Hi GazD, I have invested in a little over a dozen unlisted companies, some in the startup range you mentioned. Results have been very mixed (some scaling well, some a mess and one a total write off) as you would expect, but starting in 2019 has made what is always a rough ride even harder, so take my input with the limited and questionable experience it comes with!

I think you have covered most of the key areas for initial questions before you go deep on due diligence, I will add/emphasis:

1. Leadership - you need to assess the character of the founders and if they have a lead investor it's worth understanding them also. Startups are a brutal business experience so it required crazy levels of passion and dedication to make it work. It also takes skill and experience in the area they operate - obvious and if you are not experienced in the area the business is involved very hard to judge, so find someone who knows the business/tech/problem they are addressing well and get their input.
2. Path to Exit - this includes your already listed points on valuation and capital availability going forward. You want to see a capital raising path with milestones and hopefully justifiable valuations for the next 2-5 years and for the founders to have an exit plan (which may change, but starting with one is a must) such as listing, trade sale or even continuing to operate and pay dividends if they business model suits.
3. Economics now and to scale - this also takes into account TAM with the emphasis on "Addressable". Make sure there is a fat margin opportunity to start because it may come under pressure at scale. Also understand how much working capital (receivables, inventory and payables) and operating spend (marketing and sales) will be needed to scale at the rates they plan/hope. It something doesn't add up then dig deeper.
4. What Problem do they solve: make sure you understand what they are solving and make sure they are in love with the problem not the solution because they need to continue to innovate and adapt to addressing the problem, not be stuck with a solution looking for a problem.

Go in expecting to never see the money you invest again, or at best for it to be a long way off. Startups are illiquid and take longer than anyone every thinks to get to exit, so have no future plan for the money you invest!

Other than that, follow your instincts on questions, don't be afraid to ask stupid questions - the odds are they will provide insights into how well prepared the founders are for what lies ahead.

Good luck

Ok so attended the pitch.

all sounds good but the one question I asked I was a little concerned about the response to was the exit strategy ie they were very unsure of their exit. That said, they have plausible plans to be profitable within a year which is mitigation in my mind. Any thoughts?

I have a few small startup investments. It's early days so don't really have any performance feedback, but I'm approaching it on the basis that more than half probably won't make it, and 1 or 2 out of 10 (hopefully) will. Most of these don't have an exit plan to speak of yet, if they do fire, and are showing good growth, unit economics, cash flow etc, then an exit plan will emerge, and I'm not worried about that at the moment.

My only suggestion is caution when it comes to investing with friends. If it doesn't work out how will you all feel about it?

100% conscious of this friendship caution in two ways:

1) am I backing them in out of some kind of unconscious bias?

2) am I going to ruin a friendship if it all goes badly ?

The 2 friends are supremely capable and engaged individuals who have achieved a lot prior to this. I’m reasonably confident in their product and their commitment.

although I’d be disappointed if the venture fails, it would absolutely not be personal. As I’ve said to the friends, I know they’re doing their best and I’d never hold them responsible.

Forget about things like cost projection, addressable market or expansion opportunities. Those things only look good on powerpoint slides and have no real impact to the business, at least for now. At this stage, you are basically investing in people instead of the business.

It's a sad truth that the original ideas of most start up will fail at some point. Therefore, it is extremely important to find entrepreneurs who refuse to melt down along with their initial failures, and quickly find new solutions to save their products or new products/services to save their business.

I'm sure your friends will tell you that the grass is green and the girls are pretty when you ask your questions. They won't be running this business if they didn't believe so in the first place. If you evaluate your friends as incredibly tough indivituals who are comfortable with handling failures, maybe it is a good idea to invest.

Also, don't worry too much about the valuation. You don't know how much you will be able to sell your portion of the business for at least 5-8 years. If this start up can survive for that long, even inflation by itself will get you a higher price cuz your are entering at a very early stage.

Love this @fcmaster26

the slide deck definitely resonated with ‘girls are pretty’ hahaha