The majority of early-stage VC deals fall apart in due diligence

Here’s what investors are looking for when writing the first check into a fledgling startup

Covering Five Flute’s fundraising and tearing down the deck the company used to raise its $1.2 million seed round had 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 Axel 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.

“The 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,” 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. “Everything you do after the first meeting, I consider due diligence. You’re 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.”

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