{"id":1193071,"date":"2022-08-28T19:02:36","date_gmt":"2022-08-28T19:02:36","guid":{"rendered":"https:\/\/www.ghanamma.com\/2022\/08\/28\/the-majority-of-early-stage-vc-deals-fall-apart-in-due-diligence\/"},"modified":"2022-08-28T19:02:36","modified_gmt":"2022-08-28T19:02:36","slug":"the-majority-of-early-stage-vc-deals-fall-apart-in-due-diligence","status":"publish","type":"post","link":"https:\/\/www.ghanamma.com\/2022\/08\/28\/the-majority-of-early-stage-vc-deals-fall-apart-in-due-diligence\/","title":{"rendered":"The majority of early-stage VC deals fall apart in due diligence \u2013"},"content":{"rendered":"

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Covering Five Flute\u2019s<\/span> fundraising and tearing down the deck the company used to raise its $1.2 million seed round\u00a0had me wondering: How the hell do <\/em>investors decide whether to invest in a company at the earliest stages?<\/p>\n

VC firm Baukunst led the Five Flute investment, and I sat down with\u00a0Axel Bichara and Tyler Mincey to learn how they evaluate a potential early-stage deal. They told me that the vast majority of the deals they look at fall apart at the due diligence stage and helped me get a deeper understanding of what that process looks like from the inside.<\/p>\n

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\n\t\t\t\u201cCommon wisdom tends to generate mediocrity. That\u2019s not helpful. In VC, we are looking for the outliers.\u201d\t\t\t\t\t\t\tAxel Bichara, co-founder and general partner, Baukunst<\/cite>\n\t\t\t\t\t<\/p>\n<\/blockquote>\n<\/div>\n

\u201cThe decision to take a second meeting is one of the biggest decisions in venture capital because, from that [moment] onward, you are committing significant time,\u201d Bichara said, explaining that, in his experience, they only invest in one out of every 250 deals or so that they see. Only about 1 in 40 first meetings result in a second meeting. \u201cEverything you do after the first meeting, I consider due diligence. You\u2019re evaluating the founders. At the stage 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 get those two right, everything else will fall into place, almost by definition.\u201d<\/p>\n

With the right team and a huge market, everything else can be figured out later, Bichara argued, saying that if you have a great \u201cfounder-market fit,\u201d you\u2019re off to the races.<\/p>\n

\u201cThe 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 a niche and scale from there. If you don\u2019t get a resounding \u2018yes\u2019 from those two, you shouldn\u2019t invest,\u201d Bichara explained. \u201cAll the due diligence you do is geared toward answering those two questions.\u201d<\/p>\n

In the case of Baukunst, the firm\u2019s investment thesis means that for an investment to make sense, the startup needs to at least have the possibility of a $1 billion outcome or more\u00a0\u2014 which means that the market opportunity needs to be big enough to enable that if the founding team executes well.<\/p>\n

\u201cYou just work backward from there,\u201d Bichara said, \u201cand all the due diligence we do will be in support of that.\u201d<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Covering Five Flute\u2019s fundraising and tearing down the deck the company used to raise its $1.2 million seed round\u00a0had me wondering: How the hell do investors decide whether to invest in a company at the earliest stages? VC firm Baukunst led the Five Flute investment, and I sat down with\u00a0Axel Bichara and Tyler Mincey to […]<\/p>\n","protected":false},"author":1,"featured_media":1193073,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[21],"tags":[],"class_list":["post-1193071","post","type-post","status-publish","format-standard","has-post-thumbnail","category-celebrity-gossip"],"_links":{"self":[{"href":"https:\/\/www.ghanamma.com\/2022\/wp-json\/wp\/v2\/posts\/1193071","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.ghanamma.com\/2022\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.ghanamma.com\/2022\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.ghanamma.com\/2022\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.ghanamma.com\/2022\/wp-json\/wp\/v2\/comments?post=1193071"}],"version-history":[{"count":0,"href":"https:\/\/www.ghanamma.com\/2022\/wp-json\/wp\/v2\/posts\/1193071\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.ghanamma.com\/2022\/wp-json\/wp\/v2\/media?parent=1193071"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.ghanamma.com\/2022\/wp-json\/wp\/v2\/categories?post=1193071"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.ghanamma.com\/2022\/wp-json\/wp\/v2\/tags?post=1193071"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}