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How to get funding in a recession

January 25, 2009 |  3:19 pm

Dollars The economy is doing nasty things to the tech industry, forcing companies to lay off thousands and drying up venture funding throughout Southern California and the rest of the country. But some companies are still getting funding. A miracle, you say? Well, not exactly. We talked to two L.A. companies about their tricks for landing the cash, and just how many goats they had to sacrifice to get some money.

Gamervision, a social-networking site for video-game players, announced a $5-million funding round on Friday. President Andrew Reisini said the Beverly Hills company's first secret was to not look to VCs for the money. He instead went to angel investors and other people who had invested in the company's first round.

"In this atmosphere, it is very, very difficult to deal with any sort of institutions whatsoever," he said. "We would advise people to look within the group of people already involved with the company."

That means asking Mom, Dad and that kid you knew in elementary school who somehow turned out to be a wildly successful piccolo player (we hear they rake in the dough) to invest, as well as other people who have some extra money sitting around in these tough times. After all, Reisini argues, it's hard to find something to invest in these days that will actually grow in value.

Showing just how well you can pinch pennies appeals to investors too, say Julia Johnston and Ariel McNichol, co-founders of mEgo, which said Wednesday that it had raised $2.5 million. The L.A. company (it operates out of Johnston's living room) creates avatars that pull together people's various social networks. The company cut some employees in October, which Johnston said showed investors that mEgo was serious about keeping its expenses low.

"You have to prove that your burn rate is low, that you're really pinching your pennies," she said. It didn't hurt that mEgo is planning to break into the virtual goods space, which she says ...

... is poised to explode. (Linden Lab, creator of Second Life, said last week that it had acquired two virtual-goods companies.)

Investors also were looking for companies that had a clear business plan for making money soon, Johnston said. MEgo says it hopes to have positive cash flow by June.

Then again, one investor's mEgo is another's no-go. Jim Gauer, managing director of Palomar Ventures in Santa Monica, said his firm looks askew at anyone who says they're going to grow in 2009.

Of course, Gauer also says smart VCs will invest only in early-stage companies these days, because later-stage companies could run into roadblocks when no one steps up to acquire them because of the economy. And Mike Schoenfeld, VC advisory group leader for the Pacific Southwest Area at Ernst & Young, has observed the opposite; he says investors now seem more interested in later-stage companies that are already showing some success.

With so much conflicting advice, this whole raising-money-in-tough-times thing can seem a little like applying to college: Everyone has a different idea about what it takes to succeed. Maybe it's time for all you budding entrepreneurs out there to swallow your pride and sacrifice a goat.

Photo credit: Paul Falardeau via Flickr