Includes Five Flutes the fundraising and tearing down of the deck the company used to raise a $1.2 million seed round left me wondering: How come? To do investors decide whether to invest in the company at the earliest stage?
VC company Baukunst led the Five Flute investment, and I sat down with Axel Bichara and Tyler Mincey to learn how they evaluate potential early-stage deals. They told me that most of the deals they saw fell apart at the due diligence stage and helped me gain a deeper understanding of what the process was like from the inside.
“General wisdom tends to produce mediocrity. That doesn’t help. At VC, we look for outliers.” Axel Bichara, co-founder and general partner, Baukunst
“The decision to have a second meeting is one of the biggest decisions in venture capital because, of that [moment] so on, you put in significant time,” says Bichara, explaining that, based on his experience, they only invest in one in every 250 transactions or so they see. Only about 1 in 40 first encounters resulted in a second encounter. “Everything you did after the first meeting, I considered due diligence. You are evaluating the founders. At the stage we invest in, most of our due diligence focuses on two things: Quality of lead time and size/attractiveness of the market opportunity. If you get both right, everything else will fall into place, almost by definition. ”
With the right team and a large market, everything else can be figured out later, says Bichara, saying that if you have a great “founders market fit,” you’re in for a race.
“The right founding team will do the right thing [in that case]. They will execute well, and there will be capital efficient market opportunities. You enter with a competitive advantage, find your niche and scale from there. If you don’t get a ‘yes’ answer from both, you shouldn’t invest,” explains Bichara. “All your due diligence is geared towards answering those two questions.”
In Baukunst’s case, the corporate investment thesis means that for an investment to make sense, the startup must have at least a possible $1 billion or more of returns — meaning that the market opportunity must be large enough to allow it. if the founding team is run well.
“You’re just working backwards from there,” Bichara said, “and all the due diligence we’re doing will back that up.”