Here’s what investors look for when they write the first check to a startup
Covering five flutes fundraising and demolition the deck the company used to raise its $1.2 million seed round made me wonder: How the hell do investors decide whether to invest in a company at the earliest stages?
VC firm Baukunst led the investiture of the five flutes and I sat down with Axel Bichara and Tyler Mincey to learn how they evaluate a potential deal at an early stage. They told me that the majority of deals they look at fall apart at the due diligence stage and helped me gain a deeper understanding of what the process looks like from the inside.
“Common wisdom breeds mediocrity. This is not helpful. In VC, we look for the ultimate.” 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 that [moment] onward, you’re spending a significant amount of time,” Bichara said, explaining that in his experience, they only invest in one out of every 250 deals or so they see. Only about 1 in 40 first dates lead to a second date. “I consider everything you do after the first date to be due care. You appreciate the founders. At the investing stage, 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.”
With the right team and a huge market, everything else can be figured out later, Bichara argues, saying that if you have a great “founder’s market fit,” you’re off to the races.
“The right team of founders will do the right thing [in that case]. They will perform well and there will be capital efficient market opportunities. You go in 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. “All the due diligence you do is directed at answering those two questions.”
In the case of Baukunst, the firm investment thesis means that for an investment to make sense, the startup must at least have the possibility of a result of 1 billion dollars or more — meaning the market opportunity must be large enough to allow for this if the founding team does well.
“You just work backwards from there,” Bichara said, “and all the due diligence we do will support that.”