When the COVID pandemic is over, many New Hampshire businesspeople, including readers of this column, will want to launch new businesses they’re currently deferring. Some of these businesses will be self-funded by their founders, but many may need third-party investments from either or both of two distinct types of investors.
The first consists of “angels” – i.e., investors who are generally high-net-worth individuals, who are interested in smaller startups, and who generally invest no more than $100,000 in any single startup.
The second consists of venture capitalists – i.e., investors which are often multi-owner entities, who are generally interested in larger startups and who generally invest in any single startup at least $1 million.
What should you do as a New Hampshire business founder to maximize the chance of your obtaining such an investment?
Over the years, I’ve worked with many clients seeking angel or venture capital investments and with many angel and venture capital investors. Here are my tips on how to address the above question:
1. There are several websites that identify angel and venture capital investors who may be willing to invest in your business. However, many potential investors are likely to be interested in narrowly defined types of business. See if you can find investors who are likely to be interested and experienced in your business type.
2. Before you approach any investor, make sure you have a thorough and well-written business plan to provide to them. Indeed, it will often be wise for you to provide this plan to potential investors before you ever meet with them. Your plan should describe your business in detail, including an identification of your main competitors and the competitive advantages you have over them; and it should identify all other significant risk factors your business will face and how you should handle them. It should also show, to the extent possible, that you and any initial partners you may have possess relevant experience in the field of business you plan to enter. And it should contain detailed short-term and long-term well-drafted financial documents and plans.
But above all, your business plan should make clear to potential investors that their investment in your businesses is reasonably likely within a few years to provide them with a substantial return.
3. Before you begin contacting potential investors, you should assemble a team of business allies that are likely to be helpful to your business as it evolves and that will impress investors. Your team should include, at a minimum, reputable lawyers and accountants, and to the extent possible, it should include potential or actual suppliers, customers, and non-owner employees.
4. Before you contact any investor, you should form the entity that you propose to use in your business. In New Hampshire, this should almost always be a single-member LLC or, if you have one or more partners, a multi-member LLC, and your LLC, whether it has one or a number of members, should have a well-written, plain-English operating agreement that, if potential investors review it, will be likely to impress them.
5. Ideally, your new business should not just be a business idea, however impressive: if at all possible, you should have already launched it on at least a part-time basis, and ideally, it should have made at least a small number of sales or attracted at least a few clients.
6. It is likely that any angel or venture capital investor you consider approaching will be an “accredited investor” for federal securities laws purposes; that is, each potential investor must have an annual income exceeding $200,000 ($300,000 for joint income) for the last two years with the expectation of earning the same or higher income in the current year; or each must have a net worth exceeding $1 million, either individually or with his or her spouse. If you plan to seek investment from any unaccredited investor, including even a relative or friend, you should first consult with a securities lawyer about how to minimize the legal risks that investments by these investors may pose.
7. Before seeking cash from potential investors, you may find it useful to first contact them to ask for their business advice. They may be complimented by your request, and your meeting with them for advice may enhance the possibility that they will invest.
(John Cunningham is a Concord, NH lawyer of counsel to McLane Middleton, P.A. His practice is focused on LLC formations, general business and tax law, advising clients under IRC section 199A, and estate planning. His telephone number is (603) 856-7172, his e-mail address is lawjmc@comcast.net, and the link to his website is www.llc199A.com.)