Louisiana Venture & 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
[email protected]
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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
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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.”
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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
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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.
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
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.
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
Size
Deal
Volume
Industry
# of
Deals
Hubs
Deal
Terms
Key Components of Capital Market
Health
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Angel Capital Transaction Data
Deal Flow
Angel investment transactions under the AITC program rose for the 4th 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
46
44
45
40
40
35
30
26
25
25
20
20
15
22
13
10
5
0
2011
2012
Total Angel Credit Reservations
2013
2014
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.
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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.
Angel Tax Credit Reservations by Month
25
20
15
2011
2012
10
2013
2014
5
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.
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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
30
32
32
32
26
25
25
20
13
15
18
16
10
5
0
2011
2012
Total Companies the Applied for ATC
2013
2014
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.
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Angel Deal Volume:
Offering $ versus Closing $
$60,000,000
$50,530,300
$50,000,000
$41,628,445
$40,000,000
$30,000,000
$24,874,650
$23,935,499
$20,000,000
$10,000,000
$11,069,693
$10,611,000
$8,679,063
$8,532,945
$0
2011
2012
Total Offerings Reported to LED
2013
2014
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.
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Average & Median Deal Size
Angel Investor Tax Credit Program
$1,400,000
$1,263,258
$1,200,000
$1,000,000
$1,000,000
$956,717
$904,966
$816,231
$800,000
$690,000
$600,000
$500,000
$553,485
$543,989
$400,000
$400,000
$204,834
$200,000
$394,503
$455,500
$341,318
$237,045
$203,750
$0
2011
2012
2013
Average Size of Offering Reported to LED
Median Size of Offering Reported to LED
Average Size of Closing Reported to LED
Median Size of Closings Reported to LED
2014
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.
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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
P a g e | 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
P a g e | 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.
Total Number of Deals (GLC vs. NVCA/PwC)
30
25
20
15
10
5
0
2011
2012
GLC Database
2013
2014
NVCA
Table 7. Deal Flow—Total Deals in GLC Database vs.
National Venture Capital Association/PwC MoneyTree Report
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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.
$140,000
30
$120,000
25
$100,000
20
$80,000
15
$123,009
$60,000
10
$40,000
0.001
$20,000
$61,566
$31,101
$32,054
2011
2012
Number of Deals
Thousands
Deal Flow
Venture Capital
Deal Flow 2011-2014
Total Deal Volume
Number of Deals
5
$-
0
2013
2014
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.
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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.
Venture Capital Deal Size
Average and Median Offering and Closing Size
$7,000,000
$6,038,479
$6,000,000
$4,974,419
$5,000,000
$4,000,000
$2,798,463
$3,000,000
$2,000,000
$1,000,000
$1,943,784
$1,676,127
$887,500
$887,500
$2,136,943
$1,392,874
$1,000,000
$500,000
$1,783,695
$1,256,266
$575,000
$1,200,000
$901,400
$2011
Average Offering
2012
Average Closing
2013
Median Offering
2014
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.
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Entity Choice (LLC or Corporation)
Number of Deals
20
15
Limited Liability Company
10
Corporation
5
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.
Louisiana
Delaware
Alabama
Colorado
35%
53%
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.
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Other
Technology
4%
Retail
4%
2014 VC Financings by Industry
Food/Beverage
18%
Energy
9%
Consumer
Products
4%
Construction
4%
Residential
4%
Business
Services
9%
Biotech/Life
Sciences
35%
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.
Venture Capital Deals by Industry
2011-2014
Food/Beverage Consumer
Entertainment
6%
1%
Products
9% Construction
1%
Other
6%
Web/Software
28%
Manufacturing
5%
Energy
6%
Other/Technolo
gy
9%
Retail
1%
Biotech/Life
Sciences
19%
Business
Residential Services
3%
6%
Table 12. Industry Data (2011-2014)
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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
P a g e | 20
information or comment, please write us at [email protected] (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.
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