas Table 11. Deal Terms State of Organization Industry Data Investment in Biotech/Life Sciences related companies grew by 3% in number of deals conducted. Food/Beverage grew by 6% in 2014 over 2013. Energy deals declined by 9% in 2014. Although we originally expected energy related deals to grow, it is possible that macroeconomic trends exerting downward pressure on oil prices contributed to the decline in the number of energy related deals in 2014. Table 12 provides a view of the industry trends we observed in 2014.

Page 18 Other Technology 4% Retail 4% Business Services 9% 2014 VC Financings by Industry Energy 9% Residential 4% Biotech/Life Sciences 35% Food/Beverage 18% Consumer Products 4% Construction 4% Other 9% Table 11. Industry Data (2014) Biotech/Life Sciences, Web/Software, Consumer Products and Food/Beverage are the strongest 4 discernible industries in terms of number of deals conducted in 2014. Energy and Biotech/Life Sciences have seen the greatest total volume of investment dollars over this period. Most striking for 2014 is that there were no major venture capital deals that could be primarily categorized in the Web/Software space. Since 2011, there has been a strong downward trend in the number of Web/Software companies being funded in Louisiana, down from a high of 49% of deals in 2011 to virtually none in 2014. The data do not suggest any particular factors causing this decline, and as the next data set shows, Web/Software still comprises the single largest financing category overall in the 2011 to 2014 period analyzed. Other/Technolo gy 9% Venture Capital Deals by Industry 2011-2014 Manufacturing 5% Energy 6% Entertainment Food/Beverage 1% 6% Web/Software 28% Retail 1% Biotech/Life Sciences 19% Residential 3% Table 12. Industry Data (2011-2014) Consumer Products 9% Construction 1% Other 6% Business Services 6%

Page 19 Based on these categorizations and the available data, Web/Software/Internet and Biotech/Life Sciences companies comprise the most identifiable industry sectors in the information we observed. Financings in the Food/Beverage, Consumer Products and Energy categories are likely to remain strong based on recent trends, and we note a strong grassroots movement toward supporting Food/Beverage ventures, which is a perhaps a natural fit for Louisiana. Conclusion Data on venture and angel capital financings show that Louisiana capital markets continue to grow. Louisiana companies successfully broke the $100 million mark for growth financings for the first time since we began compiling statistics. Angel Investor Tax Credit program data indicates that a larger number of companies are seeking and obtaining angel tax credits (and, hence, funds from investors). There appear to be a variety of smaller capital deals and larger capital deals available for companies in Louisiana. Nonetheless, the angel capital data shows that there is a mismatch between the total amount of money sought by companies in Louisiana and the available angel capital. The data does not provide evidence of causation on this point. The venture capital data shows that the total deal volume in Louisiana remains fairly consistent if one excludes the largest deals in a given year. Louisiana still lacks a large number of local institutional investors interested in the risk profile of many start-up or emerging companies. Despite these limitations, we believe that companies will continue to raise large growth financings from investors who are becoming more active in the Louisiana market. At least some data indicates that they have been able to access larger institutional investors to sustain their growth. Policy-makers, advisors and entrepreneurs should continue to evaluate the state of the angel and venture capital market in Louisiana as it enters its own growth and development stage. Policies which continue to promote business and investment will remain an important part of the overall strategy if Louisiana is to remain competitive in attracting growing businesses. This edition of the Louisiana Venture and Angel Capital Report is the third such effort to gauge the health of Louisiana s emerging businesses with strong data metrics. Very truly yours, GRAFFAGNINI, L.C. Acknowledgments Graffagnini, L.C. would like to thank Samuel Peake for his invaluable research contributions to this project. Without his assistance and contributions, this report would not have been possible. Sam has a B.S. in Environmental Biology from Beloit College and an M.B.A. from Tulane University. Sam is the founder of =if, LLC, a financial modeling and consulting business serving entrepreneurs and investors. He formerly worked on the commercialization team at the New Orleans BioInnovation Center as the Emerging Environmental Fellow, and also provided commercialization support to dozens of companies in the life sciences and biotechnology spaces. Graffagnini, L.C. would also like to thank its many sources of proprietary deal information, without whose support this endeavor would also not be possible. If you would like to contribute

Page 20 information or comment, please write us at hello@graffagninilaw.com (emails may not receive reply). DISCLAIMER: The Louisiana Venture and Angel Capital Report does not provide legal advice. No party should act or refrain from acting based on any information contained herein. All information is provided as is without warranty and should not be relied upon without consulting the appropriate advisor. 4837-5867-6002, v. 1