Seed Stage Investing Criteria and Due Diligence Checklist

As someone who invests in early-stage startups alongside my career in product design, I've developed a personal framework for evaluating seed-stage opportunities. This isn't theory from a textbook — it's a living checklist I use every time I assess a potential investment. I'm sharing it here because I believe more people should have access to a structured way of thinking about startup investing, whether you're writing your first angel check or your fiftieth.

This guide covers five key areas: identifying high-upside ideas, evaluating founders, analyzing sector trends, assessing market conditions, and conducting deep product due diligence. At the end, I've also included a section on warning signs — the red flags that should give any investor pause.

Step 1: Identifying Ideas with Enormous Upside Potential

The principle that underlies all angel investing is that of upside optionality — the property of asymmetric upside with correspondingly limited downside. When looking for ideas to invest in, you're operating under the assumption that most companies will ultimately fail (90%+), but that the ones that succeed will more than make up for the companies that don't.

Many of the biggest successes in the last decade appeared to be unlikely to succeed when they first started. Airbnb, Robinhood, and Uber are some examples that come to mind. All had huge hurdles on their path to becoming successful, making them more likely to fail than succeed at the time of their seed rounds. But if you were an early-stage investor in any of these companies at the seed stage, by the point of their IPO you may have made upward of 1,000x return on your initial investment.

This is what makes investing in private companies so appealing: you only have to be right once.

That said, there are many kinds of businesses, some of which are profitable but unlikely to return venture-level returns. Below are some of the identifiers I look for in companies that have significant upside potential.

Concept 1: Deep Pains

Ideas that address a deep pain point that people are prepared to pay to resolve. If the pain point is frequent enough, it's possible to charge less and more often to address the problem. But if the problem affects a smaller audience, then the solution will need to command a higher margin to reach that audience and scale effectively. The key question to ask is: how badly does this hurt, and how often?

Concept 2: Democratization

If a product or technology can give everyday people access to desirable options that were previously only accessible to the ultra-wealthy, then it's likely that these advancements will be embraced at scale. Think about how Robinhood democratized stock trading, or how Shopify gave anyone the ability to launch an online store. When you lower the barrier to something aspirational, adoption tends to follow rapidly.

Concept 3: Shovel Sellers

When a movement is occurring, look for companies who are providing the underlying infrastructure to allow those changes to take place. These are the modern-day equivalent of shovel sellers during the gold rush. They don't need to pick the winning miner — they profit regardless. Infrastructure plays tend to have more durable revenue streams because they become embedded in the workflows of the companies building on top of them.

Concept 4: Paradigm Shifts

Paradigm-shifting ideas are unexpected; they question fundamentals and propose new normals. These ideas should have enough novelty to capture the imagination and be compelling enough to drive genuine behavioral change. The best paradigm shifts make the old way of doing something feel immediately outdated. If the idea doesn't make you slightly uncomfortable with how ambitious it is, it probably isn't thinking big enough.

Concept 5: Sector Pioneers

Some emerging sectors are inevitable and they attract a lot of noise, so picking the right company is difficult. That said, it's only a matter of time before a standout company breaks through. Look for companies who are able to articulate and package complicated ideas in ways that people can readily understand and use. Clarity of communication is often the differentiator in crowded emerging spaces.

Step 2: Finding the Right Founder

I don't prescribe to the belief that there has to be at least two founders, but I do believe a single founder must be technical. As someone smarter than me once said:

Vision without execution is an illusion.

Founders should preferably be an engineer, product designer, or sales individual — and they must also have secured the talent to complement their shortfalls. A brilliant technical founder with no ability to sell is just as vulnerable as a charismatic salesperson who can't build.

Founder Qualifiers

Here are the traits I actively look for in founders I'm considering backing:

• Integrity and honesty — This is non-negotiable. If trust erodes early, everything else falls apart.
• A reputation among other smart people — What do other founders, investors, and operators say about them?
• A strong, articulate vision — Can they paint a picture of the future that makes you want to be part of it?
• Long-term thinking — Are they building for a quick flip, or are they genuinely trying to build something lasting?
• A rabid desire to win — The best founders have an intensity that's palpable. They're not doing this because it's trendy.
• A background of making — Have they built things before? Side projects, open source contributions, previous companies?
• Taste and a bias toward quality — Do they care about the details? Great products are made by people who refuse to ship mediocrity.
• Leadership qualities and personableness — Can they attract and retain great people?
• Uniquely qualifiable insider knowledge — Do they have a genuine unfair advantage in understanding the problem space?
• Ability to move and iterate fast — Speed is a startup's greatest weapon against incumbents.
• Evidence of thriving in inverse conditions — How do they perform when everything is going wrong?
• The ability to learn from mistakes and feedback — Coachability is an underrated trait in founders.
• Thoughtful and decisive decision-making — They gather input, but they don't get paralyzed by it.
• The ability to sell to investors — Fundraising is a skill, and the company will need more capital.
• Clear communication skills — Internally and externally. Ambiguity kills startups.
• Ability to build a reputable team — You're betting on the team as much as the idea.
• A fulfilment that derives from the work itself — The best founders would be doing this even if the money wasn't there.
• Rational and calm demeanor — Startups are chaotic. You need someone who can think clearly under pressure.

Step 3: Sector Trends

Where possible, I look for companies entering growing sectors — particularly sub-segments of the economy that are expected to account for a larger portion in the future. The reason is straightforward: exponential growth is more likely to occur with the momentum of a rapidly growing sector, as opposed to trying to grow in a pre-existing, stagnant, or dying space.

If entering a pre-existing sector, I make sure it's not a sector in decline, and then I look to invest in innovative startups that are taking one of two approaches:

1. Challenging a slow incumbent in a multi-billion-dollar market
2. Monopolizing a niche market to enter other verticals at a later date

Examples of Growing Sectors

Here are some of the sectors I actively track for investment opportunities. Each of these represents a sub-segment of the economy with structural tailwinds — driven by regulatory shifts, technological breakthroughs, demographic trends, or behavioral changes that compound over time:

• Applied AI & Foundation Models
• AI Infrastructure & Developer Tooling
• BioTech & Genomics
• Preventative Health, Longevity & Wellness
• Consumer Finance & Fintech
• Education Technology
• Cybersecurity & Data Privacy
• Defense Technology & Dual-Use
• Food Technology & Alternative Proteins
• Climate Tech & Clean Energy
• Vertical SaaS & Industry-Specific Software
• Robotics & Physical Automation
• Digital Health & Telehealth Infrastructure
• Energy Storage & Grid Modernization
• Convenience Technology
• Space Economy & Satellite Infrastructure
• Creator Economy Infrastructure
• Synthetic Biology & Advanced Materials

Step 4: Market Conditions

After assessing the sector, I do a deeper dive into the specific market conditions the company is entering. The questions I ask at this stage are critical:

Is there competition? Is that a good thing, or is it a sign that this isn't needed? Is there a dominant incumbent that owns the majority of the market like Google in search? Or is it a fragmented, multi-faceted industry like direct-to-consumer fashion?

The distribution of players in a market and the quality and size of the competitors is vitally important. Are you facing a slow incumbent that's deeply embedded? Or are you competing on price in a growing sector but with an undifferentiated product? Finding a market with favorable conditions for growth is a huge advantage, because competition is one of the greatest battles founders will face.

Favorable Market Conditions

These are the market dynamics that excite me the most:

• No competition but with a validated product need — The rarest and most valuable scenario.
• Competition is untechnical incumbents ripe for tech disruption — They're leaving money on the table.
• Opportunities that emerge out of organic community growth — The market is pulling the product into existence.
• Proprietary technology or I.P. that provides a first-mover advantage — A moat before day one.
• Access to insider infrastructure that is difficult for others to obtain.
• Largest capital stockpile in a winner-takes-all space — Sometimes the war chest is the moat.

Step 5: Product Due Diligence

Never invest in a company that doesn't already have a minimum viable product. This is a fundamental test to see if founders are capable of executing their vision. If they pass this initial hurdle, then I go deep on evaluating how effective their product is — and will be. This requires looking at a significant number of factors.

1. Revenue

Is the product already driving sales? If so, what type of revenue is the product generating and what are their margins? Are these recurring month-over-month sales or one-off purchases? In either case, how did these sales come about — were they due to marketing or word of mouth? Organic revenue signals are significantly more meaningful than paid acquisition.

2. Product-Market Fit

Has the company demonstrated that what they're building is being well received? Are they getting early signs that people genuinely value what they're doing — organic signups, word of mouth, social proof? True product-market fit feels like the product is being pulled from the founders' hands rather than pushed into the market.

3. Barrier to Entry

How hard is it for a customer to access and use the product? Is there a high learning curve, or is it incredibly simple and intuitive? A high barrier to entry will deter people from using the product unless the pain point is severe. But if they can onboard quickly and easily, adoption becomes far more likely.

4. Product Infrastructure

Is the product built in a way that can be amended and scaled easily? Entrepreneurs don't want to find themselves in a situation where legacy code is destroying their ability to evolve. Technical debt in the early stages can become an existential threat as the company grows.

5. Quality

Does the product radiate quality? First impressions build trust. If a product doesn't appear intuitive or it's clear that corners have been cut, prospective customers are less likely to trust it with their money — or their time. In a crowded market, polish can be the differentiator.

6. Brand

Brand is vitally important — not just for trust-building on the customer side, but because talented people have many career options. If an entrepreneur wishes to attract exceptional talent, creating a desirable brand that people recognize and want to work for is one way to stack the deck in their favor.

7. Viral Loops & Growth Hacks

Have the founders worked out a sustainable way of attracting users to the product that doesn't just involve throwing money at the problem? If so, how long can these mechanisms sustain growth, and do they feel authentic — or is there an underlying spammy quality to the mechanic?

8. Network Effects

Does the product become increasingly valuable with the addition of each new user who joins? Do we see an adoption rate that grows significantly month over month? Products with true network effects become exponentially harder to compete with as they scale.

9. Stickiness

Is this a product that people use often or sparingly? What are the retention rates? Are people returning over and over again, or does the product have a leaky bucket problem? Retention is arguably the single most important metric for long-term viability.

10. Moats

Is the product able to defend its position, or is there a risk that competitors can replicate the technology? The best moats are compounding — they get stronger over time rather than weaker.

11. Jewelry, Aspirin, or Oxygen

This is a framework I find incredibly useful. Is this a vanity product (jewelry)? Does it resolve a mild pain point (aspirin)? Or is it a must-have essential (oxygen)? The closer to oxygen, the more defensible the business.

12. Timing

Is now the right time for this product to exist, or is it too early? Being too early can be just as fatal as being too late. If the latter, consider whether this company is likely to be an attractive acquisition target — or if there's simply no market for what they aim to create.

13. Communication

Does the product do a good job of explaining its value proposition, or is it overly convoluted and difficult to grasp? If you can't explain what the product does in one sentence, that's a problem. Clarity sells.

14. Distribution

How does the product reach customers? Is it expensive to ship or distribute? How many hurdles exist in the distribution chain? Do they have to deal with import/export regulations, multiple tax jurisdictions, or regional compliance? Simple distribution is a competitive advantage.

15. Return Rates

What percentage of people who buy the product then return it? And what does the company do with returned goods? Is it a net negative or net neutral to the company's bottom line? High return rates can signal a fundamental mismatch between expectation and reality.

16. Monopoly vs. Fragmentation

How many active competitors are there in the space the startup is entering? Can they monopolize the space and build a significant advantage, or are they competing with dozens of other players? If there are competitors, why are people going to choose this company over others? Is the difference easy to articulate, or is the complexity overwhelming?

17. Supply & Demand

Does the company have high demand? If so, how easily can they fulfill their demand needs? Does the company have to hold inventory, or can they scale up and down with customer demand? Capital-light fulfillment models are significantly more attractive at the seed stage.

18. Consumer Surplus

What's the difference between the price customers pay and the price they'd be willing to pay? What wiggle room exists in the event that production costs increase unexpectedly? Companies with high consumer surplus have a buffer that can sustain them through turbulent periods.

19. Cumulative Advantage

Does the startup have an advantage that will compound over time and lead to an increasingly larger moat? By contrast, are there any competitors who already have a cumulative advantage that makes the introduction of an alternative unlikely to succeed?

20. Lock-in

Are there inherent hooks in the product that make leaving difficult? Equally, are there hooks in competitor products that make switching to the new product difficult? Is the startup only relying on new purchasers, or are they able to convert existing customers from elsewhere?

21. Economies of Scale

Can the startup benefit from economies of scale to reduce the long-run average costs of their products? If so, how will that affect the bottom-line profit the business can generate? Companies that get cheaper to run as they grow are inherently more investable.

22. Marginal Cost

How does the cost of producing a good change as production increases? What are the fixed and flexible costs? Is there a point at which costs are likely to spike due to volume and the infrastructure needed to fulfill production?

23. Price Discrimination

Does the startup intend to use price discrimination — offering different prices to access the same goods depending on how much the consumer is prepared to pay? Tiered pricing models can dramatically increase revenue if executed well.

24. Pricing Power & Elasticity

How much pricing power does the company have? Can the price of the product be raised while customers continue to pay? Or will a small increase in price significantly reduce demand? Pricing power is one of the strongest indicators of a healthy business.

25. Frequency

How frequently is the product likely to be used? Is this something people will reach for multiple times a week, becoming habitual? Or is it used infrequently but is incredibly valuable when needed? Frequency drives lifetime value.

26. Intellectual Property

Does the product do something novel that can be patented? If so, does the company already hold patents or have they filed to protect their IP? Even with IP, do they have the resources to challenge a competitor if the technology is replicated?

27. Strategic Relationships

Does the company have strategic relationships with investors or partners that will help them reach their desired audience? If not, why not? Is this a company that influencers and industry leaders want to be associated with?

28. Burn Rate & Runway

Is this a costly business to build? If so, has the company kept on top of its overhead, or are they burning money at an unsustainable rate? How much runway does the business currently have, and how much additional runway will a successful raise provide? Watch for hidden costs like infrastructure and server expenses.

29. CAC & LTV

Does the business know its customer acquisition cost and expected lifetime value? If they've found a way to acquire customers cheaply, can this be sustained? Are their LTV numbers based on real data or future projections — and are those projections realistic?

30. Go-to-Market Strategy

What has the company attempted to date to market the product? Is the marketing high quality, or is it lacking polish? Is their approach likely to work, or are they burning money on ineffective communication? Is the product getting any form of organic marketing through word of mouth, press coverage, or real-world exposure?

31. Social Proof

Has the company been successful in elevating its profile such that it attracts notable press, influencers, awards, accreditation, or any other indicators of acceptance among its target audience? Social proof compounds — early wins make the next win easier.

32. Roadmap & Use of Funds

Why does the company need the money? Do they have a queue of potential customers waiting to buy, with capital as the only limiting factor? Or do they believe their upcoming roadmap will unlock growth? If the latter, do you believe in the roadmap, or is it steering the company in the wrong direction?

33. Customer Feedback

What are customers saying about the product? Does the company have reviews or case studies that indicate satisfaction? If there are negative reviews, are they from people who experienced an early version, or are the concerns valid issues the company is actively addressing?

34. Exit Potential

What is the eventual exit strategy? Does the company have the growth potential to IPO? Or are they a natural acquisition target? What were the best and worst-case outcomes for similar companies that have exited? Understanding the exit landscape helps frame the return potential.

35. Traction

Are people knocking down the door to get access? Is the founder's hypothesis playing out as expected? Are users talking about and sharing the product with others? Are they seeing enough value to switch from an existing solution? Traction is the single most de-risking data point in early-stage investing.

36. Low Cost of Reproduction

Can the product be replicated at minimal cost, or does creating each unit require significant resources? Software businesses have an inherent advantage here — the marginal cost of serving an additional user approaches zero.

In Summary

Due diligence is the name of the game. Be sure to validate that the company is providing real value by interacting with actual customers. Where possible, get opinions from people you trust and who you believe have sound judgment. Lean on other investors to help you, and co-invest with them so that they can identify problems with startups that you may not see yourself.

The best angel investments I've made have always had one thing in common: conviction paired with thorough homework. Neither alone is sufficient. You need the intuition to spot something special and the discipline to verify that your instinct is grounded in reality.

Warning Signs

Companies die for all kinds of reasons, but here are some of the biggest red flags I watch for. Any one of these should give you pause; several in combination should stop you entirely.

1. A Lack of Traction

Does the company lack product-market fit? Is the company spending large sums of money just to acquire customers? If the market isn't responding after meaningful effort, that's a signal worth heeding.

2. Burn Rate

Has the company inflated its expenses or valuation too high without generating enough revenue to make the business sustainable or attractive to follow-on investors?

3. Founder Mismatch

Do the founders lack a mutual understanding of their respective roles? Have they never worked together before? Are they genuinely passionate about the product they're building, or are they chasing a trend?

4. Being Out-Competed

Is a competitor's cumulative advantage so significant that it's making the sustainability of the business impossible? Sometimes the market has already been won.

5. Pricing

Is the price required to make the product profitable so high that consumer demand will cease to exist?

6. Barrier to Entry

Is the product too complicated or requires too much effort from the customer to make it worthwhile? Is the advantage of switching not substantial enough to warrant the change?

7. No Revenue Model

Does the product have no scalable way of generating significant revenue? Growth without a clear path to monetization is a recipe for running out of runway.

8. Poor Marketing

Is the company producing marketing that is underwhelming and doesn't live up to the aspirations of the product? Marketing is not just advertising — it's the company's ability to communicate its value.

9. Bad Timing

Is the company too early and doesn't have a customer base or any real-world use case where the product can be utilized? Being a visionary is only valuable if the market is ready.

10. Legislation Risk

Is the company running headfirst into a tricky political or legislative situation that will be hard or impossible to comply with or overcome?

11. Manufacturing Risks

Is the company in control of its manufacturing, or is there an existential risk if a supplier or third party went out of business?

12. Litigation Risks

Is the company exposing itself to being sued due to intellectual property or copyright infringement? Legal battles can drain both capital and focus.

13. Overcomplicated Expansion

Is expanding into multiple markets going to be so costly and difficult to navigate that the business can't sustain the overhead? Sometimes the best strategy is depth before breadth.