This is what investors look for when writing the first check to a startup startup
Covering five flutes fundraising and tearing down the deck the company used to raise its $1.2 million seed round left me wondering: How the hell? to do Do investors decide at an early stage whether they want to invest in a company?
VC company Baukunst led the Five Flute investment, and I sat down with… Axel Bichara and Tyler Mincey to learn how to evaluate a potential deal early on. They told me that the vast majority of deals they view fall apart during the due diligence phase and have helped me gain a better understanding of what that process looks like from the inside out.
“General wisdom tends to generate mediocrity. That’s not handy. In VC we look for the 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 from then on… [moment] furthermore, you spend a lot of time,” said Bichara, explaining that, in his experience, they only invest in one in every 250 deals they see. Only about 1 in 40 first meetings results in a second meeting. does after the first meeting, I consider due diligence. You evaluate the founders. At the stage where we invest, most of our due diligence focuses on two things: the quality of the founding time and the size/attractiveness of the market opportunity If you do 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 that if you have a great founder-market fit, you go to 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 come in with a competitive advantage, find a niche and scale from there. If you don’t get a resounding ‘yes’ from those two, don’t invest,” explains Bichara. “All the due diligence you do is focused on answering those two questions.”
In Baukunst’s case, the company’s investment thesis means that in order for an investment to make sense, the startup must at least have the possibility of a return of $1 billion or more — meaning the market opportunity must be large enough to make that possible if the founding team performs well.
“You just work backwards from there,” Bichara said, “and all the due diligence we do will support that.”