Most early-stage VC deals fall apart with due diligence, TechCrunch

Here’s what investors look for when writing the first check to a fledgling startup

Covering the five flutes fundraising and demolishing the deck the company used to raise a $1.2 million seed round got me thinking. Like hell to do investors decide whether to invest in a company at the earliest stages.

VC firm Baukunst led the introduction of Five Flute and I sat down Axel Bichara and: Tyler Mincey learn how they value a potential early-stage deal. They told me that the vast majority of deals they look at fall apart at the due diligence stage and helped me gain a deeper understanding of what the process is like from the inside.

“Common wisdom tends to breed mediocrity. It’s not helpful. In VC, we look for outliers.” Axel Bichara, Co-Founder and General Partner, Baukunst

“The decision to hold a second meeting is one of the biggest decisions in venture capital because of [moment] forward, you’re putting in a significant amount of time,” Bichara said, explaining that in his experience, they only invest in one out of 250 deals or so they see. Only 1 in 40 first encounters lead to a second encounter. “Everything you do after the first meeting, I consider due diligence. Do you appreciate the founders? Much of our due diligence during our investment phase focuses on two things: the quality of the time to start 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, argues Bichara, saying that if you have a great “founder market fit,” you’re off to the races.

“The right founding team will do the right thing [in that case]. They will perform well and there will be efficient capital market opportunities. You enter with a competitive advantage, and from there you find a niche and a scale. If you don’t get a resounding yes from those two, you shouldn’t invest,” Bichara explained. “All the due diligence you do is about answering those two questions.”

In the case of Baukunst, the firm investment thesis means that for the investment to make sense, a startup must have at least The potential for $1 billion or more — which means that the market opportunity must be large enough to allow for an opportunity if the founding team does well.

“You just work backwards from there,” Bichara said, “and all of our diligence will support that.”

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