Invest in startups: Insider tips to pick a winner

As an angel investor, choosing the right startup to invest in can feel like trying to spot a unicorn in a field of horses. The UK startup scene is thriving, but with so many ambitious founders and bold ideas, how do you know which ones will actually be successful? In this guide, we’ll share expert tips on choosing the right startups to invest in.

1. Look for companies that solve problems

While it’s tempting to get caught up in a great idea, make sure there’s a market for it. Ask yourself: does this company solve a real problem? And can the founders articulate clearly why their product is a compelling solution to the problem?

Startups with niche appeal are fine, but they need to address a pain point that has enough demand to fuel a growing business. Ask questions like:

• What is the target market size?
• Is the product scalable?
• Are there competitors already operating in the space, and how is this startup different?

Be wary of companies that aim to be a “jack of all trades” too early. Startups tend to do better when they focus on a specific problem and solve it well before expanding.

2. Choose strong founding teams

A solid idea is only as good as the team behind it. You want founders who aren’t just passionate – but resilient, adaptable, and experienced. You want founders who know how to sell well.

Look at the dynamics of the team. Are they complementary in skills? A tech startup, for example, will need both someone technical and someone who understands business development.

Trust your gut when it comes to evaluating their leadership qualities. Can they communicate their vision clearly? Are they committed enough to weather tough times? Don’t shy away from asking tough questions. Founders who understand their market and product should have thought about potential pitfalls.

3. Find startups that align with your interests and expertise

What industries excite you? Where do you have the most experience? Your investment journey will be much smoother if you focus on sectors where you understand the challenges, opportunities and competitive landscape. For example, if you have a background in fintech, you’ll be much better placed to assess the viability of an emerging financial technology business than a field you’re less familiar with.

Beyond expertise, investing in sectors you genuinely care about makes the experience more rewarding. Passion keeps you engaged, and it’s easier to stick with a company through the ups and downs if you believe in the product or mission.

4. Get clear on the numbers

At some point, passion meets cold hard facts – and that’s where the numbers come in. Look closely at the startup’s financials. Early-stage companies might not be profitable yet, but there should be a clear path to generating revenue. Some key metrics to consider are:

• Burn rate: How fast are they spending their cash?
• Runway: How long can they survive without raising additional funds?
• Unit economics: Are they making more per customer than it costs to acquire and service them?

Don’t expect every number to be perfect – startups are inherently risky – but ensure there’s a financial plan that’s realistic and grounded in solid assumptions. And make sure you fully understand the business model.

5. Look for customer-driven development

A company culture that’s based around embracing customer feedback shows that a company is striving to meet a real need.

Look for customer-driven startups that keep customer satisfaction at the heart of their product development. Find out how often they talk to customers. Lots of user testing, talking to potential/current customers and making changes based on that feedback is a green flag.

6. Check for traction

Traction is often the clearest indicator that a startup is on the right path. Depending on the stage of the business, this could mean a growing customer base, recurring revenue, partnerships, or other evidence that their product or service is in demand.

A company that’s already generating sales or gaining user growth has moved beyond just an idea – they’ve demonstrated they can execute. Even early interest, such as successful pilot projects, strong user feedback, or pre-orders, can be an excellent sign.

7. Choose the right fit for your investment style

Not every investment will be suitable for your portfolio or style. Consider how much involvement you want. Do you want to be a hands-on investor, offering mentorship and advice, or are you happy taking a back seat and letting the team steer the ship? Some companies thrive with a guiding hand, while others prefer the freedom to operate independently.

You’ll also want to think about the stage of the business. Seed-stage investments often come with higher risk but potentially larger rewards, while later-stage startups might offer more stability but with potentially smaller returns. Decide what level of risk you’re comfortable with.

8. Ensure the legals are in order

Make sure any startup you’re thinking about investing in has all the necessary legal frameworks in place, like Intellectual Property (IP) protection, clear equity structures, and compliance with relevant regulations. Founders should also have Founder Agreements in place.

9. Diversify your investments

Sometimes, you won’t make the right choice. Or it’ll be the right choice at the time but the startup won’t go on to succeed how you’d hoped. If you invest in multiple startups, the losses of those that don’t succeed can be offset by the ones that do, so it’s wise to not go all in on one investment.

10. Don’t forget instinct

Making an investment decision is highly strategic and you need hard evidence to make your decision. But instinct plays a role too.

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