Majority of early-stage venture capital deals collapse due to due diligence – TechCrunch
Here’s what investors look for when they write the first check to a fledgling startup
Covering five flutes fundraising and destroying the bridge the company was using to raise its $1.2 million seed round made me wonder: how the hell do do investors decide to invest in a company in the early stages?
Venture capital firm Baukunst led the Five Flute investment, and I caught up with Axel Bichara and Tyler Mincey to find out how they assess a potential early-stage deal. They told me that the vast majority of deals they consider fall apart at the due diligence stage and helped me better understand what that process looks like from the inside.
“Common wisdom tends to breed mediocrity. This is not helpful. In VC, we look for outliers. Axel Bichara, co-founder and general partner, Baukunst
“The decision to have a second meeting is one of the most important decisions in venture capital because, from there, [moment] from there you commit a lot of time,” Bichara said, explaining that in his experience they only invest in about 1 in 250 trades. Only about 1 in 40 first meetings result in a second meeting. “Anything you do after the first meeting, I consider due diligence. You assess the founders. At the stage where we invest, most of our due diligence is focused on two things: the quality of the founding moment and the size/attractiveness of the market opportunity If you get those two right, everything else will fall into place, almost by definition.
With the right team and a huge market, everything else can be figured out later, Bichara argued, saying if you have a good “founders market fit” you’re ready for the races.
“The right founding team will do the right thing [in that case]. They will perform well and there will be capital efficient market opportunities. You enter with a competitive advantage, find a niche, and scale from there. If you don’t get a resounding ‘yes’ from these two, you shouldn’t invest,” Bichara explained. “Any due diligence you do is aimed at answering those two questions.”
In the case of Baukunst, the company’s investment thesis means that for an investment to make sense, the startup must at least have the possibility of a $1 billion or more outcome – meaning that the market opportunity must be large enough to allow if the founding team performs well.
“You just work backwards from there,” Bichara said, “and all the due diligence we do will support that.”