Alfred Moresi was stunned.

After a year of transforming AppGate from a software developer to a tightly focused producer of network security devices, Chief Executive Officer Moresi saw the company knocked out from underneath him last month following a single phone call from GE Equity.

The private investment unit of General Electric had been a big supporter of AppGate, participating in a $4 million funding round in February and committing to lead another $2.5 million round in July. But then someone in GE Equity’s London office decided to reallocate its portfolio towards non-technology investments, and the commitment to AppGate was canceled.

But unlike reports elsewhere, AppGate is not dead.

“We had no clue about the move,” Moresi tells Local Tech Wire. “We had negotiated the deal by the end of June, announced it in July, and then it all blew up in August.”

GE’s move sent AppGate’s other investors “into a tailspin,” he says, and those that hadn’t already put their money into the company pulled back as well. “They like to be with partners,” he says of his company’s investors, including ABN Amro and European firms Bure Equity, Innovationskapital and Pythagoras Participations.

GE Equity representatives didn’t return phone calls for comment.

The loss of the funding round forced Moresi to shutter AppGate’s U.S. headquarters in Durham, putting about 20 people out of work, and the company’s Swedish parent declared bankruptcy on Sept. 5, laying off another 15.

A handful of customer service representatives still are working to support existing accounts, although AppGate had to turn down some business that was closed in late August because officials couldn’t fill the orders, Moresi says.

Electrifier jolted

The scenario is all too familiar to Mihail Lari, former CEO for Electrifier, a defunct Durham software company that provided a tool for streaming rich media on the Internet.

Lari was promised $1 million a year ago from an investor he declines to identify and spent months lining up customers in the online Yellow Pages and classified advertising market to satisfy the investor’s demands. Then, over Memorial Day weekend, the investor backed out of the deal and never really explained why, he says.

“It was almost like whiplash,” Lari says now. “One Friday night, the managers went out and celebrated. … By the (following Wednesday), we had fired everyone.”

Lari and Moresi say they had few options other than shutting down operations because they had devoted themselves to building their products and customer bases that they didn’t have enough money left to hold out until new investors could be found.

“In a startup, you can either raise money or make money, but it’s really hard to do both, especially over a long period,” Lari says. “If we had had more time, we probably could have survived. In hindsight, it’s always important for entrepreneurs to have options.”

For that reason, securities lawyer Jim Verdonik always urges clients to get money from investors upfront and avoid multiple-tranche deals like the one that did in AppGate. (A tranche is one of many influxes of cash which is part of an investment round.)

Tranches don’t help companies

“Tranched deals are becoming much more common because people are not comfortable that a business plan can be achieved, so they don’t want to put their money in a company until it shows some progress,” says Verdonik, who works in the Raleigh office of Kilpatrick Stockton. “Tranches protect investors because they can always withhold their money, but they’re bad for companies.”

Lari says he has learned his lesson and is now bootstrapping his latest venture, San Francisco-based Shaycom, which has built a network of “blogs,” or online journals.

“I would tell entrepreneurs to make sure that customers are the ones funding you instead of investors because once you take outside money, you lose control of your company,” he says.

Meanwhile, Moresi is working to find a buyer for AppGate’s technology and has lined up 10 targets. He believes that the Durham office, which was home to the company’s engineering team, can reopen if he’s successful.

“We have slowed operations,” he says. “We’re not done yet.”