Useful Growth Capital Strategy 2014

Ephor Group | www.ephorgroup.com | 24 E Greenway Plaza Suite 440 | Houston, TX 77046

Useful Capital Strategies for 2014 and Beyond Historically growth capital was only available to large scale, highly profitable enterprises or early stage startups via venture capital. Sources of capital for growing companies was limited to angel investors, startup lending, and personal guarantees. Today, family office investments and structured equity instruments have become available to entrepreneurs. These entrepreneur friendly useful capital sources are bridging the gap for companies looking to jump the chasm from a small and medium sized business to a market leading enterprise. And jumping the chasm creates the opportunity for wealth creation for founders that is not readily available via other financing instruments. The Availability of Useful Capital For startups driven by innovative founders venture capital can be the perfect marriage of funding coupled with ongoing management support necessary to transform the company into a market leader. But for most entrepreneurs venture capital (VC) is simply not available as the company focus is too narrow1. Annually there are 300,000 new businesses created in the USA, and only 600 companies receive venture capital funding. For most businesses venture capital is simply not available.

1 See Exhibit A1 and Exhibit A2

Entrepreneur Useful Capital is a flexible investment loan that preserves equity.

Useful Capital Strategies for 2013

Ephor Group | www.ephorgroup.com | 24 E. Greenway Plaza Suite 404 | Houston, TX 77046

The Importance of Scale on Enterprise Value There exists large pools of un-invested capital in the United States (>$4B) and abroad which are seeking the safe investment returns of growth capital. Companies that qualify for growth capital instruments have a low risk of failure and above market growth. For entrepreneurs, the value of their business significantly jumps from a subscale valuation to scaled enterprise valuation as they cross the chasm from a single location, product, or customer segment to national or global enterprise. For BPO service and tech-enabled businesses valuation multiples increase with size and scale.

Subscale Business <$20M

Scaled Enterprise >$25M

2X to 6X Adj. EBITDA

0.5X to 4X Revenues

4 to 10X Adj .EBITDA

1 to 4X Revenues for Services 2 to 8X Revenues for Software

"Growth capital, whether for market expansion, to consolidate, or to create a market leader is an

opportunity to create wealth for founders."



Creating Wealth Through Growth

Did you know that from 1995 to 2009, privately funded capital backed companies grew sales by 133%, while the average United States company grew sales by 28%2?

Growth capital is required to scale business operations. Growth capital is required to pay for the transition from a small subscale company to a large scaled enterprise. Overcoming the Chasm and Growing from Subscale to Scale Of the 1 million private companies in the United States with 20 to 99 employees fewer than 1 in 4 achieve 20%+ year over year growth.

2 Capital backed companies grew jobs by 82%, while all other companies in the U.S. economy grew jobs by 12%. These emerging companies are incredibly important to the economy as they represent well over 4X the average American company’s sales growth and nearly seven (7) times their new job growth.



Entrepreneur Useful Capital is an Alternative to Venture Capital For entrepreneurs that want to create wealth for themselves and not only their investors they must choose a capital funding solution which preserves equity as they grow. The Hidden Agenda Fiduciary Responsibilities

Did you know that venture capital over the last decade returned their investors on average less returns after costs than standard fund indexes3?

VC’s swing for homeruns and yet only the top quartile average double digit investment returns. Over the last two decades, greater than 50% of VC funds have a negative IRR, and as an industry, venture capital has invested more cash than it has returned. Without the top 25 realized investments out of >20,000 in that time period, the VC industry as a whole would have a negative IRR. At the end of the day VC’s are fiducially responsible to their investors and not to entrepreneurs. Notable over this period are the PE returns data. Studies analyzing these data have concluded that positive returns consist almost entirely of large leveraged buyout transactions (“LBOs”). While much fewer in number than the typical PE deal, large deal sizes heavily influence the weighted average returns. Most business owners have heard all about venture capital funds as a source of funding for startups and early-stage companies. But what about profitable companies who want to preserve their equity— where can they go for their millions? Historically, startups have raised seed funding from friends and family money and/or angel capital to create an initial product or service in the market to validate the initial idea. Venture capital is used to accelerate growth and capitalize on significantly large market opportunities. Once a company is beyond its rapid growth stage multiple types of private equity capital are available to profitable enterprises with significant EBITDA in the form of mezzanine and growth capital instruments in order to recapitalize the business. A recap is most often used for the purposes of succession planning and/or to pursue expansion. There are better options for growth businesses. An alternative that preserves the founder’s equity and has flexible payment terms controlled by the entrepreneur is a structured term instrument.

3 See Exhibit A4



Looking to grow and create liquidity? “Entrepreneur Useful Capital” works for the entrepreneur:

Access to capital and debt that preserves the equity.

Blended instrument combines the best of equity capital and debt financing.

Does not inhibit the cash flow of the current operations.

Growth capital without loss of control or dilution.

Entrepreneur useful capital is the alignment of interests between founders and

financiers.

Full ownership and control retained.

No company valuation.

No dilution.

No loss of control.

Returns capped.

How Entrepreneur Useful Capital Compares:

Entrepreneur Useful Capital

Venture Capital

Alignment of Interests Aligned with revenue growth

Can be misaligned

regarding growth and exit

Cost of Capital

Targeted 2x return

Targeted 10x return

Loss of Control

No

Yes, to what extent varies

Personal Guarantees

No

Sometimes

Valuation of Company Required No

Yes



Jumping the Chasm

Jumping the chasm from a “subscale business” to what financial investors and strategic buyers consider a “scaled enterprise” requires growth capital4.

Did you know that less than 1% of new business achieves $10 million in annual revenues in their first ten years?

Of these startup successes six out of every ten “jump the chasm from subscale or scale.” For any businesses, growing beyond subscale requires a smart plan for growth. The most common reasons cited for failure by owners include:

1. The market opportunity is too small. 2. The business value proposition is not differentiated sufficiently. 3. The business model execution is not profitable at scale. 4. Leadership & culture barriers derailed growth and profitability.

Businesses most commonly organically grow through incrementalism. Creating wealth requires an infusion of strategy and vision coupled with significant leaps in size and profitability. A significant leap requires equal parts of capital and leadership. Jumping the chasm…

Current State Enterprise State Governance by the founders Governance by a board of directors including founders and

outsiders. Leadership team is the management team Leadership is coupled with Management Science and an

engaged employee culture. Growth is organic Growth is a portfolio. Portfolio of products/services beyond the initial sell does not exist

The customers lifecycle is proactively managed.

Raving Fans are known but not scientifically cultivated

Raving Fans create a lower cost of sales.

Scalability depends on 1 location or 1 team of people

Scalability is best in class as defined as key performance indicators are best in class.

Strategy relies on the founders Strategy is a perpetual process both bottoms up and across the organization.

Define Success Differently: Define Success as Wealth Creation. It’s an old but true cliché: Businesses are either growing or dying. We understand the challenge of positioning your company for long-term success. We’ve been there – as entrepreneurs and operators focused on building businesses and engineering wealth creation. Creating wealth not only requires a great business staffed with a talented team; it also requires a strategy for wealth creation.



Entrepreneur Useful Capital FAQs Question: At what stage does Entrepreneur Useful Capital become available? Answer: Capital is available once the following criteria are met:

The business plan for growth is documented and validated by greater than $1M EBITDA profitability.

The strategy, vision, and leadership team is defined and aligned. The business key performance indicators illustrate scalability and outperform

the competition (i.e. are “best-in-class”). Capital efficient business with high margins. Recurring revenue models such as SaaS and subscription services. Growth capital needed to improve valuation by jumping the chasm from a

subscale startup to a large scale enterprise.

Question: How is Entrepreneur Useful Capital structured? Answer: In return for an investment loan, an agreed to percentage of future revenue is paid

to investors until the investment is repaid, inclusive up to an agreed to return amount. Determination of the total amount to be paid is based on the timing and certainty of payment amounts and other risk factors. The investment loan amount ranges from $2 to $20M.

One of the key elements is the flexibility of payment. Revenue profits are paid on a

preset amount (2% to 8%) during the term of the term loan up to a pre agreed amount and the term loan is paid in kind interest due at the end of the term loan or available to be paid in advance at a pre agreed interest rate premium.

Question: What is the process? Answer: Like any investment, due diligence of the financials, business plan and operating

plan, and interviews with the team are conducted. Upon completion and acceptance capital funding is readily available.

Question: How can I learn more? Answer: Email us at ephor[at]ephorgroup.com for a market landscape and valuation for your

industry.



Venture Capital Funding & Returns “After studying the performance of more than 6,800 small- and mid-sized businesses between 1995 and 2009, the study

authors found that revenue growth at firms backed by private equity was 129% greater than the growth at control firms. Employment grew by 257% more, with the employee rosters at PE firms jumping by 50 more employees, while those in the control group increased by 14 employees.” Pepperdine University

Venture capital is associated with job creation (accounting for 2% of US GDP),[2] the knowledge economy, and used as a proxy measure of innovation within an economic sector or geography. According to the National Venture Capital Association, 11% of private sector jobs come from venture backed companies and venture backed revenue accounts for 21% of US GDP.[3]

According to a 2011 Global Insight study, venture-backed companies accounted for 12 million jobs and $3.1 trillion in revenue in the United States in 2010 via Thompson Reuters.

Exhibit A1: Growth Capital Funding by Industry via NVCA 2013 Yearbook PDF Report:

Exhibit A2: Growth Capital Funding by Industry Sector via NVCA 2013 Yearbook PDF Report:



Exhibit A3: Venture Capital Returns

Useful Capital Funding eResources & Sources cited: Association for Corporate Growth http://www.acg.org/global/growthstories.aspx PricewaterhouseCoopers MoneyTree™ Report Data http://www.pwcmoneytree.com/ National Venture Capital Association & Thomson Reuters www.nvca.org/ SBA.Gov Small Business Administration http://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf



M&A Forecast & Landscape We anticipate M&A activity to be quite robust over the next 12-18 months.

Mergers and acquisitions in the software, information technology and BPO services continued at a fast clip in 2012, as the number of deals rose over 2011 levels.

Overall, acquirers have been focusing on complementary acquisitions, with the majority of transactions less than $100M. Looking ahead to 2013 M&A deals for strategics seeking complimentary assets/capabilities and also distressed or stagnant small to medium businesses without access to capital (growth capital liquidity trap) highlight the forecast.

There is a shortage of capital for those companies with less than $10 million in EBITDA, but a general surplus for companies with $10 million in EBITDA or more. Rising complexities and costs are causing market bifurcation and the thinning of middle class of businesses.

Capital options landscape:

Credit facilities will be almost exclusively asset based lending only. Venture continues to ride the wave of “Consumerism.” The types of businesses that venture capitalists plan to invest in the

next 12 months are 33% targeting information technology and another 23% planning to invest in health care or biotech. Approximately 44% of respondents plan to make new investments outside of the U.S.

Mezzanine lenders remain eager to put capital to work with transaction structure and pricing relatively flexible. Access to growth capital for branded sector leaders only. PEG world suffers from weak returns from 2005 to 2010 and

combined with the difficult economic climate has caused many anemic companies. M&A corporate development will continue to be strong although deal valuations will be limited and capped. The M&A outlook

will remain strong, including deal count volume as cash-rich strategics augment growth and capabilities. Strategics Seeking Growth. Conditions are good for an increase in strategic acquisitions in 2013. U.S. corporations

have built up immense balance sheet firepower, with more than $2 trillion of aggregate cash currently earning a minimal return. Given the sluggish economic outlook, M&A can be an effective tool for lifting the top line and generating margin improvement through synergies following an extended period of cost controls.

Private Equity Financial Sponsors will be focused on selling assets due to pressure to put committed capital to work and to generate exits. Financial sponsors evaluating platform acquisitions and add-on deals continue to have in excess of $400 billion in un-invested capital that needs to be deployed as well as access to debt at reasonable terms. At the same time, achieving fully valued realizations is a high priority for private equity firms with aging portfolio companies.

Useful Growth Capital Strategy 2014

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