Editor’s note: “The Angel Connection” is a regular feature in WRAL Local Tech Wire. LTW asked consultant Bill Warner to share advice for entrepreneurs seeking angel investors and/or venture capital investment. He is chairman of the Triangle Accredited Capital Forum, an angel investor network with over 100 members throughout the Southeast.

RESEARCH TRIANGLE PARK, N.C. – You may run into some articles and reports on private equity that talk about great performance in 2008. The danger is that these reports are usually talking about the first half of 2008, long before the roof feel this summer.

Of note is the Venture Capital Deal Terms Report that highlighted the fact that “despite the credit crunch, the fund-raising climate for start-ups remained favorable through the first half of the year.”

Well, that might have been somewhat true, but it isn’t any more.

The “credit crunch” started a house of cards to fall. The credit flow slowed as a result of the greatly weakened balance sheets of financial institutions substantially caused by the rapidly declining value of their mortgage backed securities. This materially hurt businesses of all kinds who needed credit. Then the bailout was proposed and passed, giving the American people the chance to pay for this problem. We then saw the markets fall into the ditch, to the tune of 30 percent to 40 percent of market value lost.

That’s all very unfortunate, but how does this affect a company who needs to raise private equity. The connection is that private equity firms (i.e. VC’s and Investment Bankers) get their money from large institutions like pension funds and private foundations. These institutions become the limited partners in private equity funds and have strict agreements with the private equity firms that spell out the kind of financial performance that is required.

Unfortunately, these institutions are also heavily invested in the public markets, so their portfolios of investments just got hit with an axe. This is literally causing them to reprioritize their investments in private equity funds, to the extent that they are backing away from previously made investment commitments and actually divesting themselves of these investments. That means that private equity firms will have less money to invest in new deals, and they are putting pressure on their portfolio companies to conserve cash. Your chances of getting another round of VC funding are going to be very low.

The angel investment world is similar in many ways, but not as dire. Angels are investing their own money, so they don’t have the pressure from limited partners that VC’s have. However, their personal portfolios also got hit with that same axe, so they are hurting in the same way that the institutions are. As a result, the same reprioritization is occurring.

Many angel organizations are asking their portfolio companies to conserve cash but telling them that they are with them if they need more money. This means that angels are holding money in reserve to protect their current investments, which also means they will have less for new investments. Angels are entirely more flexible and willing to work through this because they can make a unilateral decision about their own money and they invest in start-ups for many other reasons than to just make money.

Nevertheless, it is going to be quite hard to raise angel money in this economy, but if you have a business with a lot of potential, you have a chance.

So, be careful about anything you read about the state of private equity. If those reports have not factored in what is now happening, you are in danger of having a very incorrect picture of your chances of getting angel or venture capital financing.

About the author: Bill Warner is the managing partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.