Investing in startups

Most of them fail. The maths only works if you plan for that from the first cheque rather than discovering it on the fourth.

The shape of the returns

Early-stage returns follow a power law: a small number of investments produce nearly all of the return, and the majority return nothing. This is not pessimism, it is the structure of the asset class, and it has a direct consequence — a portfolio of three companies is not a portfolio, it is three bets. Angels who do well write more, smaller cheques over more years than first-timers expect.

Treat the money as illiquid for a decade. There is no exit on your schedule.

What due diligence is actually for

Not to prove the company will work — you cannot. It is to find the thing that would make it impossible: a founder dispute with no shareholders' agreement, a share structure that cannot take an investor, IP sitting with a former contractor, revenue concentrated in one customer who is leaving.

Most fatal problems are legal and historical rather than commercial, and they are all findable in an afternoon by someone who knows where to look.

Canadian routes in

Angel groups operate in most major centres and bring deal flow and shared diligence, which is worth more to a new investor than the discount on any single round. Equity crowdfunding exists and is accessible but adverse-selected — ask why a company is raising this way.

On the tax side, several provinces run investor tax credits for qualifying small business investments; the rules and the caps differ by province and change, so confirm the current terms before relying on one.

The question to ask first

Not "could this be big?" — everything can be big in a deck. Ask what has to be true for this to work, then ask the founder how they would find out. A founder who has already run that test is a different proposition from one who has not thought to.