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The secret to closing second-round deals

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There is at least a flicker of good news for those who have raised a round of angel funding: They will probably be the top priority of their investors. "Angels will stick with their children and help them through the tough times," says May. This isn't as benevolent as it sounds. The number of venture funds raising new cash plunged 28 percent in the third quarter of 2008, according to the National Venture Capital Association. Angels need to keep their early-stage investments alive until funding picks up again, or they risk losing their money. But don't expect them to throw good money after bad. "You are going to see a lot of liquidations of companies that couldn't raise their B-round of funding," warns Sack. Below, some tips to help make sure yours is not one of them.

Start Stockpiling

Ron Conway was among the first investors in Google and has since backed more than 130 companies, including Facebook, PayPal, and Zappos. His advice? Find money while you still can. "Raise your funding as soon as possible and raise as much as possible," Conway wrote in an e-mail to his portfolio companies in October. His reasoning is pretty obvious: Businesses with healthy war chests will be better able to stay alive until funding picks up again. Conway suggests that companies with less than a year of cash reserves will need to be looking at all options -- including mergers and acquisitions.

Bring Back the Bootstraps

"Companies that have already received funding from angels are going to be asked to tighten their belts," says Warner. Among the measures angels are advocating: reducing head count, cutting capital expenses, and focusing the business around the core, revenue-generating activities.

Prepare to Be Scrutinized

Founders will probably see much more frequent interaction with their investors, who are going to want to keep close tabs on how their money is being spent. "Entrepreneurs may even be asked to resubmit their operating plans in light of the new economy," says Warner. "They are going to have to show real, demonstrable progress on sales and reaching a point where they are profitable and cash-flow positive."

One Company's Story

When it comes to raising funds, Ron Wiener knows a thing or two. He has scored angel and venture funding for 10 businesses, five of which he founded and ran as the first CEO. His latest venture, Earth Class Mail, recently raised $5.1 million in follow-up funding from the angel network Keiretsu Forum. Whatever the economic climate, Wiener doesn't wait for his investors to inquire about his company; he brings the news to them. Every three weeks, he sends out an "angel-gram" that keeps angels informed of everything that has been going on -- good and bad. "I think a lot of our money came in at the end because investors didn't have any better place to go, and we were showing them good news," he says. On his Earth Class Mail blog, Wiener has compiled his "Top Ten Tips for Funding a Start-up Company."

Given the anxiety surrounding the current economy, he has some advice for young companies: Be wary of doomsayers. "There is always some excuse that an angel or VC has to try to hammer you down on valuations," he says. "At the end of the day, they are just bottom feeding, looking for low valuations."

Last updated: Jan 1, 2009




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