Investing in startups feels like betting on the future, except the odds are brutal and the rulebook keeps changing. If you are writing a cheque today, treat it like active intelligence work, not passive hope. Here’s a tight, practical playbook for investors, drawn from industry practice, regulation and on-the-ground reality.
Know the math, and the odds
Startups are high-variance bets. Broad studies show roughly 90 percent of startups fail, which means careful selection and portfolio thinking are essential. Expect many losses, and size each cheque accordingly.
Read the capital structure, not the pitch
Term sheets matter more than the founder’s charisma. Preference shares and have legal quirks you must understand, especially around conversion events and tax implications. Know whether you are buying equity, a convertible, or a preference share, and how liquidation, anti-dilution, and control rights play out on paper. Legal form changes value quickly; get counsel familiar with local practice.
Due diligence, done like a pro
Due diligence for early-stage companies is less about spreadsheets and more about truth-finding. Confirm the market size, unit economics, customer retention, IP ownership, contracts with large partners, cap table cleanliness, founder background checks, and key hires’ incentives. Checklists from experienced VCs highlight market, legal, financial, team and product validation as the pillars of a proper review. If you cannot verify a material claim quickly, mark it as a red flag.
Team, not just tech
Products can be copied. Teams are durable. Prioritise founders who have complementary skills, clear decision-making, founder-market fit, and the humility to learn. Look for early hiring plans that show an understanding of the roles that will scale the business, not just vanity headcount.
Unit economics and defensibility
Revenue growth is exciting, but sustainable unit economics matter far more. Ask how the company acquires customers, the cost to serve them, the lifetime value, and how these metrics will evolve as they scale. Also map defensibility network effects, regulatory moats, deep tech patents, or exclusive supply ties.
Exit realism
Think like an acquirer. Most returns come from a tiny number of winners. Understand plausible exit routes and timelines. Are incumbents likely acquirers? Is there a realistic IPO path? If the sector is crowded, build a scenario where the startup survives long enough to reach profitability or become strategic to a buyer.
Portfolio rules
Don’t bet the house on one idea. Spread capital across stages, sectors and instrument types. Keep reserve capital for follow-ons. Early-stage investing is a marathon that rewards discipline.
Red flags that should make you pause
Opaque cap tables, founders who dodge basic questions, over-reliance on a single customer, unclear unit economics, and legal scents such as pending litigation. If a founder resists an independent reference check, walk away.
Short checklist before you sign
1. Confirm instrument and conversion mechanics.
2. Validate at least two core metrics: revenue (or traction) and unit economics.
3. Do background checks on founders and critical hires.
4. Model downside scenarios, including regulatory shifts.
5. Reserve follow-on capital, aim for portfolio sizing that accepts multiple write-offs.
Startups are messy and human. The ones that survive combine clear economics, team resilience and legal clarity. Invest like you are buying into a team that will ship through storms, not a slide deck that tells a neat story.
