ETF Applicant Workshop Presentation

Texas Emerging Technology Fund

February 24, 2009

Agenda• Texas Emerging Technology Fund (ETF) Overview

• CenTex RCIC website: www.centexrcic.org

• Commercialization (Subchapter D) Eligibility Criteria

• Funding Structure

• Application Process

• Question and Answer Session

Texas Emerging Technology Fund Overview

• Expedite innovation and commercialization of research

• Increase higher education applied research capabilities

• Attract, create, or expand private sector entities that will promote a substantial increase in high quality jobs

• Keep emerging technologies in Texas

Purpose of HB 1765 2005 Legislation of TETF

• Aerospace

• Biotechnology, medicine, & life sciences

• Information & Computer Software Technology

• Defense

• Energy, Clean Energy & Manufactured Energy Systems

• Nanotechnology

• Micro-electro mechanical systems

• Petroleum Refining & Chemical Processes

• Semiconductors

• Other pursuits as determined by leadership

Defined “Emerging Technologies”

Think investment award, not grant- Investment in the form of equity or a convertible note

Priority for Funding - An emerging technology industry participant is eligible for funding if the activity to be funded:

1. will result in the creation of high-quality new jobs in this state, immediately or over a longer period; or

2. Has the potential to result in a medical or scientific breakthrough or a breakthrough in the area of clean energy

Legislative Changes - HB 1188 2007 Legislation of TETF

HB 1765 - Fund I

Fund has three different components

Research Superiority (F) : $50M

Research Matching (E) : $50M

Commercialization Grants (D): $100M

Enabling Legislation

HB 1188 – Fund II 20%- $37m

10%- $18.5m

70%- $129.5m

Note: Funding for Commercialization Grants has increased from Fund I

Categories of Funding

• Commercialization Awards (Subchapter D)• Requests typically $1 to $2.5M (max request - $5M)• Pre-seed requests $250k, 4 tranches, $1M allocation per

awardee

• Research Grant Matching Awards (Subchapter E)• Matches non-State grants to non-profit in consortium

• Research Superiority Awards (Subchapter F)• Help public universities attract world-class researchers

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• Subchapter D processed by RCICs• Subchapter E & F processed by Governor’s Office

©

2004

“The Gap”

• Central Texas Regional Center of Innovation and Commercialization selected as 1 of 8 RCICs– Responsible for 15-county region in Central Texas

• Extensively use volunteer evaluators & business experts

• Promote ETF awareness in their region• Solicit and screen applications for ETF funding

– Commercialization Grants (Subchapter D)

• Recommend best regional applicants to State• Provide assistance to awarded companies

Regional Centers

Regional Map

www.centexrcic.org

• Primary ETF information source for CenTex RCIC region: Bastrop, Bell, Burnet, Caldwell, Coryell, Falls, Fayette, Hamilton, Hays, Lampasas, Lee, Milam, Mills, Travis and Williamson counties of Texas.

• Document downloads:– Application forms, Guide to Application, Workshop presentation– Summary of Deal Terms, Sample Investment Unit agreement,

Sample Award and Security agreement, 9-step Due Diligence, Pre-seed deal information, etc.

• Contact information for CenTex RCIC staff– MK Holody, Program Director– Susan Davenport, Program Manager

www.centexrcic.org

Commercialization Grants (Subchapter D)

Application Process and Guidelines

• Type D funds best answer: “Will it sell?”• Especially suited for Pre Seed and Seed stage companies in

“The Gap”• For Businesses ONLY, must be a C-Corporation• Two Types:

– Regular “D” deals:• Average size $1M to $2.5M

– Pre-Seed Deals:• Raised less than $500K• Must convert to C-corporation before signing contract

Commercialization Grant (Type D)

6 Criteria for Funding

Required funding factors – must meet ALL criteria

1)Commercialization of emerging technology

2)Collaboration with a Texas institution of higher education

3)Defined project scope, commercialization path & business plan

4)Demonstrable economic impact for State of Texas

5)Commitment to raising matching funds from outside investors

6)May result in scientific, medical, or clean energy break-through

• Must be considered a disruptive “emerging technology”

• End goal of project must be commercialization, not just research and development

• Must be supported by business plan that contains a thorough marketing and sales strategy

1) Commercialization of Emerging Technology

• Must be within the State of Texas, can be private or public

– CenTex RCIC can assist in identifying collaboration partners

• Updated January 2008 – Categories of collaboration

– Category A (Strongest) – University Spinout or Licensed University Technology

– Category B (Acceptable) – An Executed Agreement with a University for additional work. Examples: Sponsored research agreement, Contracts for services, Marketing and business plan development

– Category C (Unacceptable) – A planned or unexecuted agreement with a University for additional work.

• At application, must provide documentation of relationship: Executed contract from Office of Technology and Commercialization, Office of Sponsored Research, Dean or Department head, etc. Letters from professors are not sufficient.

– Pre-seed: executed letter of intent with same make-up as contract

– Scope of work, cost estimates, time frame, etc

• Additionally, as the company progresses through the application process we will need copies of these agreements.

2) Collaboration with an institution of higher education

• Must have a defined project scope, commercialization path, and business plan– Company must submit a Business Plan with the application

• Pre-Seed grant requests– May have an incomplete Business Plan/Strategy and/or

management team – typical of very early-stage companies

– Recommend outlining your needs and strategy in your use of funds

3) Business Plan

• Creation of high paying Texas jobs (>$18/hour)

• Enhance the State’s competitiveness– Impact on other businesses in the “cluster”

– Platform technologies that could spawn additional products/businesses

• Must commit to commercialization and/or manufacturing of the technology – in Texas

4) Demonstrable economic impact for State of Texas

• It is not required that you have raised capital before applying

• Must commit to raise funds from outside investors

– Recent funding (past six months)

– Funding currently in progress

– Commitment to raise future funding (contingent upon receiving ETF grant)

– Grants like SBIR or STTR do not qualify as matching funds

• Not a $:$ match requirement

• Must be hard equity – cash

– Not in-kind, not founders, not a contract in exchange for products or services

• ETF cannot be the sole source of funding.

5) Commitment to raise “matching” funds from outside investors

• Cannot be “incremental” technology or a service business

• Commercialization program – Not a Research program

• Projects must be based on potentially disruptive technology

• Technology must be protected and defensible

– Typically protected by patents

– If ETF award will be for IP protection – show in use of funds• Additionally, as the company progresses in the application progress

you must provide your patent number, authors, dates to the RCIC for an IP check with the UTPO office. If the patent has not been approved yet and if provisional, the RCIC will need a copy of the filing receipt.

• Recommended that the company submit any documents that can support the technology’s validity and disruptiveness. (i.e. Federal program, academy, university, industry, publications, etc.)

6) May Result in Scientific, Medical, or Clean Energy Breakthrough

• Applications will be screened using typical ‘investor’ criteria:

– Business assessment• Commercialization strategy• Management team• Financials• Sales & marketing strategy• Competition

– Technical assessment• Viability of commercializing the technology• Disruptiveness of the technology• Protection of the technology

Commercialization Grant Application Evaluations

Funding Structure

• State’s return used for future rounds of ETF funding

• Terms posted on www.centexrcic.org– Form of Type D investment = Straight Equity

• 10 year promissory note which washes away after 10 years– If company moves out of state, payback equal to the amount of the agreement plus interest must

be made. The State will retain equity.

• Right to purchase equity– Purchase after the company is valued by the QFT within

– Price & terms established by recent or future funding round (>= $500k)– Invest at a market rate (follow a lead investor)– Eliminate/Minimize complications to upstream investors– State will follow majority investors on votes– Commercialization and/or manufacturing must be in Texas – 2nd payment triggered by meeting project milestones– Compliance reports

Return on Investment to State of Texas

• Investment for stated dollars, with timeline for disbursement provided in agreement.

• 10 year promissory note and a right to acquire a number of shares (with terms) of the Company’s common stock to reflect a stated percentage of the Company, adjusted as follows: If subsequent financing within 90 days, to reflect the

common stock price reflected in that financing; If subsequent financing is after 90 days and before 18

months after ETF grants, to reflect for the ETF a 20% premium over the share price of the subsequent financing;

If subsequent financing does not occur before 18 months after ETF grant, to reflect for the ETF a 20% discount of the subsequent financing’s share price;

A pre-seed has 30 months instead of 18 months

ETF Funding Structure

Application Process

1) Learn more about ETF– Contact CenTex RCIC staff for more information

• Susan Davenport, 512-322-5657 or sdavenport@austinchamber.com • MK Holody, 512-322-5677 or mholody@austinchamber.com

– Attend a CenTex RCIC Application Workshop – Visit www.centexrcic.org or www.emergingtechfund.com

2) Submit application form and other required documents to CenTex RCIC by 5 p.m. on round deadline date– Business Plan, Management Team Resumes, Past three year financial

statements, collaboration letter and other materials3) Pay $250 application fee

– $125 for re-submission of applications previously processed by the CenTex RCIC

4) Complete a Business Retention & Expansion survey with the Austin Chamber staff

(Note: Not applicable to companies located outside of 5-county MSA during application submission date. Survey occurs post-application)

How to Apply

• Quarterly submission process• Regional Centers source, groom, and pre-screen Commercialization deals

– Administrative Review – CenTex RCIC Staff • Deals must meet all required criteria to be reviewed by Local Selection

Team

– Technical Review – Outside Consultant– Local Selection Team

• Companies will be reviewed by Local Selection Team subcommittee for a 5 minute PowerPoint presentation “quick pitch”. Format will be freeform. The subcommittee will forward the best “pitches” for review by entire Local Selection team at the Local Selection Day.

• Local Selection Day – Company will give a 20 minute PowerPoint presentation before the Local Selection Team. Local Selection Team will vote to determine the best deals. Note: Life Science deals are sourced in the regional RCIC, but will also be pre-screened by the Texas Life Science RCIC.

Application Process

• Pre-screened deals are forwarded quarterly to the Statewide Advisory Committee – All application materials to Governor’s Office. The Company will give a 20

minute PowerPoint presentation to members of the Governor’s 17 member Advisory Committee. Bios are on www.emergingtechfund.com

– State-wide Presentation day is in Austin, Texas• CenTex RCIC provides mentoring sessions for the companies recommended

• The Committee of 17 forwards recommended deals to the Leadership

• Company enters into Due Diligence• Leadership -- Governor, Lt. Governor, and Speaker -- must

unanimously approve• Company enters Contract phase• Company receives investment funding

Application Process – cont’d

Approximate Timeline

• Submission

• Local Selection Level 3.5 months

• Committee of 17

• Due Diligence : approx. 1 month

• Leadership : approx. 1 month

• Contract : approx. 1 month

• Length of time from application to funding – approx. 6 months or longer

9 Step Due DiligenceOffice of the Governor

* See www.centexrcic.org for more in-depth explanation of processes

Step Description Common Issues

ETF Application Review Inconsistencies, Inaccuracies, Omissions, Updates

# 1 One Page Project Summary

# 2 Advisory Committee Assessment

# 3 Technology & Industry Analysis Competition, Realistic Assessment, Detailed Technology Analysis

# 4 Management & Business Assessment Tax Forfeitures, Omissions, Business Relationships

# 5 Intellectual Property Assessment IP Analysis, Patent Omissions, Ownership/Rights

# 6 Capitalization Structure FD Ownership, Valuation, Qualified Financing, Option Pools

# 7 Ownership Terms

# 8 Financial Analysis Accrued Liabilities, Debt Agreements, Financial Statements

# 9 Milestone Analysis Realistic Milestones (ST + LT), Collaboration

Nine-Step Due Diligence Process

Guide to Application

Upcoming Dates

Round 17 Submission, July 28th

Next Funding Workshop: June 2nd

MCC Auditorium

4-6 pm

Questions?

*Applications & Materials to applications@austinchamber.com*

MK Holody

mholody@austinchamber.com

512-322-5677