1. Sources of Capital for Start Ups Frank Demmler Associate Teaching Professor of Entrepreneurship Donald H. Jones Center for Entrepreneurship Tepper School of Business at Carnegie Mellon

2. © Frank Demmler 2004all rights reserved2 Phases of the Embryonic Stage

3. © Frank Demmler 2004all rights reserved3 Sources of Money by Phase

4. © Frank Demmler 2004all rights reserved4 Sources of Money Sweat equity Sweat equity Company operations Company operations Loans Loans Technology Development Programs Technology Development Programs  Federal  State & Local Investment Investment

5. © Frank Demmler 2004all rights reserved5 Sweat Equity Your foregone income Your foregone income Your savings Your savings Your computer and other equipment Your computer and other equipment Your basement or apartment Your basement or apartment Your credit cards Your credit cards

6. © Frank Demmler 2004all rights reserved6 Company Operations Gross margin Gross margin Balance sheet management Balance sheet management  Vendor terms and conditions  Customer terms and conditions  Stretch payment of liabilities »DO NOT PLAY AROUND WITH PAYROLL OR PAYROLL TAXES

7. © Frank Demmler 2004all rights reserved7 Loans Conventional bank debt Conventional bank debt SBA SBA Economic development loans Economic development loans

8. © Frank Demmler 2004all rights reserved8 Federal Programs Small Business Innovation Research (SBIR) Program Small Business Innovation Research (SBIR) Program  Technology development largely performed by the company Small Business Technology Transfer Research (STTR) Program Small Business Technology Transfer Research (STTR) Program  Technology development largely performed under contract by universities Advanced Technology Program (ATP) Advanced Technology Program (ATP)

9. © Frank Demmler 2004all rights reserved9 Three Phases of Federal Programs Phase I - Feasibility study - up to $100,000 Phase I - Feasibility study - up to $100,000 Phase II - Proof of Concept (Prototype) - up to $750,000 Phase II - Proof of Concept (Prototype) - up to $750,000 Phase III – Commercialization Phase III – Commercialization

10. © Frank Demmler 2004all rights reserved10 Federal Program Considerations Not dilutive Not dilutive Alignment with company imperatives Alignment with company imperatives

11. © Frank Demmler 2004all rights reserved11 State & Local Programs Innovation Works Innovation Works Idea Foundry Idea Foundry Pittsburgh Digital Greenhouse Pittsburgh Digital Greenhouse Pittsburgh Life Sciences Greenhouse Pittsburgh Life Sciences Greenhouse

12. © Frank Demmler 2004all rights reserved12 Investment Return expectations: 30%-plus Return expectations: 30%-plus Essence is PERCEIVED risk vs. reward Essence is PERCEIVED risk vs. reward Approach investors strategically Approach investors strategically

13. © Frank Demmler 2004all rights reserved13

14. © Frank Demmler 2004all rights reserved14 Structures Notes with high interest rates Notes with high interest rates Notes with warrants Notes with warrants Convertible notes Convertible notes Notes with options & buybacks Notes with options & buybacks Preferred stock Preferred stock Common stock Common stock

15. © Frank Demmler 2004all rights reserved15 Questions?