Due diligence when you don't have a due diligence team

Part 4 of "Angel investing for startup operators" — a five-part series from M8 Ventures

If you've ever watched a Series B due diligence process from the inside — the data rooms, the financial audits, the legal reviews that take weeks and cost tens of thousands of dollars — you might think that's what angel investing due diligence looks like, just smaller. It's not. At pre-seed and seed, there is often no revenue. Sometimes there's no product. Occasionally there aren't even customers yet. You're not auditing a business. You're making a judgment call about whether a small group of people can turn an idea into something real.

That's actually good news for you, because it means the due diligence that matters most at this stage is the kind operators are best equipped to do. You're not building a financial model or hiring a law firm. You're assessing people, problems, and products — things you've been doing your entire career, whether you realised it or not.

Forget the VC playbook

Most of what gets written about startup due diligence is aimed at institutional investors deploying other people's money. They need process. They need documentation. They need to be able to show their LPs they did the work. You don't. You're investing your own money, making your own calls, and answering to nobody but yourself.

At M8 Ventures, we take what I'd call a product-led approach to evaluation. We're not particularly interested in five-year financial projections at pre-seed — those numbers are fiction and everyone involved knows it. What we care about is whether the founding team can build a world-class technology product. Can they ship? Do they have taste? Do they understand the problem deeply enough to build something people genuinely want? That lens has served us well, and I think it's a natural fit for operators who already know what good product work looks like.

Most early-stage investors obsess over market size or the pedigree of the founding team's LinkedIn profiles. Those things aren't irrelevant, but they're secondary to whether this team can actually execute. A brilliant market thesis is worthless if the team can't ship.

What to actually evaluate

Let me walk you through the areas that matter, roughly in order of importance.

The founders. This is the big one. At pre-seed, you are betting on people more than anything else. The business plan will change. The product will pivot. The market might shift entirely. What won't change — or at least shouldn't — is the quality of the team.

Can they execute? Have they built something before, even if it wasn't a startup? Do they have genuine domain expertise, or are they tourists who read a blog post and decided the market was hot? How do they handle disagreement — between co-founders, and with you when you push back in the pitch? I want founders who are confident but coachable. Confidence without coachability is arrogance, and arrogance kills startups.

Here's my secret weapon: reference checks. Not the references founders hand you — of course those people will say nice things. I mean the informal kind. Find someone who actually worked with the founders at a previous company. Were they good to work with? Did they deliver? How did they handle pressure? You'd be amazed what you learn from a fifteen-minute call with a former colleague, and it's the single highest-signal thing you can do in your entire DD process.

The problem. Is this a real problem that real people or real businesses actually have and would pay to solve? You'd be stunned by how many startups are solutions looking for problems. The founder had a clever technical idea and went hunting for someone who might need it, rather than starting from genuine pain.

If you can, talk to a couple of potential customers — not the ones the founders introduce you to. Ask whether they have this problem, how they currently deal with it, and whether they'd pay for something better. If the answer to that last question is a hesitant "maybe," that's a red flag. People in genuine pain don't say maybe.

The product. If a product or prototype exists, use it. Actually use it. Click around. Try to do the thing it's supposed to let you do. You don't need to be an engineer to assess whether something is well-built. Does it feel good? Is it clear what you're supposed to do? Does it work, or does it break in obvious ways?

At M8, we look at whether the early product demonstrates taste and judgment. Has the team made smart decisions about what to build first and what to leave for later? Is there craft in the details — the copy, the onboarding, the little interactions that show someone cared? A rough prototype is fine. A sloppy one tells you something about how the team works.

The market. Is the market big enough to produce venture-scale returns? If the total opportunity is $50 million, even a wildly successful outcome won't return your capital meaningfully. You need markets that can support companies worth hundreds of millions or billions.

Be deeply sceptical of market size slides. Every pitch deck has one, and they almost always cite some eye-watering TAM number pulled from a Gartner report that includes every vaguely adjacent industry. What actually matters is the specific segment the startup is going after, whether it's growing, and whether there are structural tailwinds. I'd rather back a team going after a $500 million market growing 30% a year than a team claiming a $10 billion market that's flat.

The deal terms. Is the valuation reasonable for the stage? A pre-seed startup raising at a $20 million valuation had better have something extraordinary to justify it, because that valuation makes it very hard for you to make a good return even if things go well. What instrument are they raising on — a SAFE, a convertible note, a priced round? Are there any unusual terms that could disadvantage you, like liquidation preferences that stack unfairly or anti-dilution provisions you didn't expect? We'll dig into deal terms properly in Part 5, but for now, just know that you should read every document you're asked to sign and make sure you understand it. If you don't, ask someone who does.

Red flags that should make you pause

Over the years I've developed a mental list of things that make me step back from a deal, and I want to share a few of them because they'll save you time and money.

Founders who won't share information are an immediate concern — if you ask reasonable questions and get evasive answers, something is off. Similarly, founders who can't explain their business simply. If they need forty-five minutes and a deck full of buzzwords to tell you what they do, they either don't understand it themselves or the idea is too complicated to execute.

Watch out for excessive burn before product — if a startup has spent hundreds of thousands of dollars and still doesn't have something you can use, that's poor prioritisation. Co-founder conflicts are another one. If the founding team doesn't get along, nothing else matters, because the company will implode before the product gets traction. If nobody is using the product, not even friends and family, ask yourself why. And equity splits that don't make sense are worth flagging. If one co-founder has 95% and the other has 5%, there's usually a story there, and it's rarely a good one.

How much time to spend

Here's the part where operators tend to overthink things. At pre-seed, a few hours of focused due diligence is reasonable. Read everything the founders share with you. Use the product if one exists. Do two or three reference checks. Ask the founders hard questions in a follow-up conversation and watch how they respond. That's it.

You're not trying to eliminate all risk — that's impossible at this stage. You're trying to get enough information to make an informed bet on people. If you find yourself spending twenty hours on DD for a $5,000 cheque, you're over-indexing on process and under-indexing on judgment.

It gets easier

Your first deal will feel overwhelming. There's too much you don't know, too many things you haven't thought about, and a nagging feeling that everyone else in the cap table saw something you missed. That's normal. Push through it.

By your fifth deal, you'll have pattern recognition. You'll know which questions actually matter and which ones are just noise. You'll have a feel for what a reasonable valuation looks like, what a good founding team sounds like, and when something just doesn't smell right. That instinct — built from years of operating inside startups — is your genuine edge. Trust it, sharpen it, and let it guide you.

In Part 5, we'll get into the mechanics of actually writing the cheque: deal terms, instruments, and the practical stuff that trips up first-time angels.

This is Part 4 of Angel investing for startup operators, a five-part series from M8 Ventures.

← Previous: Part 3: Where the deals are
Next: Part 5: Writing your first cheque →